美國銀行 (BAC) 2016 Q3 法說會逐字稿

Good day everyone and welcome to today's program.

(Operator Instructions)

Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr. 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 third-quarter 2016 results. Hopefully everybody has had a chance to review the earnings release documents that are available on the website.

Before I turn the call over to Brian and Paul let me remind you we may make some forward-looking statements. For further information on these please refer to either our earnings release documents, our website or our SEC filings.

One thing before Brian and Paul get into the results I just want to remind you we filed an 8-K on October 4 giving notification the Company changed our method of accounting for the amortization of premium and accretion of discounts related to certain debt securities known by the investment community as FAS-91. Our change to the contractual method which is used by the majority of our peers will provide better comparability of our results. As a result of that change we restated our historical results and provided the historically restated information in the 8-K and our earnings materials today naturally reflect those restatements.

With that let me turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Brian?

Thank you, Lee. Good morning everyone and thank you for joining us today to review our third-quarter results.

Our results this quarter continue our progress on our long-term strategy. We continue to drive responsible growth and deliver more of the Company's capabilities to our customers and clients. This progress is becoming clearer with each successive quarter and you can see the highlights of that on slide 2.

We reported earnings of $5 billion or $0.41 per diluted share, an EPS improvement of 8% from the year-ago quarter. We improved operating leverage across the businesses, utilizing technology to lower cost and improve our processes.

Our pretax earnings improved 17% compared to third-quarter 2015. This pretax earnings comparison is important as it eliminates the unusual movements in the tax line like this quarter's tax charge and the UK corporate tax rate change.

Like last quarter I thought I would address a few topics we are hearing from all of you. To do that let's look at slide 3 and 4 of the earnings material.

A first question is, are we making progress driving our responsible growth strategy? Yes, we continue to show progress throughout all the businesses. Our revenue growth has more clarity as we move past the periods of significant impacts from implementing regulations, running off non-core portfolios and divesting non-core businesses.

Revenue grew 3% over the third quarter of last year. Behind that improvement is our continued investment in this great franchise, in our sales teams, in our technology across the board. These sales teams and the buildup we have been doing there helps us to increase our capacity to serve our customers and clients.

An example of that is in our Consumer business. There our focus is on being the core bank to all our households. This has resulted in fewer checking accounts than we had years ago, but the average balance of the checking accounts we have has doubled and they are now roughly $6,500 per account.

You can also see this in the growth of our Merrill Edge brokerage balances which now total over $138 billion, adding investment relationships to the mass-market customer base. In general, consumers are deepening their relationships with us as they use our straightforward investing tools to get them started on the path to investing.

For our affluent and wealthy customers our customer progress also continues. Our Global Wealth & Investment Management teams, US Trust and Merrill Lynch, not only managed $2 trillion-plus in investment balances but also manage nearly $150 billion in loans at more than $250 billion in deposits. And we continue to see net flows of core assets in that business.

On the commercial side clients continue to respond to our universal banking model for a simplified stop for financing investing advisory services. We will continue to operate within our established risk framework in defined customer groups and we aren't reaching for growth. This will drive more sustainable results over a longer period of time for our shareholders.

With our global peers restructuring, including in the Markets business, I think this quarter is another great example of our Global Markets business' importance to our investing and issuing clients. We saw better client activity driving the best third-quarter results we have had in five years in Investment Banking and in sales and trading. We are doing that with a smaller balance sheet, fewer people and lower value at risk or VAR.

So growth in deepening all consistent with our responsible growth strategy continues across all the customer bases. Paul will talk to you more about the statistics and these successes.

Another question that we get asked is can credit remain this strong? Well, many of you asked that last quarter and the quarter before that and the quarter before that and this quarter it still got better again with our charge-off ratio declined to 40 basis points this quarter at an historic low. This is driven by changes we made right after the crisis, think in 2008 and 2009, and the long-term benefits of that effort continue to come through.

And, by the way, sticking to our responsible growth strategy even as times have been relatively better. US consumer health is generally good. Over the past few quarters, exposures in our oil and gas that were causing industry concerns for commercial losses have improved and charge-offs have receded. Other commercial credit remains very strong, and Paul will touch on these topics later.

Another question we get asked is what can we do to drive earnings even if we stay in this low rate, low growth environment? We aren't waiting for interest rates to rise here at Bank of America. We are driving our earnings growth now.

We work on the things that we can control: expenses, loan and deposit growth and fee growth. Long-term rates are down compared to last year yet earnings have grown. Despite that net interest income is up 3% from third-quarter 2015 while net interest yield has been stable because we grew core loans and deposits.

Paul will take you through the loan growth details later but I want to pause a moment and talk about our deposit growth. Deposits are a core part of what drives our franchise earnings. We have $1.2 trillion in deposits.

That's proof that customers entrust us to safeguard their money. We are heavily weighted in the mix of those deposits towards consumers whether the general consumers or wealthy consumers. This, in turn, provides a very stable base of funding for the Company and allows us to be less reliant on the markets for funding.

Nearly $450 billion or 36% of our deposits are noninterest-bearing, a very strong mix. Deposits on average grew $68 billion year over year or 6%. The teams have done tremendous work here and this quarter wasn't an anomaly.

This is the fourth consecutive quarter where we have grown deposits more than $50 billion over the previous year. Our commercial teams remain focused on growing deposits also. They are growing deposits that are LCR friendly and doing great work with our industry-leading cash management capabilities.

As a result year-over-year Global Banking grew deposits 3% to $300 billion. Our Consumer and Wealth Management teams combined have $860 billion in deposits. They grew this large base by 8% in the past 12 months.

For the first time Consumer topped $600 billion in deposits. These deposits are growing because our capabilities in the business are the best in the industry and our customers and clients see that. Whether t is our 21 million plus mobile banking customers, or 34 million plus online customers or the more than 5 million customers that come into our financial centers every week, these customers show that they appreciate the capabilities and integration of our networks.

So when we look at what else can we do to control and drive earnings in a low growth environment we get asked a lot about expenses and can those expenses keep being driven down and go lower. Well, the answer is yes. Last quarter we gave you a 2018 expense target and we continue to make progress towards that.

Our expenses declined 3% from the third quarter of 2015 to 2016. Our efficiency ratio improved to 62% this quarter. That is a 400 basis point improvement from last year's third quarter.

We continue to deliver on expense reductions while continuing to invest in technology and sales teams and other matters that are important for the future of this franchise. After you take into account the additional large bank FDIC assessment that started this quarter, expense is also down on a linked-quarter basis even as we continue to invest and absorb all the severance, regulatory, resolution planning and other repositioning cost to continue to reduce our operating costs.

We have been innovating in technology and we will continue to do so to improve processes and eliminate the need for paper and humans handling that paper. Our Simplify and Improve initiatives continue to help drive those costs are down.

And that leads to the question we also get asked, can we deliver and sustain returns above our cost of capital? As Lee talked about earlier we restate our results to change under FAS-91 and reduce the variability and make us more comparable to peers. As you can see, that makes it a little easier to see the longer-term return on tangible common equity trends.

This quarter we reported 10.3%. It has now stabilized above the cost of capital, even given our larger and larger capital base.

We still have work to do here to drive it to our ultimate goals. But this quarter is another strong step in that direction.

Importantly, on slide 4 you can see that each business has improved its leverage. They grew their earnings, had strong efficiency and returned far above the cost of capital. And all that continues to bode well as we look ahead.

So as we look forward we are driving responsible growth and maintaining discipline on cost. And this has allowed us to deliver more capital back to you. And we will keep on doing that.

Now let me turn it over to Paul to cover the numbers. Paul?

Thanks, Brian. Good morning everybody. Since Brian covered the income statement highlights I will start with the balance sheet on page 5.

Strong deposit growth drove a small increase in the size of our balance sheet versus Q2. Deposits rose $17 billion or 6% on an annualized basis. During the quarter long-term debt fell by $5 billion.

We put cash to work growing securities in our investment portfolio and more modestly through loan growth. Global liquidity sources rose driven by deposit growth and we remain well compliant with LCR requirements. Tangible common equity of $174 billion improved by $2.8 billion from Q2, driven by earnings.

In the process we returned $2.2 billion to common shareholders through a combination of dividends and $1.4 billion in share repurchases. On a per share basis tangible book value increased to $17.14 of $1.60 or 11% from Q3 2015. I would note that this increase was driven by both retained earnings as well as share repurchases below tangible book value as we reduced shares 3% from Q3 2015.

Turning to regulatory metrics, as a reminder we report capital under the advanced approaches. RCET1 transition ratio under Basel III ended the quarter at 11%.

On a fully phased-in basis, CET1 capital improved $4 billion to $166 billion. Under the advanced approaches compared to Q2 2016 our CET1 ratio increased 40 basis points to 10.9% and is well above our 10% 2019 requirement.

RWA declined roughly $20 billion, driven by reductions in global markets exposures and improvements in credit quality driven by runoff of non-core legacy exposure. We also improved our capital metrics under the standardized approach. Here our CET1 ratio improved to 11.8%. Supplemental leverage ratios for both parent and bank continue to exceed US regulatory minimums that take effect in 2018.

Turning to slide 6, on an average basis total loans were up $23 billion or 3% from Q3 2015 and while up from Q2 2016 growth was at a slower pace. Consistent with past periods, we break out loans in our business segments and in All Other. Year over year, loans in All Other were down $30 billion, driven by continued runoff of first and second lien mortgages while loans in our business segments were up $53 billion, or 7%.

In Consumer Banking we continue to see growth in residential real estate and vehicle lending, offset somewhat by home-equity paydowns which continued to outpace originations. In Wealth Management we saw growth in residential real estate and structured lending. Global Banking loans were up $26 billion or 8% year over year. On the bottom right of the chart, note the growth of $68 billion average deposits that Brian mentioned.

Turning to asset quality on slide 7, we believe a number of factors including our strategy of responsible growth, enhanced underwriting standards since 2008 and a healthier economy have transformed the risk profile of Bank of America as we look forward to future economic cycles. Total net charge-offs of $888 million improved $97 million from Q2. Consumer losses declined across a number of products and commercial losses also declined, driven by lower energy losses.

Driven by these improvements, provision expense of $850 million declined $126 million from Q2. We had a small overall net reserve release in the quarter as consumer real estate releases more than offset builds in other products.

On slide 8 we provide credit quality data on our Consumer portfolio. We remain focused on originating consumer loans with borrowers with high FICO scores and our asset quality remains strong.

Net charge-offs declined $71 million from Q2. This improvement was broad-based across consumer real estate as well as credit card.

Note that credit cards accounts for more than two-thirds of losses in our Consumer portfolio and within our US credit card book the loss rate improved to 2.45%. NPLs improved and reserve coverage remains strong.

Moving to Commercial credit on slide 9, net charge-offs of $110 million improved $26 million from Q2. With respect to energy, exposures are down, losses improved, oil prices have stabilized and we have $1 billion of reserves. More specifically, energy charge-offs of $45 billion decreased $34 billion from Q2.

While reservable criticized declined from Q2 we did experience an increase in NPLs this quarter which was concentrated with two clients, one in metals and mining and one in energy. Overall, our commercial portfolio continues to perform well. As I shared with you last quarter, the metrics in the commercial portfolio speak for themselves in terms of quality and performance.

The reservable criticized exposure declined and as a percentage of loans remains low. The Commercial net charge-off ratio is 10 basis points. Excluding small business it is 5 basis points and has been around 15 basis points or better for 15 consecutive quarters and the NPL ratio remains low at 45 basis points.

Turning to slide 10, net interest income on a GAAP non-FTE basis was $10.2 billion, $10.4 billion on an FTE basis. As Lee mentioned earlier, we changed our accounting method for the amortization of premium or discount paid on certain of our debt securities from the prepayment method to the contractual method. The contractual method is used by our peers and should make it easier for investors to make comparisons.

Compared to Q3 2015, NII is up $300 million or 3% as loan growth, higher short-end rates and higher security balances funded by deposits more than offset the negative impact of generally lower long-end rates over the past several quarters.

Okay, with respect to asset sensitivity as of 9/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $5.3 billion over the subsequent 12 months. This is lower than the sensitivity we reported at June 30.

The reduction was mostly on the long end, driven by the change to the contractual method and slower prepaid speeds based upon recent trends and customer behavior. Note that this sensitivity on the short end at $3.3 billion has not changed significantly.

Turning to slide 11, noninterest expense was $13.5 billion. That's $0.5 billion lower or 3% lower than Q3 2015, driven by cost reductions across the Company. This is the initial quarter of the increased FDIC assessment to shore up the deposit insurance fund.

The increase in expense for us is roughly $100 million per quarter. Compared to Q2 2016, expenses were stable as good core expense control was offset by the higher FDIC cost and modestly higher incentives.

Q3 litigation expense was $250 million, which is fairly consistent with both Q3 2015 as well as Q2 2016. Most expense categories were lower year over year. This trend was led by personnel expense, which includes the Q4 2015 expiration of the fully amortized advisor awards in Wealth Management. The rest of the improvement was driven by reduced cost of mortgage servicing coupled with same efforts and other initiatives.

Our employee base is down 3% from Q3 2015. While the overall headcount is down it is important to note that year over year we added over 1,000 primary sales associates across Consumer, Wealth Management and Global Banking.

Turning to the business segments and starting with Consumer Banking on slide 12. Consumer earned $1.8 billion, continuing its trend of solid results and reporting a robust 21% return on allocated capital. I would note that pretax pre-provision earnings rose $377 million or 10%.

Expense and NII improvement were both notable and together enough to more than offset higher provision expense and prior-year divestiture gains. Revenue was relatively flat on a reported basis compared to Q3 2015 as 4% in NII was offset, as I said, by the absence of approximately $200 million of divestiture gains in 2015. As a reminder, these gains in Q3 2015 result from divestitures of an ancillary appraisal business, a card portfolio and some financial centers.

Excluding those prior-period gains, revenue improved year over year and growth in pretax pre-provision earnings was even more substantial. Falling 400 basis points, Consumer Banking's efficiency ratio of 55% improved meaningfully year over year.

Okay, turning to slide 13 and key trends, first on the upper left the stats are a reminder of our strong competitive position. Looking a little closer at revenue drivers compared to Q3 2015, net interest income continued to improve as we drove deposits higher. Average deposits continued their strong growth, up $50 billion or 9% year over year, outpacing the industry.

With respect to noninterest income service charges were up modestly while card income was down. Spending levels and issuance were strong but revenue growth was muted by customer rewards. We are attracting relatively higher quality card customers that, on the one hand, have higher spending habits but, on the other hand, receive more rewards.

This has two important benefits to note. First, rewards deepen relationships, helping to grow deposits and make them more sticky, for example. Second, in our experience these customers have lower loss rates and a reduced need to interact with call centers, thereby allowing us to lower costs.

Turning to expenses, in the upper right they climbed 7% from Q3 2015 despite, excuse me, turning to expenses they declined 7% from Q3 2015 despite the higher FDIC assessment charges in the quarter. Expense reductions are the result of a number of initiatives. For example, mobile banking penetration helps to optimize our delivery network while improving customer satisfaction, more chip cards help us lower fraud costs and digitalization of processes and statements helps us eliminate paper and related handling costs.

One can observe the impacts of these types of initiatives on the cost of deposits which continued its march lower, dropping below 1.6% this quarter. Focusing on client balances on the left, in addition to deposit growth Merrill Edge brokers assets at $138 billion are up 18% versus Q3 2015 on strong account flows and market valuations. We also increased the number of Merrill Edge accounts by 11% from Q3 2015.

We now have nearly 1.7 million households that leverage our financial solution advisors and self-directed investing platform.

Moving across the bottom right of the page, note that loans are up 7% from Q3 2015 on strong mortgage and vehicle lending growth. As reviewed in previous quarters we continue to focus on originating high FICO score loans which have generally produced low loss rates and strong risk-adjusted returns. Loan growth included consumer real estate production of $20.4 billion, up 21% from Q3 2015 and in line with Q2 2016 as customers continue to take advantage of historically low interest rates.

We retained about three-quarters of first mortgage production on the balance sheet this quarter. Average vehicle loans were up 17% from Q3 2015 with average booked FICO scores remaining well above 750 and net losses remaining below 30 basis points.

With respect to US card -- excuse me, US consumer card, average balances grew 7% from Q2 on an annualized basis, aided by seasonal back-to-school lending. We issued more than 1.3 million cards in the quarter and spending on credit cards, adjusted for divestitures, was up 8% compared to Q3 2015.

Turning to slide 14 and digital banking trends, as I mentioned earlier, we continue to see strong momentum in digital banking adoption with use across service, appointments and sales. Mobile banking is transforming how our customers bank and reshaping our Consumer segment. Importantly, as adoption rises, particularly around transaction processing and self-service, we see improved efficiency and customer satisfaction.

We continue to improve capabilities with the latest example being the launch of our Spanish mobile app which attracted over 800,000 active users in the first 10 weeks. We added roughly 1.1 million new mobile users in the quarter. The pace of user growth has increased despite an already impressive penetration rate of our checking account holders.

With more than 21.3 million active users, deposits from mobile devices now represents 18% of deposit transactions and 26 million checks were deposited via mobile devices this quarter. That is an average of 280,000 deposits per day, an increase of 27% year over year and the equivalent to volume of 830 financial centers.

Digital sales now represents 18% of total sales. And we now have more than 3,500 digital ambassadors in our financial centers driving further adoption.

Also, as you know, we are a leader in person-to-person and person-to-business money movement through digital transfers and bill payment capabilities. Consumers moved $243 billion in Q3, up 6% from last year.

And while all this is transformative, I would just remind you that we still have a little less than 1 million people per day walking into our centers across the US. This in-person interaction is important in terms of deepening and retaining personal relationships, providing more complex financial help and creating opportunities for further engagement.

Turning to slide 15, Global Wealth & Investment Management produced earnings of $697 million, up 10% from Q3 2015. Now it's no secret that this segment operates in an industry undergoing meaningful change as firms and clients adapt to the new fiduciary rules and other market dynamics. The good news is we start from a position of strength with a $2.5 trillion in client balances.

We have market-leading brands and a wide range of investment service offers from self-service to fully managed. Plus we have the resources to continue to invest in market-leading capabilities that address the changing needs of our clients. Year over year, revenue was down modestly but expenses were down even more, improving pretax margin to 25%, up meaningfully from Q3 2015.

Overall revenue declined 2% from Q3 2015 as NII growth was more than offset by lower transactional revenues. NII benefited from solid loan and deposit growth, noninterest income declined from Q3 2015 driven by lower transactional revenue that continues to be impacted by market factors as well as migration of activities from brokerage to managed relationships.

Noninterest expense declined nearly $313 million or 6% from Q3 2015 with half of that benefit derived from the expiration of the amortization of advisory retention awards that were put in place at the time of the Merrill Lynch merger. The rest of the improvement was a result of work across many categories of expense more than offsetting higher FDIC cost.

Moving to slide 16, we continue to see overall solid client engagement. Client balances approached $2.5 trillion and are up from Q2, including higher market valuations, $10 billion of long-term AUM flows and continued loan and deposit growth.

Average deposits compared against Q3 2015 are up 4%, driven by growth in the second half of 2015. Compared to Q2 average deposits were impacted by seasonal tax payments.

Average loans were up 7% year over year. Growth remained concentrated in consumer real estate and structured lending.

Lastly, earlier this month we announced some innovations to our IRA products and services which we believe positions us to better serve our clients given new fiduciary rules. These innovations are industry-leading and address not only the new fiduciary rules for time and accounts but also client preference for more choice and new ways to invest. First, we announced the rollout of a new offering called Merrill Edge Guided Investing.

This solution offers clients online investing enhanced with professional portfolio management. With the addition of this solution, clients have three fundamental choices which they can mix and match to best meet their needs. Clients can invest online completely self-directed through Merrill Edge or if they are interested in enhanced professional portfolio management they will be able to use Merrill Edge Guided Investing or they can choose fully advised, working one-on-one with a financial advisor via brokerage or fee-based advisory platforms.

We also announced that beginning in April 2017 for clients that choose to have a financial advisor provide advice with respect to their IRA accounts, we will provide this service to our fee-based advisory platform, Merrill Lynch One as we believe this is the best way for us to deliver for our IRA clients who choose to have this level of service and advice. Clients will also have the option to invest their retirement through Merrill Edge either completely self-directed or through Merrill Edge Guided Investing.

Turning to slide 17, Global Banking earned $1.6 billion which is up 22% year over year. Q3 reflects good revenue growth, solid cost control and solid client activity. The efficiency ratio improved to 45% in Q3.

Compared to previous third quarters, investment banking fees this quarter were the highest since the merger with Merrill in 2009. Return on allocated capital was 17%, a 300 basis point improvement from Q3 2015 despite adding a couple of billion dollars of allocated capital this year. Global Banking continues to drive loan growth within its risk and client frameworks, producing solid year-over-year improvement in NII.

Revenue growth also benefited from roughly $175 million from gains on FVO loans this quarter versus losses in Q3 2015. Higher treasury fees also added to revenue growth. The decrease in noninterest expense compared to Q3 2015 reflects good expense control that offset modestly higher revenue-related compensation and higher FDIC costs.

Looking at the trends on slide 18 and comparing to Q3 last year, average loans on a year-over-year basis grew $26 billion or 8%. Growth was broad-based across large corporates as well as middle-market borrowers and diversified across most products.

Having said that, as we noted last quarter the pace of commercial loan growth has slowed over the past couple of quarters. Demand across the industry appears to have slowed as well. We remain diligent in certain sectors such as commercial real estate and energy and we are also closely monitoring certain international regions.

Average deposits increased from Q3 2015, up $10 billion of 3% from both new and existing clients. As we grow treasury services we remain focused on quality deposits with respect to LCR.

Switching to Global Markets on slide 19, let me start by reviewing what I said last quarter regarding this segment. The past few quarters are examples of the importance of this segment to not only its clients around the world but also to the customers and clients of all our business segments. Again this quarter, Global Markets delivered for clients by helping them raise capital, buy and sell securities as well as manage risk.

We continue to invest in and enjoy leadership positions across a broad range of products. We believe this improves our sustainability -- we believe this improves the sustainability of our revenue and makes us more relevant to clients across the globe. We've been there for clients when they needed us across all these products.

Our results this quarter reflect this strategy and continued commitment to clients. Global Markets earned $1.1 billion and returned 12% on allocated capital. Revenue was up appreciably year over year and even outpaced typical seasonality by posting modest improvement over Q2 2016.

Total revenue excluding DVA was up 20% year over year on solid sales and trading results which rose 18%. It's worth noting we achieved these results with slightly less balance sheet, lower VAR and 7% fewer people. Continued expense discipline drove cost 1% lower year over year as increases in revenue-related incentives were more than offset by reductions in operating and support costs.

Moving to trends on slide 20 and focusing on the components of our sales and trading performance, sales and trading revenue of $3.7 billion excluding DVA was up 18% from Q3 2015 driven by FICC. In terms of revenue this was the best third quarter in five years. Excluding DVA and versus Q3 2015, FICC sales and trading of $2.8 billion increased 39% as we built momentum as the quarter progressed across a host of credit products and continued gains in rates products.

Mortgages showed particular strength among credit products as investors sought yield. Equity sales and trading was solid at $1 billion in revenue but declined 17% versus Q3 2015 which benefited from higher levels of market volatility and client activity.

On slide 21 we present All Other which recorded a net loss of $118 million. This loss includes a previously disclosed tax charge of $350 million due to the third-quarter UK enactment of a tax rate reduction which reduced the value of our UK DTA. The loss in the current period compares to earnings of $152 million in Q3 2015 as lower security gains and higher expense litigation offset higher mortgage banking revenue. NBI revenue this quarter includes $280 million benefit from higher valuations on our MSR driven by slower expected prepaid speeds based upon recent observed trends in customer behavior.

Okay, let me offer a few takeaways as I finish. We reported solid results this quarter that were consistent with our strategy of responsible growth. We remain focused on delivering responsible growth as well as strengthening and simplifying Bank of America.

Capital and liquidity strengthened. Asset quality remains strong. We grew revenue.

We grew deposits. We grew loans. We delivered for clients in capital markets.

We lowered costs. We invested in our future by adding sales professionals and deploying technology that helps customers better live their financial lives and improves satisfaction. And, importantly, we returned more capital to our shareholders.

With that let's open it up to questions.

(Operator Instructions) John McDonald, Bernstein.

Hi, good morning guys. I wanted to ask about expenses.

Could you talk about what kind of timing expectations you have on the various projects helping to drive down your expenses further in 2017 and 2018? Maybe just remind us what are some of the big items that you are working on? And should we still think about $53 billion in 2018 as your hard target that you are shooting for?

Well let me start with the last part first. Nothing has changed at all for our thoughts regarding the 2018 target that we discussed in the second-quarter call. Again I would note that year over year we reduced expenses by $0.5 billion.

And I would also just point out to remind everybody that if you look at expenses over a longer term we reduced quarterly expenses ex-litigation by $4.8 billion from Q3 2011. That's a $19 billion run rate.

So if you think about what we have to do between now and 2018, I think we've talked about this before, roughly a third of that is going to come from continued progress on the (technical difficulty) loan servicing. The other two-thirds is going to come from a lot of different initiatives across the Company.

We've talked about SIM, our Simplify and Improve initiative. We are going to be utilizing technology to digitize processes, eliminating handling costs. We are going to get technology efficiencies from our data centers consolidation and for more efficient servers.

As I said, we are going to continue to make progress on delinquent loan servicing costs, hopefully see some modest improvement in litigation. Very important part of this is the shift to self-serve digital channels: mobile, online, ATM. So that's what the list sounds like and it goes on and on.

I would emphasize this shift to self-serve. We're seeing good momentum with more than 21 million mobile banking active users. And that's growing every week, every month.

18% of our deposit transactions are now completed through mobile devices. That's better for customers.

It's also better for our shareholders. It's 1/10 the cost of walking into a branch.

So it's all these things put together. It's initiatives across the whole Company. It's going to come a lot from support and operations, but there's a little bit in the front office, as well, as we get more efficient.

In terms of the timing, Paul, is it something that we should think of is ramping throughout 2017? And is it have a longer tail at the end? Can you give us a sense there?

Yes, I would say it's going to be fairly spread out throughout the whole process. However, as you think about one quarter over a next, it's not going to be straight down every quarter. Not every quarter is the same, there's going to be some lumpiness.

If you look at the fourth quarter, for example, we traditionally have some seasonality in the fourth quarter. So generally we will make progress but don't expect that you are going to see it in every single quarter.

Okay, thanks. And then a second question just quickly on net interest income.

Can you help us try to translate your 100 basis point rate sensitivity into something closer to what one Fed hike might do for your net interest income? And what would be the trajectory of NII and NIM if we did get a Fed hike this quarter? What would you expect more in the near term next quarter, too, on NII and NIM?

Sure. So let me I can help you through that. So if you look about a 25 basis point, that would be one quarter of our $5.3 billion in sensitivity.

If you want to assume that 25 basis points increases the long end by 25 basis points you know the answer. you can roughly take a quarter of it, perhaps even a little bit more, because we're probably more asset sensitive on the first 25 than the last 25 of that 100.

But if you don't want to increase on the long end just look at the short end. We've disclosed its $3.3 billion. You can divide that by four and get a pretty good sense of what 25 basis points would do over the subsequent 12 months.

Great, thanks.

Glenn Schorr, Evercore ISI.

Hi, thanks very much. Just curious for a point of clarification, Brian had mentioned Global Markets. It feels like it's taking a little share, alluded to global peers restructuring.

Completely get it, believe it's going to happen. Just curious if you can give a little color on where you might see some of that evidence taking shape. Product, geography, whatever?

Yes, I will try to do that but let me just start with a couple of thoughts. First of all, I think it's difficult to see share shifts in Global Markets in any given quarter. The fee pools are just not as transparent as they are in, let's say, investment banking fees or other areas.

What we know is client activity was up in the third quarter and that's what drives our short-term results. Over the longer term it is easier just to assess what's going on with fee pools and share. So I just want to point out from 2014 to 2015 on declining fee pools we're pretty sure we improved our share.

Third parties tell us that. And I think that share has come from a number of regions and a number of firms and a number of products as competitors adjust their strategies and capabilities.

More specifically, we've been investing in rates for a number of years. I think we're making some progress there. We have a very strong credit platform, as you know.

I think we are making progress there relative to competitors around the world. And I think we are investing in equities. And I think equities revenue is down, but we are seeing an improvement relative to the fee pool in equities as well.

I do want to emphasize, very importantly, that our strategy is to have a diversified product portfolio across both FICC and equities and globally. That's what our clients need and want from us. And so you could see gains one quarter in one place and see something lower in another place, and that's okay with us.

That's our strategy. It's about what the client needs in any given quarter. If we are doing a little bit worse in one place we are probably doing better in another place.

Fair enough. Nature of the business, I guess. One other, one in GWIM I appreciate all the color on the different products and what you are doing in Wealth Management.

The curious move in the quarter was the move away from the commission-based IRAs. And I'm curious, is that move specifically done to avoid the best interest contract?

I'm just curious, based on how we roll forward if the SEC comes in what that might mean. You talked about giving customer choice, but this sounds like less choice for the FA.

Clients are going to have three ways to invest in their IRAs: they are going to continue to do it completely self-directed through Merrill Edge, they are going to be able to do it online but enhanced with professional portfolio managed through Merrill Edge Guided Investing and, again, for those clients who want one-on-one advice and service from their FA they are going to be able to do that on a fee-based advisory platform. What we've decided not to do is use the best interest exemption to allow IRA accounts to be added to our brokerage platform where clients pay on a transaction basis.

After reviewing all her options, let's say, if a client chooses one-on-one advice and service on her IRA we believe the best way to provide that advice is through Merrill Lynch One on our fee-based advisory platform. We took a lot of time to make this decision.

We took months thinking about this. We did research. We believe this is the best interest of our clients and our advisors.

I don't doubt that. I worry about just the execution of it. I'm assuming that it means that the advisor has to talk to the client and explain this whole thing and just --

That's right but the advisor is going to have to talk to their clients and explain the best interest exemption. That's going to be much harder a conversation than the one we are going to have.

Fair enough. All right, thanks, Paul.

Betsy Graseck, Morgan Stanley.

Hey, good morning. A couple of questions. Just one on loan growth.

Could you give us a sense as to how you think you are trajecting there? We talked a little bit about market share and trading, could we talk a little bit about how you think you are doing in the lending side of the equation and if there's any legs there?

We feel good about loan growth. The economy feels good, so we are confident we can grow. But, of course, there's going to be some uncertainty and as I said in certain sectors in certain regions around the world.

I would remind you that we are focused on responsible growth. So we are going to look a little bit different than some of our competitors in some places but we feel good. Year over year if you look at our business segments we had 7% loan growth.

So one of the areas that I just want to dig in a little bit more to is on the mortgage side where you have had some good loan growth. But I'm just wondering if there's more opportunity there as it relates to either taking some duration exposures or on credit as you've moved into some wider credit boxes with my first home which is insured by Fannie, Freddie but just want to get some color on that.

Betsy, if you go to page 6 of the materials you can see that we are continuing in the mortgage area overall. So I think both in the home equity and first mortgage loans.

You can see that we continue to run off some of the non-core portfolios and overall the balances grow in the business segments. And we expect that to continue. We are doing about 2,000 applications a day, about 1,000 each plus in each of the products that has continued to grow. And so we will continue to drive that core capability to the customer.

In terms of expansion of product sets we have a limited product for that we've built for similar to 3% down payment for $0.5 billion a year of production just to give us a more competitive product there but limited the size. And we will do some other things, but we are going to stick with the core credit.

Remember who you are talking to here, Betsy, and our experience in mortgage is probably deeper than most people. So we will stick with what our customers need and what we think the right business for the Company is.

Okay, so as you are thinking about your revenue growth from here, which are the three key legs that you expect are going to keep that revenue growth going?

Well, I think if you think about the growth you've got the interest side and you've got the fee side. And if you look at the interest side it's going to be driven by balanced growth between loans and deposits. And I think we keep growing deposits year over year $60 billion, we are paying 4 basis points in Consumer and think about that dynamic and putting that to work in anything we can is important.

And we continue to grow loans at less rate than we grow deposits. That's going to drive our NIM is just a bigger and bigger, lower lower cost deposit base.

And on the loan side I think Consumer is growing better now than commercial linked quarter but overall we expect commercial will kick back in a little bit as the economy continues and some of the uncertainty lifts in the political season here. So on loans and deposits it will just be growing and now as you've seen year over year core growth of 7% on loans and growth on deposits.

On the fee side what you are seeing is the dynamic in especially consumer fee areas finally turn a little bit stable and then turning for us in the card revenue and things like that, which we've hit sort of the inflection point where the run down and relative interchange due to selling some portfolios and getting out of non-core portfolios and putting on the core portfolios with rewards attached to it which helps us generates deposits and things like that has stabilized and you are starting to see in the last few quarters card income start to move up a bit.

And on service charges it's been relatively stable. So the fee side will be driven more by Wealth Management markets and things like that. And Consumer is stable, which is good because it had been a drag for a long time.

And then on the expense side you indicated all the various technology efforts that you've got underway but is there more that you can do on the comp side as well?

We continued -- when we have less people going through our bonus pools and stuff you can see that comp continues to drift down. A large part of a comp, obviously, is the financial, in the Wealth Management business which there is no meaningful changes there. But in the other business we continue, as we have less people we continue to reduce that as a percentage of revenues.

Okay, thanks.

Jim Mitchell, Buckingham Research.

Hey, good morning. Maybe you could talk a little bit about the credit cycle.

I think one of the major pushback from investors is that we are going to start to see credit get worse but I think you guys have been pretty clear that you are not lowering standards to drive growth. So how do you think about the cycle from here, I guess that's the start?

I said earlier if you think about the last several quarters of earnings calls it's been getting better than this and every quarter it gets slightly better. And that in part is because we are still getting the benefits of the changes made six, seven, eight years ago coming through the Consumer business i.e., that what we call back book portfolios or legacy portfolios or whatever word you want to use continue to run off with higher credit risk. And we keep putting on and have put on and continue to put on higher credit quality.

So I think if you think about overall charge-offs of 880 this quarter that's a driven by the Consumer business and that's driven by the card and the legacy home equities. So keeping the card business where we want it is critical and you are seeing this continue even as we start to grow that portfolio, both nominally and rate the charge-off picture is strong. And so when you go back and look at what happened during the crisis the charge-offs came normally from the edges of credit and we've kept ourselves out of it.

So you feel like you can keep your lease ratios as you grow pretty stable?

We have done that.

Okay. And maybe a follow-up on the capital ratios. Paul, I saw that the RWAs dropped while the balance sheet grew a little bit, so it seems like you've reduced risk. I guess where was that and can that continue?

Yes, you are speaking under the advanced approaches we had a drop. We had it under standardized as well just a little bit less. And that drop came, again, from legacy portfolios running off and from continued work by our Global Markets teams to better manage their balance sheet relative to those ratios.

Is there any more detail or can you get a little more from here?

Yes, look there's always more to do and we are focused on a lot of different regulatory metrics. We are looking at all of them. There are some that may be a little bit more important than others.

Right now we are focused on all of them. And I think there is more to come there.

Obviously, as we do grow the balance sheet, as we grow loans and deposits we are going to continue to see some increase particularly on the standardized side. But I think we can, relative to that growth I think we can continue to make a little bit of progress incrementally.

Okay, great. Thanks.

Matt O'Connor, Deutsche Bank.

Good morning. Can you talk about the strategy within the securities book?

You did mention that you added some later in the quarter and, obviously, deposit growth has been exceeding loan growth to justify that. But maybe just some color in terms of what you are buying, the duration and how to make sure it doesn't get too big relative to the size of the balance sheet.

You pick up on the core thing that drives. We have a securities portfolio because we have more deposits coming in, then we have loans. So our view of that portfolio is we don't take credit risk there and so we have two alternatives, treasuries and mortgage-backed securities, or cash I guess is a third.

And so that's how we invest it. And Paul can take you through his earlier comments a little bit and give you some color on that. But I think people always have to remember the reason why we have more is because our deposits grew at $60 billion year over year and that's more than our loans grew by quite a bit.

So, Paul, do you want to answer, give some color on that?

Just one step back. Obviously what we are doing every day is managing earnings, capital liquidity and interest rate risk when we think about that portfolio and where we want to invest things. This quarter as you noted our deposit growth exceeded loan growth and so we did add significantly to the investment portfolio.

Most of that incremental amount we devoted to treasuries. Just as we think about the balance in that portfolio we wanted to just add a little bit more treasuries. That's really kind of it.

Okay. And then a little bit related but on the deposit side, obviously, very strong growth year over year. You mentioned $60 billion and really little to no repricing despite the one bump in Fed rates that should impact the year-over-year comps.

So I guess the question is if we do get a rate increase, do you think you've got more flexibility to limit deposit repricing given it's basically worked so far and the loan growth is, obviously, not enough to absorb the deposit growth you have?

Remember that the reason why you don't see much repricing is really two or three dynamics. One is a full $450 billion of our deposits are noninterest-bearing. So they aren't going to reprice.

The great debate is about how sticky are those? And if you think about that, those are dominated by our Consumer business and our noninterest-bearing accounts in Consumer have doubled in size over the last five or six years due to focusing on primary accounts, grew up to 90% primary accounts in the household where they run their household finances through our account and, therefore, they direct deposit their check and things like that.

So the first thing to remember is that $1.2 trillion, $450 million noninterest-bearing and a dominant and part of that Consumer and also in the Wealth Management and the transactional account of both Consumers. And then on the business side similarly we have a driven our deposits to be really LCR friendly into core operating accounts.

And so those aren't going to move, they are noninterest-bearing and they aren't going to move much and the big debate is how much balance will be in there and we feel confident the balances will stay just because of the nature of the accounts. And then when you go to the second dynamic, remember that even with all this deposit growth one of the things we continue to do and the impact is less and less is we are expecting Consumer business running off CDs still at a fairly decent clip that were historically used to fund prior companies' balance sheets that we don't need the funding that cost. So we have some rollover but that continues to decline.

That weighted average cost drops off -- that cost drops off and drives down or hold steady the average weighted cost. And then if you look at money markets and other interest-bearing they really haven't moved much.

So we feel good about the consumer -- we feel good about the deposit base overall. We feel very good about the consumer deposit base, just crossed $600 billion for the first time in the Company's history in Consumers generally.

And with that, I think if rates rise we think that it's substantial value for the Company. And Paul gave you a way to think about that earlier with a quarter of $3.3 billion -- 25% of $3.3 billion.

Okay, thank you very much.

Ken Usdin, Jefferies.

Thanks, good morning. I want to ask about the card business a little bit. I saw in the deck that you grew card issuance at the fastest level since 2008, but we are not really -- and there is a burden on the fee side, with reward stuff, balances are still flat.

I was wondering if you could walk us forward and help us understand a little bit better just the ROA and income direction of the card business? When do we start to see that show up in both balances? And when do expect to see that fee growth come along for the ride given the good underlying growth that we haven't quite seen yet in the financials?

So look, I think you are noticing some modest card balance growth in the quarter, which we think will continue as we add new accounts. And, again, we are very focused on adding high-quality accounts there.

I think you probably also noticed that while combined debit and credit card spend was good in the quarter at 5%, 6% if you include fuel, I'm adjusting for divestitures last year, that the growth in the card income was impacted by, as you noted, customer reward programs. However, I think just focusing on the fee income misses some really key benefits of our strategy which is to attract relatively higher-quality card customers and reward them for deepening their overall relationship with us.

This strategy really drives deposit growth and makes deposits stickier, plus we believe these customers have lower loss rates. They use the call center less which helps us lower costs. I think when you want to see the effect of this you have to look at the overall Consumer segment and what's going on there in terms of growth of profits and improvement in expenses.

And just lastly I would just point out, look, our risk adjusted margins on card are strong at over 9%. This is in no way a signaling that we are not going to be able to grow the card income line. I just want you to get a better sense of how we think about it.

I think if you think about that more broadly, we had the last divestitures of size we made in this card business were the fourth quarter of last year and they are through the P&L, so they are through the balances and through the thing. So what you are starting to see if you look at the trend this year is you are starting to see movement, positive movement both in card income and in balances as we move across the year. And we expect that to continue.

It will be strong, responsible growth. And one of the great debates we have in the Company is people say, why can't you grow this faster? Or why can't, we are giving up too much in the interchange for the preferred balance or preferred rewards, the interesting question is are you giving up something you'd never have in the preferred rewards i.e., we are bringing more customer relationships in depth and that gets us something.

So incrementally the net interchange is actually there as opposed to what theoretically you get gross interchange with a non-customer in an affinity program. So we focus on the entire customer relationship. It is very valuable, it is very profitable and believe me if we could grow it faster responsibly we would.

But the idea is just to grind out the slow, steady growth and we are starting to see that come through. And largely it was masked in 2014, 2015 and behind that 2013, those areas because we were divesting a lot of non-core relationships and now we have the core affinities we want and we have the core card businesses we want.

And, again, I think you can see it if you look at the whole segment. I don't want to start comparing us to peers, but just take a look at our PPNR year over year. It's up 10%.

Understood. Second quick question is you mentioned that you are now achieving the cost of capital in an ROE above 10% and capital is still building.

Do you think you can continue to hold if not improve the ROE as capital will likely continue to grow, presuming that you still will get those benefits going forward and you are not at the point of returning more than 100% of your earnings yet?

Well, I think embedded in that is the future return of capital. And we now have a significant buffer above the requirements. And as Paul said we continue to try to optimize our core.

So I think you are a little bit of a horse race between increasing earnings and increasing capital. And as we return more you expect that the horse race of increasing earnings would stay ahead of it. But we've got room to go and we are driving at it.

But if we don't hit -- if the issue is that our capital continues to grow, that capital is also yours as an investor and continues to go into our book value. And so it's not going anywhere. It's there to be returned when we can get through the process of getting from where we are to higher percentages of capital return and ultimately returning excess capital.

And we have a goal to return more.

Understood. Thanks, guys.

Mike Mayo, CLSA.

Hi, you've reduced your branch count from 6,000 to 4,600. Where do you think that count can go? And on the one hand we heard you say almost 1 million customers walk into branches each day but on the other hand you have grown deposits $1.2 trillion.

You did mention more self-service digital channels. You did mention mobile banking is 18% of the deposit transactions. And less reliance on the branches might ease any extra pressure to sell more products in this low rate environment.

So where do you think you might take the branch count to? And I don't think you mentioned the impact of the cross-selling issues on Bank of America or if we wake up one day and find out that Bank of America did something inappropriate.

Well, let's go to how we run our Consumer business. So we run our Consumer business consistent with responsible growth for the Company. And what that means is that you focus on deepening relationships, what we call a stairstep where the core deposit account, the quarter credit card and getting it used in the core mortgage, in the core home-equity and the core auto loans.

That's what's been driving it and we'll continue to drive that. That is the backbone of what we did and how we repositioned this Company over many years.

In terms of the branches, Mike, you rattled off all the statistics which Paul talked about earlier. But it is a complex optimization, but it all starts with the consumer. What is the consumer going to do?

And so while 18% of deposits are made by mobile deposits, 82% by their nature aren't and where do they go, about 50 percentage points of that go through the ATM machines and about another 30% odd go through the teller line still today. And so you have to be ready and able to serve in all dynamics.

And so what we continue to do is optimize the branch structure, the call structure, the ATM structure, the mobile structure and the online structure altogether. And the way to think about that optimization and why it's an extremely important business to this Company is that we've gone from 300 basis points of the cost of all that to deposits to about 150 over the last six, seven years. And that's by continuing to optimize the physical plant as well as all these other means.

And so if you ask me your question is how far can go? You have to also then think about what we want to go on at a branch.

And so if you look back at some of the statistics that Paul had in the deck for Consumer where you see things like appointments set up or 340,000 in the third quarter, so just think about that. 340,000 times a customer went on a mobile phone and asked to come to a branch.

And so we need those branches to receive those mobile phone customers and why are they coming? Usually for a much more important financial transaction to them than handing us a check for deposit. So it's a quality versus quantity and making sure we understand that.

So we are optimizing all those and you can see on page 14 on the lower right you can see the different moves. I'd say we went from 7 million visits probably four or five years ago to 6 million to 5 million. But those five are of a higher quality and we think that's important.

And there certain transactions and certain capabilities that you just have to have at your branch, you just have to do face-to-face. Very difficult things like how to get a power of attorney for a parent that's sick or I want to do a mortgage, it's still difficult to do through the phone and things like that. So we will have all aspects, we will drive it down and you can see that we continue to make that progress.

I mean just as a follow-up, on slide 14 it's kind of thing Bank of America we're a FinTech Company, and look how well we are doing. And you are showing some good growth rates, that chart on the upper right.

So at what point does that lead to a greater number of branch reductions? Is this do you have the answer and you don't want to say for competitive reasons? Or you don't know yet, it's kind of a give-and-take based on the customer experience?

Some of your competitors talk about closing 100 to 200 branches per year. You've reduced 112 over the last year but it seems to be slowing. So I'm trying to get a sense of that.

I'd say that the point is that we run this business and we start with the consumer and their activities and their behaviors, and so what they want to do. And the key is not to get ahead of them because that can cause you problems and not to be behind them because that can be cost issues and empty branches.

So even in the 112 we are down we've added branches. And places like Denver, the Denver branch that we added are in the top 10% of performing branches today on relationship building. We've added branches in Manhattan, we've added branches in Minneapolis.

So we are in a sea change in terms of what the branches look like individually. The new branches are different. We are adding branches we didn't have and we are closing branches where the utilization isn't there.

The nature of how far a customer will travel is also different now than it was 10, 15 years ago. So I think you said what all the different reasons? The answer is I think you said is we will follow the customer.

And I don't know the exact number because I can tell you eight years ago when we had 6,100 there were people that said there was never going to be less branches in our system and maybe we should add more. And guess what? We are 4,600 -- 4,500.

All right, thank you.

Paul Miller, FBR & Company.

Yes, thank you very much. You guys took an MSR write-up or hedging benefit, I can't really which one it is, about $360 million. But you did write up the MSR from 51 basis points to 60 basis points.

Was that all rate driven? The 10-year did go up a little bit. Or was that also some better credit metrics out of the servicing portfolio?

You are right, we had a $280 million benefit this quarter and that was from a higher valuation of the MSR, which was due to slower observed prepayment speeds. So we are just updating our -- the way we value that.

We have to monitor -- it's a level III assets, so there's a lot of things that go into that. It's hard to value and you've got to continually be looking at that valuation. And we thought it was time based upon observations of prepayment speeds to make a change in some key assumptions.

Okay, guys. Thank you very much.

Eric Wasserstrom, Guggenheim Securities.

Thanks. I just wanted to follow up on a couple of questions related to the various consumer lending businesses.

First, Paul, just from your response to Ken's question a moment ago on card, I heard everything you said about the risk-adjusted margin and the credit quality of the portfolio, etc. But just to be clear, are you expecting improving, stable or deteriorating ROA based on the current competitive environment? Because it seems like many peers are underscoring the near-term risks to profitability from rewards and customer acquisition costs.

Based upon how we are growing the business, how we are running the business we expect stability.

Stability, okay great. And with respect to mortgage I saw there was about $100 million benefit from rep and warrant release. How much of that research still exists and what would be your expectations about potentially realizing it at this stage given where we are with respect to that issue?

I think the rep and warranty is a contra-revenue. So is that what you are referring to?

Yes, correct. It's the provision line item. You had a negative provision.

So that's going to bump around. That bumps around because --

Hey, Eric, it's Lee. I think what you are looking at, what Paul is referring to is the contra-revenue item. So it's a negative revenue item when it's a provision expense on the provision, okay?

Okay, maybe I will come back to you in a bit. Just finally on auto, it seemed that some peers were signaling that competitive conditions in auto underwriting were easing a bit after intensifying over the past several quarters. Are you seeing anything like that across any particular segment of the FICO strata?

We are continuing to see good growth in consumer vehicle lending the way that we run the business. We are up roughly 7% or $7 billion or 17% year over year. Again, though, we are focused on prime and super prime.

So originations were down modestly Q3 versus the prior quarter as we accepted a little bit less dealer flow but we still feel good about that product offering. The third-quarter average book FICO scores remained at approximately 770. Debt to income was at all-time lows.

We are not following the market expansion to 84 months in terms of tenor. We have got a maximum tenor of 75 and I think in the third quarter we were averaging around 67. So we are getting the growth within our responsible growth framework and we feel good about it.

Thanks very much.

Steven Chubak, Nomura.

Hi, good morning. So I want to kick things off with a follow-up to an earlier question on the DOL.

Paul, you had noted that Merrill FAs will no longer be permitted to engage in brokerage activities in retirement accounts. And I was hoping you can give us an update as to what portion of Merrill client assets are currently in brokerage IRA?

And maybe more specifically, how should we think about the net economic impact from transitioning some of those retirement assets into some of the other offerings that you highlighted, whether it be fee-based which should generate higher fees versus robo or self-directed Merrill Edge?

Sure. So the primary affected portion of our business is in the transactional brokerage retirement accounts.

And if you look at our roughly $2 trillion of GWIM client assets outside of loans and deposits we would see the DOL rule having an impact on significantly less than 10% of those balances. And, again, that's as the industry works towards the full implementation of the rule in January 2018.

So as you noted we are going to see some geography movement on the P&L. There's going to be some shifts.

And if I had to guess today we might see some modest revenue impact in 2017. But it's really way too early to know how it's all going to shake out. But we would expect to mitigate that in subsequent years.

People, Steve, when you talk about backing up to the fuller trends on Wealth Management and there's been a constant decline in brokerage revenue over the years largely because the industry and we have been moving more to a financial device to manage the account execution. And so in, obviously, a limited portion of that is IRA-related in both counts. But the reality is this is against the backdrop that you will see, that brokerage number has the number has been tough to chase for five years now.

Got it. Okay. And just one other quick follow-up on the same topic, the press article have highlighted some of the changes that you've made indicated that some clients that would transition to the, quote, higher touch advisory offerings will be rebated some incremental fees.

And I was wondering how are you planning to apply changes to the fee structure for those brokerage assets that do, in fact, transition? I'm just struggling to see how a two-tiered structure might work in practice across the hundreds of billions of assets that would be affected here?

I think the implementation has to be very carefully handled. And the team, Andy and John, have been leaders in trying to figure this out the right way for the client. And we start with what's best for the client.

So what you are reading about is there will be adjustments made clients by clients based on their circumstances and what they want from us. And the FAs will engage in a lot of conversations about that as we go through the next several months.

Got it. Okay, thanks Brian. Then just one more on the topic of capital, just switching gears for a moment.

Following Tarullo's recent remarks, there's one area of debate has been whether the Collins Floor would, in fact, apply to this new capital framework, i.e. whether you will be forced to manage to capital minimums under both the standardized and advanced approaches. And now that you've had some time to digest the initial release or guidance I was wondering if you can give us any insights into how you are thinking about that potential change?

Okay, well, look that's, obviously, a pretty technical question. And it's not that we haven't thought about it, but to be frank it's just a speech at this point and he didn't really address that in his speech. So we don't know the answer.

That's one of the questions we have. I think once we get the Fed's proposal we will have a better idea. But all I can tell you is based upon our current reading of the speech, in particular some of the changes you mentioned in CCAR around asset growth, we think that the substitution of the capital conversion, conservation buffer, sorry, capital conservation buffer with the stress capital buffer would not be a material change for Bank of America given our risk profile and given how we run the Company.

Got it. I recognize it's early days, Paul, so I appreciate you taking, making the effort to answer the question. And that's it for me.

Brian Foran, Autonomous Research.

Good morning. I guess we've had a couple of good quarters in FICC both for you and the industry and I know volatile business not really looking for quarterly expectations.

But just more broadly there is an investor debate, is it just a couple of good quarters or has the business absorbed all the changes in regulation, absorbed low rates, absorbed all the restructuring required and the cycles inflecting FICCs at the bottom and has upward pressure from here? So where do you come in on the debate? Is it a couple of good quarters at this point or has FICC bottomed?

Well, the way I come at that debate is to go back along many years ago and think through the repositioning that was done in our Company and so the key was to make FICC work. You are talking more revenue, but we look at profit.

And so to get the profit we needed to out of the fixed income and equities business we had to take the cost structure down which we did in 2010 and 2011. Tom Montag and the team worked very hard at that and got breakeven down over $1 billion a quarter.

And then we ran along a number of years and then they've actually had taken out, year over year you can see the costs continue to be managed well despite higher revenue. So I would say taking the discussion I'd say the way our fixed income business generates revenue a lot of it is around our capabilities, underwriting capabilities in all the different variations from high-grade leverage to everything that goes on. And that's a relatively stable pool of revenue that you see repeated.

What goes up or down is really the activity around that based on the market seizing up in certain quarters in terms of issuance and things like that. When you think about the other thing that Tom and the team had to really go after which is to broaden our capabilities in the macro segment a little bit because that was something that traditionally the Bank of America Merrill Lynch teams came together. And he has done that so that's added some more volume to us.

So we think we've been gaining share, as Paul said earlier. When you look at revenue comparison among the top 10 banks without all the leak charge for just revenue, and we think it's driven by our fixed income capabilities and it's driven by our connectivity from the issuer of the bonds in debt to the investor. And we will continue to drive that.

And so the team has done a good job. And I'd say we are at a fundamental level.

This quarter feels better than last year's quarter. It's not a quarter that when you look across four or five years that we haven't come close to on many cases and have done better than a few times.

Thank you for that. I guess a similar question on commercial lending.

You referenced some of the strategies you have in place driving responsible growth and how you felt good about the business going forward. But we saw this pause across the industry in the third quarter in commercial growth, the Fed numbers, your numbers, other banks reporting so far. Have you seen signs of customer demands coming back, I guess, late in 3Q and early in 4Q, do you have visibility and confidence that the commercial loan growth cycle more broadly is still in gear?

We feel -- I think let me start with what we noticed in commercial in the quarter was lower industry growth this quarter I think that really reflected a slowdown in closed, actually booked closed acquisition financing for us, which is probably maybe could be different for peers depending on the timing of transactions and then uncertainty around the election and then I think some lingering concerns around certain countries or regions. That's what I think impacted the third quarter.

When you look at the US, when you look around the globe, when you look at GDP growth we are optimistic. We think the economy feels good. So in a good economy we should be able to grow commercial loans.

We will have to stay focused on some sectors in some regions but we think we can grow commercial loans. Utilization rates and revolvers, they came off their highs but they are at the higher end of the range which also suggests or reflects good commercial activity.

We are adding bankers in the US in commercial banking and small business. We are adding them to regions where we know we have some synergies or some capabilities, some big MSAs. So there's no reason why we can't grow within our responsible growth framework assuming the economy continues to chug along here.

Also if you think about by sub asset class, in real estate we modulate our growth there based on our view of wanting a diverse portfolio and then how we lend in the business. And if you see that number it was growing and it has flattened out a little bit and that relative to others that was the difference. But I think to Paul's last point is a key point.

There are creditworthy customers that we can do more with and the only way to do that is because we have a talented world-class commercial banking team is to add more capacity. And that capacity is starting to build, and it takes a while because you hire a commercial banker and we sometimes give them some of the undercovered names in our portfolio or else then they go after the prospects that we have, then it takes a while to build those up. People don't change their commercial banking relationships in an afternoon.

So in our business banking and our middle market, especially across America, we have been adding commercial bankers and we expect that to redound to our benefit. Given an environment which may be solid but okay we'd expect to gain share in those markets as those bankers come on stream and become more productive and Alastair Borthwick and Katy Knox, the team that's driving that, has proven that those bankers do get share and you will see that come through.

Thank you both.

Nancy Bush, NAB Research.

Good morning guys. We are all, of course, very attuned to the issue of fraud after the recent news at Wells Fargo, both on the customer side and on the employee side.

I guess my question to you would be as you move more to digital methods of attracting customers and keeping customers, etc., is fraud on either side becoming a bigger issue? Or if you could just speak to the whole issue of how you prevent fraud as you become a more electronic bank.

I think when you think about fraud most people think about in terms of the electronic side most people think about credit card fraud and fraud as a broad worded, arguments about whether the charge was valid, whether a merchant and things like that. So there's a long history of adjudicating that.

So more and more sales go online by the consumer the techniques for online are continuing to develop. At face to face or point-of-sale, the chip card when we are largely through our customers having chip cards, merchants, what we call chip-on-chip, i.e. our chip card used with a merchant chip machine is rising a percent or so a quarter and is now as best we judge it in the 30s, the high 20s or something like that, Nancy.

So all that being said, we expect to get leverage in our fraud losses in a Consumer business year over year and we expect that to continue to come down. So yes, that is a major initiative for us to continue to drive that down.

Part of it is education to consumers, part of it is getting the chip cards in the hands and getting the machine, merchants using the chip machines. Part of it is the tokenization and the wallets and things that go on in Visa Checkout and all the variations of MasterCard and getting, because that's a tokenized better execution and is more secure.

So our view as a provider has been to adopt all these wallets and technologies that have this tokenization capabilities and that then drives down the cost of losses due to merchant complaints and other types of things. So you are absolutely right: cyber security, theft of cards from other people and sold on the Internet, all that stuff is important to us. And so we spend, as we said, $0.5 billion a year protecting ourselves but also part of it is making sure we understand who our consumers are in terms of lost cards and things like that.

Well how about on the other side, the employee side, opening false accounts. If you could just speak to how you think your methodology is different from what produced the problems at Wells Fargo.

Maybe I will take that one. Look, I want to take just one step back because to really answer that question you just have to have a better appreciation for how we run Bank of America. And it truly really does start with our purpose, which is to help customers better live their financial lives and then from there you have to understand what we mean by responsible growth.

So if you ask anybody in the Company, responsible growth, it's about developing relationships so that we can grow with our customers over time based upon their needs and goals. It's not about the number of products that we open. It's whether customers want or need the products and services we are offering them and use them.

That's how we measure ourselves. We've spent years building controls and governance and escalation around this. We are always monitoring them.

It's just how we run the Company. So that's probably the best answer I can give you in terms of how we think about this issue.

And Brian, I have what is going to be a difficult question for you. But in response to the problems at Wells Fargo we have seen them separate the chairman and the CEO roles. And while that may have been due to exigent circumstances, do you foresee another push now either by regulators or by shareholders to separate those roles?

Nancy, I'd say this, we have dialogue with all our shareholders often and Jack Bovender, our Lead Independent Director. Obviously, we went through this a year or so ago. And last year the shareholders they voted on it, but the key is how we run the Company and how we govern ourselves.

So, again, Paul's view of what he talked about responsible growth, one of the tenets is to be sustainable and sustainable, all growth has to be sustainable and it involves things like you've got to invest in the future. But it also involves how we govern the Company.

And our Board, the independence of our Board, the experience on our Board, how they approach their responsibilities I think is very strong. And I think our shareholders have understood that and agreed with that.

So I think we govern ourselves in a very tough fashion i.e., the Board's demanding on us and understands the strategy and has helped support the strategy through some times when people would challenge it. And I think it's proven to be the right strategy at this point.

So if you get to the technicalities our Lead Independent Director duties are as strong as anybody's in the industry. If you look at all the new governance surveys that have come out, all the words about proper governance and all the different things you've seen recently, we meet or exceed everything anybody says to go to. So I feel comfortable with that.

All right. Thank you.

Brennan Hawken, UBS.

Good morning. I just wanted to follow-up on the fiduciary rule questions before. So I appreciate retirement assets are less than 10% of your balances as you've highlighted before.

But I think what a lot of folks are thinking about here is that SEC has been pretty clear that they are working on their own version of this applying to taxable. And so when people watch what you are doing here on the fiduciary rule for retirement people it's sort logic to assume you would apply the same policy in the event we see a similar rule come out more broadly.

So isn't that the message that you are basically sending to FAs? And aren't you concerned that FAs might look at your platform versus some of your competitors that will offer the BIC and think that they might have greater amount of flexibility as some of those other platforms?

Okay, so look. When you look at advisor attrition today it's at all-times lows. And we don't expect significant attrition for the same reasons that attrition is low today. Merrill Lynch is a great place to work and serve your clients.

So if you are an FA you are looking at a platform, we have market-leading capabilities, we have breadth of products across banking and wealth management, we have lots of options in terms of servicing clients. We have got great technology that we are investing in, tremendous transparency that provided through Merrill Lynch One award-winning research and incredible global execution through global markets. So there's a lot of reasons to be here.

This is a great place to serve your clients. We are implementing a strategy that creates significant flexibility for our advisors. And we are delivering fiduciary best interest advice to clients.

I said it before. When we came to this decision not to use the best interest exemption after a lot of months of thinking and research, and this is better for our advisors and it's better for our clients. The best interest exemption is going to create confusion, it's got operational pain for clients, it's going to be inefficient and cumbersome for advisors. This is the best solution we believe for our clients and advisors.

And if you look at the brass tacks financials in the third quarter of 2016 we had $4.4 billion of revenue in our Wealth Management business. Of the $4.4 billion, $500 million of it in total was brokerage. And so this part of the business has been declining in favor of financial advice to the client and to managed portfolios that meet the needs of the client and have investment framers and decisions based on the client's goals.

So the goals-based method is the dominant method in our business. And so you've seen a constant growth in asset management fees, net interest income and other sources of revenue and, frankly, a constant decline in the brokerage business across many years. And so the SEC has an obligation in the rules to issue a rule on this at some point, and they will and we will adjust to that there, but it's consistent with where we have been taking the business for five or seven years.

Sure, sure. I get it and there's no question that commissions have been declining.

It is just that when you look at some of the asset classes like alternatives and such it's hard to get everything to fit into a fee-based approach. So that was the gist of my question. Maybe going a different direction --

Well, again, just to be clear we are not doing away with brokerage. Brokerage is going to be -- unless something changes in the industry, and that's going to affect everybody, we are not doing away with brokerage. Brokerage is a very important part of our advisory relationship and FAs will work that out with their clients what's best for them.

Right. But if we take the logical conclusion that your approach here with retirement would be similar to taxable under the assumption and, look, all of this, I am making assumptions with all of this, but we all have to, that the SEC comes out with a similar rule, then your option within to maintain brokerage is self-direct. And I could see how FAs might dislike the idea of having a component of their relationship move effectively away from them.

So what has been the response from FAs of this idea that if we want to maintain brokerage it has to go the self-directed route? And has that tapped in on any of the worries that some of these brokers have seen much of their book shift over to discount brokers that would fit in that type of an approach?

I think you've stated yourself that you are making a lot of assumptions. Let's let it play out.

We have the biggest and most capable business in the world making more money and having better margins than anybody else. I think we will figure it out.

Okay, thanks.

Matthew Burnell, Wells Fargo Securities.

Thanks for taking my question. Perhaps a bigger picture question. On your media call you were, I guess, asked a question on Brexit, and it sounds like you do have plans in place for that which certainly makes sense.

I guess given relative to your $53 billion cost target for 2018 and the fact that the negotiations seem to be starting to gear up early next year, how are you thinking about the costs in the Global Markets and Global Banking businesses from Brexit if it ends up being a harder Brexit than a softer Brexit?

Look, I think it's just too early to tell at this point. We don't know how it's all going to unfold in the UK and in Europe. We don't know what the effect is going to be on our clients on the new rules.

So as I said on the press call we've developed plans based upon various scenarios and we are going to have to wait and see how everything unfolds to know what we are going to do. But as I emphasized on that call, today we are focused on our clients. And as I alluded to, this impacts them, too.

So for now we are just working with them, providing them loans, helping them raise capital, store and move their money, manage risk. That's what we are focused on.

Just remember materiality here. So the markets business is about 20% of our expense base today.

That's the entire business. So I don't think the impact of Brexit in the overall Company, we would manage it without having any impact of any great magnitude. As it relates to the European business itself, it will have an impact if it costs us more but not to the whole Company.

Okay. And then just a quick administrative question.

You mentioned on slide 9 that the nonperforming loans in the commercial portfolio were increased by $340 million quarter over quarter. It seems like it's mostly in the energy and related space. Is that a US or are those US credits and what's your outlook for those balances going forward?

Yes, it was to credits, one in metals and mining, one in the US. And if you look at the ratio it's at a very comfortable level.

So that doesn't concern us. If you note criticized assets were down in the quarter. That's because these two credits that went NPL were already in reservable criticized.

Okay, thanks very much.

Vivek Juneja, JPMorgan.

Hi, thanks for taking my question. Couple of questions.

Paul, your deposits at the Fed declined pretty sharply, almost 20% linked quarter even though you had deposit growth and given that long-term rates are still very low. Can you talk a little bit about what drove that thinking?

Yes, we moved some cash into securities. Again, we are always managing the trade-off between liquidity capital in terms of interest rate movements and returns. And we just deployed some of that as I said in U.S. Treasury, so you can think about it going from one part of the government to the other.

We just moved them to get a little bit more yield. We feel good about that move and we will continue to optimize our cash and investment securities.

Is that saying that you don't expect rates to go up that much given that you move credit a chunk at a time and long-term rates are pretty low?

I'm not sure we're making any -- we are not projecting any view of rates . When we make that move we are just balancing liquidity capital and earnings.

It's a big portfolio. We are always looking at it to make sure that we feel good about where we are at any point in time.

One more question. Earlier you mentioned that global, in response to a question that Global Markets was doing a better job managing the balance sheet. Could you give us some more color about what specifically they are doing?

I'm not sure I really want to give much more color than that. They are doing the standard things you might do to optimize RWA, create compression, looking at returns on various assets and just optimizing.

All right. Thanks.

Marty Mosby, Vining Sparks.

Thanks. I wanted to ask you about two strategic balance sheet decisions.

One is that there seems to be a lot more retention mortgages. So when we have these surges we are not picking up as much mortgage fees but growing mortgage loans maybe a little bit faster. That is a shift, and do you think that will hold mortgage fees down and trade-off for further net interest income down the road?

Yes, you've got the dynamic. But the reality is as Paul was just answering the last question we continue to build cash that we need to put to work. These are our core customers, very high credit quality mortgages and pipeline has grown quarter over quarter and continues to grow and production capacity and capabilities.

So you've got it right. The technical differences instead of recognizing the upfront gain on sale of the mortgage and capitalizing the servicing you see that come through NII over time. And so and the other dynamic, remember, is the MSR asset will continue to drift down because we have less and less third-party servicing.

And, again, I want to point out we've done a lot of thinking about that. And we think maybe there's a near-term impact on earnings. But long term we think that's a better strategy for our shareholders given the risk profile of the mortgages that we are originating and putting on the balance sheet.

And kind of in connection with that you talked about the big question on asset sensitivity which is duration expectation on your deposits. As you've gone through this cycle, and initially we all assumed that there was going to be a lot more volume runoff than the volumes that keep going higher, have you adjusted that duration and is that part of why you are also comfortable putting on more mortgages that have that longer duration feel to it?

In terms of the technical modeling for NII we still use the same assumptions we've used. You could have great debate in our Company whether we think those assumptions are conservative or not. But so in terms of the NII modeling we've been very consistent in terms of what, Marty, a deposit beta and what would change and how it would work.

I think the pragmatic answer is that we are 90% of our customer consumer checking accounts are core transaction accounts, the primary checking account. Those balances are touching $250 billion-plus.

They've been doubled over the last seven, eight years. Those balances are the daily cash flow of a household, and I don't think they are going to change much. But until you've got experience, a model has to look backwards as we'd say.

And so we will see what happens. But so far those of us that take the side that this will be less sensitive of one, let's just say that.

All right. And, lastly, just a strategic utilization of capital, if you look at your allocation of capital and returns by business segment you do a weighted average, you come up with close to an 18% return.

As profitability is getting higher that is getting further away from the overall return which is still around 10%. How do you envision trying to clean up either the capital positions or the overhang from overhead expenses that brings those two numbers maybe a little bit closer together? Thanks.

So, Marty, moving expenses down, we talked about that earlier, that helps the returns. But we always have to remember that there is basically, leave aside how the allocation works, to the businesses works differently, but when you think about the 10% capital requirements for us 300 basis points or 3 percentage points of that cannot be put to use, it cannot take risk.

And so we are earning all our money on the 7%. And so when you think about the weighted average of that it comes out over 10, that means you are in a lot more on the 7 even across the whole Company. And so that's one of the difficulties.

So how do we optimize that? We make that 10% less dollar volume, if we can keep moving dollar volume down and keep increasing earnings you get that that's by all the discussion Paul had in response to earlier questions about optimizing the balance sheet or we get expenses down or we grow less risky earnings that can generate income, but it's a constant optimization. But the basic that people, that we sometimes forget is that when you think about 10% only a 30% of capital can take no risk, and so basically earns your cost of debt.

Got it, thanks.

Gerard Cassidy, RBC.

Thank you and good morning. A question on your digital sales.

Obviously, you've had 18% of total sales coming through digital channels and 25% through the mobile. Can you share with us what products you are having the most success with selling through these channels and which products proved to be more challenging?

Well, generally you should think that the products which are more straightforward, like a card application, we build a nice auto loan execution that's unique because those things are fairly straightforward applications mortgage and things like that really take a lot more process around them. So I'd say cards and autos are the dominant part of it.

Is there any target of where you can get these sales to as a percentage of total sales? Can eventually 50% of sales come through the digital channel?

I think it will continue to rise in terms of dollar amount, probably rise in terms of percentage. But remember as sales grow overall in the Company, getting it to 50 means they have to win the mix race in the growth overall. But we are becoming more and more capable in delivering this, and that's why you've seen the nice growth, and so we are applying it deeply where it can really be the primary method and things like cards and autos are the easier play.

And then, finally, sticking with digital, is there any application in the digital channel where you can have success like you are having in the consumer bank in the Merrill Lynch brokerage channel?

Yes, well, Merrill Edge is, obviously, an across-the-board execution. There are clients that utilize that in Merrill and in US Trust and the broad Consumer business. So it's a broad execution and well-recognized as being one of the leaders by the various authorities.

We believe, and one of the things Terry Laughlin and Keith Banks and Andy Sieg and John and others are working on is to increase our capabilities for both the advisor and the customer in digital more or less stated in that GWIM business. So we think there's upside for us. Again, less customers, so the leverage is not quite the same, and that's why we spend a lot of our time around the consumer and there's just less leverage.

In the advisor you have to think about that business because the advisor is the core strength that we have to the customer that we have to have an execution which is universal between the advisor to the customers they can all see the same thing. And so we've got some great capabilities now in My Merrill and things like that.

But we plan to continue to enhance them and continue to integrate them so when they get the loans and deposits and things like that they are much more integrated over time. You can still see it all, but it's not where we want it to be.

Great, thank you, Brian.

Brian Kleinhanzl, KBW.

Yes, thanks. I just had one quick question and it is on the $53 billion expense target.

If we got into an environment where you saw revenues come back more robustly near term, could you still commit to that $53 billion target, meaning you have enough levers to pull? Or would you see yourself switching to maybe an efficiency ratio target if all of a sudden these revenues came back stronger? Thanks.

Yes, if you remember when we made that target it was in the context of a 1.5%, 2% GDP growth economy much like we have now and a rate environment incremental from where we have now. So I think the shareholders and this management team would be happy if we were having a discussion about revenue-related incentives going up faster than that. That would be good news for the Company.

Thanks.

It appears we have no further questions at this time I will return the floor to our presenters for closing remarks.

Thank you very much. And we look forward to speaking to you next quarter.

This will conclude today's program. Thanks for your participation. You may now disconnect.