Bank of America Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Bank of America is a diversified financial services company with four reportable segments: Consumer Banking, Global Wealth & Investment Management, Global Banking and Global Markets. Amounts below are U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Total revenue, net of interest expense | $26.3 billion | Up from $23.2 billion in Q1 2022 |
| Net interest income | $14.4 billion | Up from $11.6 billion; FTE net interest yield was 2.20%, up 51 basis points |
| Noninterest income | $11.8 billion | Up slightly from $11.7 billion |
| Provision for credit losses | $931 million | Compared with $30 million in Q1 2022 |
| Noninterest expense | $16.2 billion | Up from $15.3 billion |
| Net income / diluted EPS | $8.2 billion / $0.94 | Compared with $7.1 billion / $0.80 |
| Return on average assets / common equity | 1.07% / 12.48% | Compared with 0.89% / 11.02% |
| Efficiency ratio | 61.84% | Improved from 65.95% |
Higher net interest income, driven mainly by higher rates and loan growth, was the principal earnings driver. Higher deposit costs, lower debt securities, and lower net interest income from Global Markets activity partly offset the increase. Noninterest expense rose with investment in employees and technology and higher FDIC expense. Fee pressure included lower investment and brokerage income, investment banking fees, and service charges; market-making income improved.
Cash flow: Operating activities used $11.3 billion; investing activities provided $30.8 billion; financing activities provided $126.1 billion. Cash and cash equivalents increased $146.0 billion to $376.2 billion. Financing inflows reflected higher securities financing and short-term borrowings, while deposits declined.
Balance sheet and funding: At March 31, assets were $3.195 trillion, loans and leases $1.046 trillion, deposits $1.910 trillion, long-term debt $283.9 billion, total liabilities $2.914 trillion and shareholders’ equity $280.2 billion. Deposits fell $19.9 billion from year-end, principally as customers shifted funds to higher-yielding alternatives. Long-term debt increased $7.9 billion during the quarter.
Capital and liquidity: The standardized CET1 ratio was 11.4%, versus a 10.4% current requirement; the supplementary leverage ratio was 6.0%. Average Global Liquidity Sources were $854 billion, average HQLA net of regulatory adjustments were $591 billion, and average LCR was 117%. The company reported compliance with the Net Stable Funding Ratio requirement. These liquidity resources and regulatory ratios do not remove the risk of stress or restrictions on moving liquidity between legal entities.
Material changes versus the comparable period
- Net interest income increased $2.9 billion year over year as higher interest rates flowed through assets; interest expense also rose substantially, including deposit interest expense of $4.3 billion versus $164 million.
- Provision for credit losses increased $901 million. Net charge-offs more than doubled to $807 million; the annualized net charge-off ratio rose to 0.32% from 0.16%, with credit cards a key driver.
- Global Markets revenue rose 6% to $5.6 billion, supported by stronger fixed-income, currencies and commodities trading; Equities trading revenue declined.
- Global Banking net income increased to $2.6 billion, with higher net interest income and a $237 million provision benefit. GWIM net income fell 19% to $917 million, reflecting lower market valuations and asset-management pricing.
- Consumer Banking net income rose 4% to $3.1 billion, but Consumer Lending net income fell to $856 million as credit card provisions increased.
- Unrealized losses on held-to-maturity securities remained significant: fair value was $525.5 billion against amortized cost of $624.5 billion, a difference of about $99.1 billion. These securities are carried at amortized cost, subject to applicable accounting and impairment rules.
Outlook, risks, contingencies and unusual items
- No specific earnings guidance was provided in the supplied filing text. Management described the balance sheet as asset-sensitive: its modeled 12-month pretax net interest income impact was positive $3.3 billion for an instantaneous +100-basis-point parallel shift and negative $3.6 billion for a -100-basis-point shift. The analysis assumes no management response and no change in deposit size or mix; actual outcomes depend materially on customer deposit behavior, pricing and other assumptions.
- The allowance forecast weighted 95% toward a mild recessionary environment in 2023. It assumed U.S. unemployment above 5% by Q4 2023 and near that level through Q4 2024, and GDP contraction of 0.5% year over year in Q4 2023 followed by 1.4% growth in Q4 2024.
- March 2023 banking-sector failures increased market volatility. The company said its direct exposure to the failed institutions was not significant. It participated in a $30 billion group deposit to First Republic, of which its share was $5 billion; after First Republic’s May 1 receivership and sale, the company became a depositor of JPMorgan Chase Bank for that amount. Further deposit outflows, bank failures, rising rates, and falling asset values could adversely affect results and liquidity.
- Credit quality was described as relatively healthy overall, but consumer delinquencies and charge-offs were rising from unusually low levels. Commercial nonperforming loans and criticized exposures increased, particularly in office real estate. Office loans were $18.7 billion; $3.7 billion was criticized, and approximately $9.8 billion was scheduled to mature by the end of 2024. Management said these loans remained well secured at quarter-end, while acknowledging uncertainty about office demand and collateral values.
- The company recorded $210 million of net losses on sales of available-for-sale debt securities. All Other reported $220 million of AFS securities sale losses, largely offset by risk-management derivative gains.
- On January 1, 2023, adoption of revised loan-modification guidance reduced the allowance by $243 million and increased retained earnings by $184 million after tax.
- For litigation, regulatory matters and representations-and-warranties exposures, the estimated reasonably possible loss in excess of accrued liabilities was $0–$0.8 billion. The company cautioned that this is not a maximum loss estimate. A magistrate judge recommended in an FDIC assessment dispute that BANA was liable for unpaid assessments, subject to certain statute-of-limitations issues; the recommendations remained for district-court consideration.
- Moody’s had placed long-term ratings under review for upgrade; S&P affirmed ratings but revised its outlook from Positive to Stable. The expected increase in the G-SIB surcharge to 3.0% on January 1, 2024 may raise the company’s future CET1 requirement.
- Other stated risks include economic and geopolitical uncertainty, regulatory and capital changes, cyber and operational disruption, climate-related risks, and the U.S. debt ceiling. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit balances and mix stabilize, and how quickly deposit costs rise relative to asset yields.
- Whether credit card delinquencies, net charge-offs and the provision continue to increase, and whether the allowance remains adequate under changing economic assumptions.
- Office and other commercial real estate loan performance, criticized exposure, maturities, collateral values and refinancing outcomes.
- The size, duration and capital implications of unrealized securities losses, including any need to sell securities or access contingent liquidity.
- Actual liquidity availability across legal entities during stress, including the status and accessibility of the reported liquidity buffer and borrowing capacity.
- Future capital requirements, including the G-SIB surcharge, 2023 CCAR results, and the capacity for dividends and repurchases.
- Developments in the FDIC assessment litigation and other legal matters, including any change to the recorded reserve or estimated loss range.