Question: Where are you now, and how to you get to $45 - 50 billion of pre-tax, pre-provision income over time?
Answer [Moynihan]: What we reported in the second quarter was around 8.5-9 billion I think it was 8.9, each quarter it’s been running around that. In the near term as the margin settles in, and depending on how the trading goes in a given quarter that number could go up or down. The question people often ask us is how do you get from there to the levels you talked about earlier this year? The first order of business on that is we were clear and we will continue to be clear, to get to the $45-50 billion level, you need to have an economy which is functioning more normally than the economy is now. Not a robust crazy economy that grows 3-3.5 percent but you need to have an economy for us to turn out some of the profits. Because frankly that would also resolve itself in a higher front-end interest rate of 1.5 plus as opposed to where it is now. So that’s one step. Rising rates to a modest level is worth half three quarter billion dollars to us in pure profit. One of the problems we have in the industry is that as that potential pushes out. We’ve got to go work on the cost level. So if you think about some ways to think about where we are, you’ve got about 35, 30, 36 billion based on what I just told you, you’ve got to be careful about that that you [garble] but then you build back two basic pieces, interest rates in the environment where you’ve got a reasonable growing economy, reasonable rate, more normal rate actually a more normal rate, you would go through about a three billion dollar pick up on that. And rate then secondly just from costs across the board we know we can get out another billion and a half a quarter, through LAS and the other cost work we’ll do we’ll get that that plus more probably and so that will build a bridge back so we’ll get into the low 40s in PKNR.
Question: Key question now: Is this earnings power, present going to the future expected earnings power, enough to solve all issues without raising capital, within a wide margin of safety?
Answer: I think let’s come at it the way we’ve been working on it, which is we continue to drive franchise earnings power, and we continue to take all the capital away from things which aren’t core and put it toward and put it against the ability to resolve issues and build the capital ratios we need under Basel 3. Based on our view of the future, the risk and stuff we’ve accrued, we feel very comfortable. If you gave me a four-year recessionary environment or something far different from what people predict, I think that would be different, but that’s not the environment that Andrew’s planning into or any of us expect, so given a normal environment reasonable environment, a grinding slow recovery and the continued work we’re doing on the franchise and the ability we have to move capital from things that aren’t core to things that are core, we feel comfortable that we can drive this business forward and make the capital ratios that Bruce spoke about earlier.
Question: In terms of cash, when will you be able to show owners the money, via dividends and buy backs.
Answer: Bruce, this is one that I had no success on so far, in the sense that trying to predict exactly. We need to get the work done that we need to get done and make sure that we have the capital to run this franchise and continue to optimize the balance sheet. Our clear view that we’ve been saying to people is that the expectation for capital return prior to us getting through the Basel implementation has to be very, very modest. But all the capital we store will go into our tangible book value per share calculation, that’s why we’re focused on it. So, as we store up the capital we need to meet Basel 3, that capital doesn’t go anywhere, it sits on the balance sheet, gets capitalized into the company. It’s not even put to risk quite frankly, because it has to not attract more risk or we’d have to raise more capital. We’ll ask for a dividend when we’re darn well sure we’ll get approval, and we’re not going to ask for it a minute before. But I think as soon as we get that our longer term view is that is similar to what you’ve heard from my peers and even from banking regulators, which is, once we get to the point where we’re returning capital the formula would be to return say 30% in recurring dividends of the earnings and then everything above that to use to return either through a special dividend or return through capital management. The time frame of that depends on us making sure we got the capital to run the company and to make Basel 3, and as we said, anything between now and the end of 12 is very modest.
Question: You’ve had a lot of harsh critics. Everyone has their own personal opinion as to your performance. How do you grade your performance?
Answer: I think my performance with the management team in terms of transforming the company I think has been strong. I think my performance on the share performance has not been strong. We see that in the market every day. But you have to think about it, we’ve been in this business for 230 years, and we’ll be in this business another 230 years. It won’t be me, and it won’t be you here, but they’ll be someone like us a couple centuries from now talking about this great company. I say the way to think about this is we’re in a multi-year transformation in a very difficult environment, where we had to reposition the company dramatically. So I think the greatness is still out there to be had but importantly we were very mindful of the share performance, and we’re going to do everything we can to drive it, but we’ve got to control the controls.
Question: Your ability to make up for reductions in fees for the consumer.
Answer: think about two major pieces of change, the first piece was the overdraft regulation called Reg E. And we made changes in anticipation of those rules in 2009 and so that’s all through the system and the last couple of quarters you’ve seen the entire impact of that and so those fees are starting to grow. The trade we made was you had a small portion of our customers paying a lot of overdraft fees because of the stress in the economy and what was going on and we just didn’t think that was right. So we fixed that along with the regulation to fix that and the additional work we did on debit overdrafts is different than regulations but allows us to really drive with our customers to have a common goal with them. So as you see the way we’re going to fix that is how we re-price the accounts. And how we re-price the accounts is shifting from the overdraft fee as a mechanism to collect revenues to monthly fees, which when we talk to our customers and talk to advocates for those customers, is a much clearer way for them to understand how they’re paying as opposed to the application of overdrafts due to debit card transactions and things like that. So we’ve hit the low point in that, the retail business made $500 million this quarter reflecting all that. It will start to creep back up and we’ll make it back through three ways: monthly fees as we restructure the accounts which we’ve rolled out across several markets and will continue to roll across the franchise in the next 18 months, as rates rise we will the value exchange of the customer will have more of the rate structure to the industry and to us, which is critical to the industry to maintain the balance and get back some of the rate structure we’ve lost as rates have crunched to zero. And the third way is operating costs, because at the end of the day, if customers use our resources which are substantial – 5,800 branches 18,000 ATMs with our 30 million online customers our mobile banking facilities, our phone capabilities – if customers use all that what that allows us to do is serve a lot more cheaply, and as we’ve seen customers do that, the reason why we’re closing branches is that customers don’t use them for the same purpose that they used to. And we’re allowed to take that cost. So it’s rates, fees and ultimately costs. And we’re real comfortable. The real way we’re able to make the change was though lower attrition. We are down to attrition rates that didn’t exist when this company was a lot smaller, and our customer satisfaction with us in our consumer deposit business is much stronger and that’s led to net new growth in checking accounts with a lot less sales and churning and burning. So that’s how we make it up in the overdraft fees side.
On the Durbin amendment, as we’ve been clear, that’s about a $2 billion a year deduct from us because we’re the largest debit card uses by far in the industry and it costs us more than other people, again in the pricing of the accounts, we have a account re-pricing that will help us make that up over time. That will take us 11 or 12 to restructure all the accounts because literally we will have to convert every single checking account and franchise to a new account.
Question: I have a question regarding the counter party risk that you take on with European banks. Can you give us a dollar amount of the worst downside risk you might have associated with your debitor positions, and also can you speak to how confident are you or can be in this assessment?
The process we use is assessment based on credit and based on the particular transactions that Bruce will take you through. But if you think about even through the '08 crisis and beyond and there’s been many market movements that have been fairly significant, even over the last year and a half in this area we’ve been able to move through them well and make sure we don’t have risk to any one party that causes great problems for the company.
What it says is if we take a step back and look at what we do internationally, through our risk area working with the lines of business we establish by country the amount of risk we’re willing to take within each individual country and then within those countries we allocate that risk across different areas and different products. What I would say is that we obviously monitor every night the amount of counter party risk that we have when we go through periods of stress like this. we obviously from an operational perspective go into a heightened state of readiness and I think as you think about the counter party risk and I’m not going to get into individual names, we’re very cognizant of managing each individual name within the limits that we set for each of those counterparties and I think the other thing that’s much different and it’s why the operational aspect of this is even more important than it has been before. That the majority of the work that we do through our trading business is with counter parties, there’s the obligation to post collateral on virtually every day, so we’ve got limits, we know the exposures are by each type of exposure of each counter party, and in times of stress we obviously are particularly focused on making sure that the collateral flows are what we would expect, and what I would say is that I think we have clearly gone through two fairly stress periods between when the debt crisis in Europe started during the second quarter of last year as well as what we’ve gone through at this point, and we just haven’t had any problems at all. Also check out:
Answer [Moynihan]: What we reported in the second quarter was around 8.5-9 billion I think it was 8.9, each quarter it’s been running around that. In the near term as the margin settles in, and depending on how the trading goes in a given quarter that number could go up or down. The question people often ask us is how do you get from there to the levels you talked about earlier this year? The first order of business on that is we were clear and we will continue to be clear, to get to the $45-50 billion level, you need to have an economy which is functioning more normally than the economy is now. Not a robust crazy economy that grows 3-3.5 percent but you need to have an economy for us to turn out some of the profits. Because frankly that would also resolve itself in a higher front-end interest rate of 1.5 plus as opposed to where it is now. So that’s one step. Rising rates to a modest level is worth half three quarter billion dollars to us in pure profit. One of the problems we have in the industry is that as that potential pushes out. We’ve got to go work on the cost level. So if you think about some ways to think about where we are, you’ve got about 35, 30, 36 billion based on what I just told you, you’ve got to be careful about that that you [garble] but then you build back two basic pieces, interest rates in the environment where you’ve got a reasonable growing economy, reasonable rate, more normal rate actually a more normal rate, you would go through about a three billion dollar pick up on that. And rate then secondly just from costs across the board we know we can get out another billion and a half a quarter, through LAS and the other cost work we’ll do we’ll get that that plus more probably and so that will build a bridge back so we’ll get into the low 40s in PKNR.
Question: Key question now: Is this earnings power, present going to the future expected earnings power, enough to solve all issues without raising capital, within a wide margin of safety?
Answer: I think let’s come at it the way we’ve been working on it, which is we continue to drive franchise earnings power, and we continue to take all the capital away from things which aren’t core and put it toward and put it against the ability to resolve issues and build the capital ratios we need under Basel 3. Based on our view of the future, the risk and stuff we’ve accrued, we feel very comfortable. If you gave me a four-year recessionary environment or something far different from what people predict, I think that would be different, but that’s not the environment that Andrew’s planning into or any of us expect, so given a normal environment reasonable environment, a grinding slow recovery and the continued work we’re doing on the franchise and the ability we have to move capital from things that aren’t core to things that are core, we feel comfortable that we can drive this business forward and make the capital ratios that Bruce spoke about earlier.
Question: In terms of cash, when will you be able to show owners the money, via dividends and buy backs.
Answer: Bruce, this is one that I had no success on so far, in the sense that trying to predict exactly. We need to get the work done that we need to get done and make sure that we have the capital to run this franchise and continue to optimize the balance sheet. Our clear view that we’ve been saying to people is that the expectation for capital return prior to us getting through the Basel implementation has to be very, very modest. But all the capital we store will go into our tangible book value per share calculation, that’s why we’re focused on it. So, as we store up the capital we need to meet Basel 3, that capital doesn’t go anywhere, it sits on the balance sheet, gets capitalized into the company. It’s not even put to risk quite frankly, because it has to not attract more risk or we’d have to raise more capital. We’ll ask for a dividend when we’re darn well sure we’ll get approval, and we’re not going to ask for it a minute before. But I think as soon as we get that our longer term view is that is similar to what you’ve heard from my peers and even from banking regulators, which is, once we get to the point where we’re returning capital the formula would be to return say 30% in recurring dividends of the earnings and then everything above that to use to return either through a special dividend or return through capital management. The time frame of that depends on us making sure we got the capital to run the company and to make Basel 3, and as we said, anything between now and the end of 12 is very modest.
Question: You’ve had a lot of harsh critics. Everyone has their own personal opinion as to your performance. How do you grade your performance?
Answer: I think my performance with the management team in terms of transforming the company I think has been strong. I think my performance on the share performance has not been strong. We see that in the market every day. But you have to think about it, we’ve been in this business for 230 years, and we’ll be in this business another 230 years. It won’t be me, and it won’t be you here, but they’ll be someone like us a couple centuries from now talking about this great company. I say the way to think about this is we’re in a multi-year transformation in a very difficult environment, where we had to reposition the company dramatically. So I think the greatness is still out there to be had but importantly we were very mindful of the share performance, and we’re going to do everything we can to drive it, but we’ve got to control the controls.
Question: Your ability to make up for reductions in fees for the consumer.
Answer: think about two major pieces of change, the first piece was the overdraft regulation called Reg E. And we made changes in anticipation of those rules in 2009 and so that’s all through the system and the last couple of quarters you’ve seen the entire impact of that and so those fees are starting to grow. The trade we made was you had a small portion of our customers paying a lot of overdraft fees because of the stress in the economy and what was going on and we just didn’t think that was right. So we fixed that along with the regulation to fix that and the additional work we did on debit overdrafts is different than regulations but allows us to really drive with our customers to have a common goal with them. So as you see the way we’re going to fix that is how we re-price the accounts. And how we re-price the accounts is shifting from the overdraft fee as a mechanism to collect revenues to monthly fees, which when we talk to our customers and talk to advocates for those customers, is a much clearer way for them to understand how they’re paying as opposed to the application of overdrafts due to debit card transactions and things like that. So we’ve hit the low point in that, the retail business made $500 million this quarter reflecting all that. It will start to creep back up and we’ll make it back through three ways: monthly fees as we restructure the accounts which we’ve rolled out across several markets and will continue to roll across the franchise in the next 18 months, as rates rise we will the value exchange of the customer will have more of the rate structure to the industry and to us, which is critical to the industry to maintain the balance and get back some of the rate structure we’ve lost as rates have crunched to zero. And the third way is operating costs, because at the end of the day, if customers use our resources which are substantial – 5,800 branches 18,000 ATMs with our 30 million online customers our mobile banking facilities, our phone capabilities – if customers use all that what that allows us to do is serve a lot more cheaply, and as we’ve seen customers do that, the reason why we’re closing branches is that customers don’t use them for the same purpose that they used to. And we’re allowed to take that cost. So it’s rates, fees and ultimately costs. And we’re real comfortable. The real way we’re able to make the change was though lower attrition. We are down to attrition rates that didn’t exist when this company was a lot smaller, and our customer satisfaction with us in our consumer deposit business is much stronger and that’s led to net new growth in checking accounts with a lot less sales and churning and burning. So that’s how we make it up in the overdraft fees side.
On the Durbin amendment, as we’ve been clear, that’s about a $2 billion a year deduct from us because we’re the largest debit card uses by far in the industry and it costs us more than other people, again in the pricing of the accounts, we have a account re-pricing that will help us make that up over time. That will take us 11 or 12 to restructure all the accounts because literally we will have to convert every single checking account and franchise to a new account.
Question: I have a question regarding the counter party risk that you take on with European banks. Can you give us a dollar amount of the worst downside risk you might have associated with your debitor positions, and also can you speak to how confident are you or can be in this assessment?
The process we use is assessment based on credit and based on the particular transactions that Bruce will take you through. But if you think about even through the '08 crisis and beyond and there’s been many market movements that have been fairly significant, even over the last year and a half in this area we’ve been able to move through them well and make sure we don’t have risk to any one party that causes great problems for the company.
What it says is if we take a step back and look at what we do internationally, through our risk area working with the lines of business we establish by country the amount of risk we’re willing to take within each individual country and then within those countries we allocate that risk across different areas and different products. What I would say is that we obviously monitor every night the amount of counter party risk that we have when we go through periods of stress like this. we obviously from an operational perspective go into a heightened state of readiness and I think as you think about the counter party risk and I’m not going to get into individual names, we’re very cognizant of managing each individual name within the limits that we set for each of those counterparties and I think the other thing that’s much different and it’s why the operational aspect of this is even more important than it has been before. That the majority of the work that we do through our trading business is with counter parties, there’s the obligation to post collateral on virtually every day, so we’ve got limits, we know the exposures are by each type of exposure of each counter party, and in times of stress we obviously are particularly focused on making sure that the collateral flows are what we would expect, and what I would say is that I think we have clearly gone through two fairly stress periods between when the debt crisis in Europe started during the second quarter of last year as well as what we’ve gone through at this point, and we just haven’t had any problems at all. Also check out:
