Kinder Morgan Reports Strong Q2 2024 Earnings Amid Energy Market Shifts

Kinder Morgan (KMI) Q2 2024 Earnings Call Transcript

Welcome to the quarterlyearnings conference call All lines have been placed on a listen-only mode until the question-and-answer session of today's call. Today's call is also being recorded. If you do have any objections, you may disconnect at this time. And I would now like to turn the call over to Rich Kinder, executive chairman of Kinder Morgan. Thank you. You may begin. Richard D. Kinder -- Executive Chair Thank you, Sue. As usual, before we begin, I'd like to remind you that KMI's earnings released today and this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Security Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Now, on these investor calls, I'd like to share with you our perspective on key issues that affect our midstream energy segment. I previously discussed increased demand for natural gas, resulting from the astounding growth in LNG export facilities. And last quarter, I talked about the expected growth in the need for electric power as another significant driver of natural gas demand. Since that call, there has been extensive discussion on this topic with a consensus developing that electricity demand will increase dramatically by the end of the decade, driven in large part by AI and new data centers. I'm a firm believer in anecdotal evidence, particularly when it comes from the actual users of that power and the utilities who will supply it and from the regulators who have to make sure that the need gets satisfied. Should you invest $1,000 in Kinder Morgan right now? Before you buy stock in Kinder Morgan, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Kinder Morgan wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $774,281!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. And the anecdotal evidence over the last few months has been jaw-dropping. Let me give you just a few examples. In Texas, the largest power market in the U.S., ERCOT now predicts the state will need 152 gigawatts of power generation by 2030. That's a 78% increase from 2023's peak power demand of about 85 gigawatts. This new estimate is up from last year's estimate of 111 gigawatts for 2030. Other anecdotal evidence also supports a vigorous growth scenario. For example, one report indicates that Amazon alone is expected to add over 200 data centers in the next several years, consistent with the large expansions being undertaken by other tech companies chasing the need to service AI demand. Annual electricity demand growth over the last 20 years has averaged around one-half of 1%. Within the last 60 days, we've seen industry experts predict annual growth from now until 2030 at a range of 2.6% to one projection of an amazing 4.7%. So, the question becomes, how will that demand be satisfied and how much of a role will natural gas play? Many developers of data centers would prefer to rely on renewables for their power, but achieving the needed 24-7 reliability by relying only on renewables is almost impossible. And growth in usage is limited by the need for new electric transmission lines, which are difficult to permit and build on a timely basis. Batteries will help some, and some tech companies now want to use dedicated nuclear power for their facilities, but as The Wall Street Journal recently pointed out, they will likely increase reliance on natural gas to replace the diverted nuclear power. Again, anecdotal evidence is key. In Texas, a program that would extend low-cost loans for new natural gas-fired generating facilities was massively oversubscribed, which an ERCOT official predicted in a day's gas daily could result in an additional 20 to 40 gigawatts just in the state of Texas. And the governor has already suggested expanding this low-cost loan program. That oversubscription, I think, is clear evidence that the generators are projecting increased demand for natural gas-fired facilities. Perhaps, Ernest Moniz, secretary of energy under President Obama, summed it up best when he said, and I quote, "There's some battery storage, there's some renewables. But the inability to build electricity transmission infrastructure is a huge impediment, so we need the gas capacity." As an example of how industry players see the world developing, S&P Global Insights, as quoted in Gas Daily, reports that U.S. utilities plan to add 133 new gas plants over the next several years. And this view is reflected in the significant new project in the southeastern United States that we are announcing today. While it's hard to peg an exact estimate of increased demand for natural gas as a result of all this growth and the need for electric power, we believe it will be significant and makes the future even more robust for natural gas demand overall and for our midstream industry. And with that, I'll turn it over to Kim. Kimberly Allen Dang -- Chief Executive Officer OK. Thanks, Rich. I'll make a few overall points and then I'll turn it over to Tom and David to give you all the details. We had a solid quarter. Adjusted EPS increased by 4%. EBITDA increased by 3%. And those were driven by growth in our natural gas segment and our two refined products business segments. We ended the quarter at 4.1 times debt to EBITDA, and we continue to return significant value to our shareholders. Today, our board approved a dividend of $0.2875 per share, and we expect to end the year roughly on budget. Now, let's turn and talk about natural gas for a minute. The long-term fundamentals in natural gas have gotten stronger over the course of this year with the incremental demand expected from power and backing up data centers that Rich just took you through. Overall, WoodMac projects gas demand to grow by 20 bcf between now and 2030 with a more than doubling of the LNG exports, as well as an almost 50% increase in exports to Mexico. However, they are projecting a 3.9 bcf a day decrease in power demand. As Rich's comments indicated, we simply do not believe that will be the case given the anticipated power-related growth in gas demand associated with AI and data centers, coal conversions, and new capacity to shore up reserve margins and back up renewables. Let's start with the data center demand. Utility IRPs and press releases published since 2023 reflect 3.9 bcf a day of incremental demand, and we would expect that number to grow as other utilities update their IRPs. It's early in the process, but we're currently evaluating 1.6 bcf a day of potential opportunities. Most estimates we have seen are between three and 10 of incremental gas demand associated with AI. Rich took you through the 20 bcf a day of natural gas power that Texas is contemplating, subsidizing -- I should have said 20 gigawatts, as well as the U.S. projection of 133 new gas plants over the next several years. At Kinder Morgan, we're having commercial discussions on over 5 bcf a day of opportunities related to power demand, and that includes the 1.6 of data center demand. Certainly, not all these projects will come to fruition, but that gives you a sense of the activity levels we're seeing and supports our belief that growth in natural gas between now and 2030 will be well in excess of the 20 bcf a day. Not included in the 5 bcf of activity that we're seeing, is capacity SNG signed up on its successful open season for its proposed approximately 3 billion South System 4 expansion that's designed to increase capacity by 1.2 bcf a day. Upon this completion, this project will help to meet the growing power demand and local distribution company demand in the South Eastern markets. Mainly as a result of this project, our backlog increased by 1.9 billion to 5.2 billion during the quarter. In the past, we have indicated that we thought the demand for natural gas would allow us to continue to add to the backlog, and South System 4 project is an example of that. We continue to see substantial opportunities beyond this project to add to our backlog. The current multiple on our backlog is about 5.4 times. During the quarter, we also saw some very nice decisions from the Supreme Court. On the Good Neighbor Plan, the court stayed the plan, finding that we are likely to prevail on the merits. There's still a lot to play out here, but I do not think the Good Neighbor Plan will be implemented in its current form. It is likely to be at least a few years before a new or revised plan could be put together, and a few years beyond that for compliance. And in the interim, we've got the presidential election. The overturning of the Chevron doctrine, which gave deference to regulatory agencies when the law is not clear, is also a positive. Together, these decisions will help mitigate the regulatory barrage we've seen over the last couple of years. And with that, I'll turn it over to Tom to give you some details on our business performance for the quarter. Thomas A. Martin -- President Thanks, Kim. Starting with the natural gas business unit, transport volumes increased slightly in the quarter versus the second quarter of 2023. Natural gas gathering volumes were up 10% in the quarter compared to the second quarter of 2023, driven by Haynesville and Eagle Ford volumes, which were up 21% and 8%, respectively. Given the current gas price environment, we now expect gathering volumes to average about 6% below our 2024 plan, but still 8% over 2023. We view the slight pullback in gathering volumes as temporary. The higher production volumes will be necessary to meet demand growth from LNG expected in 2025. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation capacity and storage capabilities in support of growing natural gas markets between now, 2030, and beyond. In our products pipeline segment, refined product volumes were up 2%. Crude and condensate volumes were flat in the quarter compared to the second quarter 2023. For the full year, we expect refined product volumes to be slightly below our plan, about 1%, but 2% over 2023. Regarding development opportunities, the company plans to convert its Double H Pipeline system from crude oil to natural gas liquid service, providing Williston Basin producers and others with NGL capacity to key market hubs. The approximately $150 million project is supported by definitive agreements. And the initial phase of the project is anticipated to be in service in the first quarter of 2026, with the pipe remaining in crude service well into 2025. Future phases could provide incremental capacity, including in support of volumes out of the Powder River Basin. In our terminals business segment, our lease liquid capacity remains high at 94%. Utilization and project opportunities at our key hubs at the Houston Ship Channel and the New York Harbor remain very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased in 2025, assuming likely options are exercised. And currently, market rates remain well above our vessels' currently contracted rates. The CO2 segment experienced lower oil production volumes at 13%, lower NGL volumes at 17%, and lower CO2 volumes at 8% in the quarter versus the second quarter 2023. For the full year, we expect oil volumes to be 2% below our budget and 10% below 2023. During the quarter, the CO2 segment optimized its asset portfolio in the Permian Basin through two transactions for a net outlay of $40 million. The segment divested its interest in five fields and acquired the North McElroy unit, currently producing about 1,250 barrels a day of oil, and an interest in an undeveloped leasehold directly adjacent to our SACROC field. The impact of these two transactions is to replace fields with high production decline rates and limited CO2 flood opportunities with fields that have attractive potential CO2 flood projects. In the Energy Transition Ventures group, they continue to have many carbon capture sequestration, project discussions that utilize our CO2 expertise for potential projects that take advantage of our existing CO2 network in the Permian Basin, and our recently leased 10,800 acres of pore space near sources of emissions in the Houston Ship Channel. These transactions take time to develop, but the activity level and customer interest are picking up. With that, I'll turn it over to David Michels. David Michaels -- Chief Financial Officer All right. Thanks, Tom. So, a few items before we cover the quarterly performance. As Kim mentioned, we're declaring a dividend of $0.2875 cents per share, which is $1.15 per share annualized, up 2% from our 2023 dividend. As disclosed in the press release, we're changing our investor day presentation from annual to biannual. We'll plan to continue to publish our detailed annual budget early in the first quarter as normal. Also, last one before we get to the quarterly performance, I'd like to recognize our accountants, planners, legal teams, business unit teams, everyone involved in the preparation for our earnings release and our 10-Q filing. We already have a tough close at this time of year with many working during the July 4th holiday period. And additionally, many of our Houston-based colleagues were impacted by Hurricane Beryl. I want to thank you all for going above and beyond to meet the challenges presented by power outages and damage and not missing a beat with regards to our quarterly reporting and analysis schedule. For the quarter, we generated revenue of $3.57 billion, up $71 million from the second quarter of last year. Our cost of sales were down $4 million, so our gross margin increased by 3%. We saw our year-over-year growth from natural gas products and terminals businesses, the main drivers with contributions from our acquired South Texas midstream assets, greater contributions from our natural gas transportation and storage services, and higher contributions from our SFPP asset. Our CO2 business unit was down versus last year, mainly due to lower crude oil volumes, due to some timing of recovery of oil in the second quarter of 2023. Interest expense was up due to the higher short-term debt balance due in part to our South Texas Midstream acquisition. We generated net income attributable to KMI of $575 million. We produced EPS of $0.26, which is flat with last year. On an adjusted net income basis, which excludes certain items, we generated $548 million, up 1% from Q2 of 2023. We generated adjusted EPS of $0.25, which is up 4% from last year. Our average share count reduced by 18 million shares or 1% due to our share repurchase efforts. The DCF is up 2% from last year. Our second quarter DCF was impacted by higher sustaining capex and lower cash taxes, both of which are, at least in part, due to timing. We expect cash taxes to be favorable for the full year and sustaining capital to be in line with budget for the full year. On a year-to-date basis, EPS is up 5% to last year, and our adjusted EPS is up 9% from last year, so good growth. On our balance sheet, we ended the second quarter with $31.5 billion of net debt and a 4.1 times net debt to adjusted EBITDA ratio, which is consistent with where we budgeted to end the quarter. Our net debt has decreased $306 million from the beginning of the year, and I'll provide a high-level reconciliation of that change. We generated $2.9 billion cash flow from operations year to date. We've paid out dividends of 1.3 billion. We've spent capex of 1.2 billion. And that includes growth, sustaining, and contributions to our joint ventures. And we've had about $100 million of other uses of capital, including working capital. And that gets you close to the $306 million decrease in net debt for the year. OK. And so, now, we'll open it up for questions. Sue, if you could come on, please. [Operator instructions] Our first question is from Manav Gupta with UBS. You may go ahead. Manav Gupta -- UBS -- Analyst Thank you, guys. First quick question here. The backlog went up pretty much. I mean, a good note, which is very positive, but the multiple also went up just a little. So, if you could just talk about the dynamics of those two things here. Kimberly Allen Dang -- Chief Executive Officer OK, sure. So, you know, the backlog, as I said, was up by $1.9 billion. That's really two projects that are driving that. It's the South System 4 that we mentioned, and then it is also Double H is the other one. And it's our share of South System 4. And then, with respect to the multiple, yes, it increased a little bit. As, you know, we always say, the reason that we give you the multiple is to give you guys some idea of the returns that we're getting on these projects so that you can be able to model the EBITDA. Now, it is not our goal ever, you know, to -- we're not targeting a specific multiple and getting a specific multiple on the backlog when we look at these projects. When we look at these projects, we're looking at an internal rate of return. And so -- and we have a threshold for that. And we have a pretty high threshold for our project. And that threshold is well, well, well in excess of our cost of capital. And then, we vary around that threshold, you know, what I'd say marginally, depending on the risk of a project. And so, you know, if we have -- and projects that we do that are connected to our existing infrastructure, you know, where it's not, you know, greenfield tend to have a much higher multiple associated with it. You know, when we're having to loop a pipeline or something, those typically might have a little bit higher multiple. But they're still meeting our return thresholds. And so, you know, I think these are very -- despite the fact that the multiple on the backlog is going up a little bit because of these projects, these are still very, very attractive return projects. Manav Gupta -- UBS -- Analyst Thank you for a very detailed response. My quick follow-up here is you mentioned the demand coming from data centers, and we completely agree with you. When you are having these discussions with the data center operators, we believe at one point, you know, these data center operators were not even talking to natural gas companies. They were only talking to renewable sources. Have you seen a change in sentiment where reliability has become a key factor so you are a bigger part of these conversations than you were probably 18 or 24 months ago? Kimberly Allen Dang -- Chief Executive Officer Yeah, I'd say -- you know, our initial reaction was similar to yours when we started to see this demand was they're probably going to target renewables. But as we have had discussions with them, I think that, you know, two things are key from their perspective. One is reliability and two is speed to market. And so, I think natural gas -- and Rich said this last quarter, you know, given the reliability of natural gas, it is going to play, we believe, a key role in supplying energy to these data centers. Thank you. Our next question is from John Mackay with Goldman Sachs. You may go ahead. John Mackay -- Goldman Sachs -- Analyst Hey, team. Thanks for the time. Maybe we'll pick up a little bit on that last one, surprisingly. So, if you guys are talking about 5 bcf of power demand discussions right now. We'd just be curious to hear a little bit from you on, you know, where you're seeing that geographically. You know, is it primarily Texas? Is it elsewhere in the portfolio? And anything you can comment on in terms of speed to market. And again, that might be a Texas versus kind of more FERC jurisdictions kind of discussion, but both of those would be interesting. Thanks. Kimberly Allen Dang -- Chief Executive Officer I think that and Sital and Tom, you guys supplement here, but, you know, the 5 bcf is overall power, so some of that's related to AI and some of it's just related to coal replacements, you know, shoring up reserve margins, backing up renewables. So, it's across the board. We're seeing it in Texas. We're seeing it in Arkansas. We're seeing it in Kentucky. We're seeing it in Georgia, desert -- in Arizona, desert southwest. I mean, it's -- you know, it is in almost all the markets we serve. We're seeing, you know, some sort of increase in power demand. John Mackay -- Goldman Sachs -- Analyst And maybe just on the kind of time to market in terms of how long it could bring -- how long it could take to bring those on -- Kimberly Allen Dang -- Chief Executive Officer Yes, how long it's going to be is very much dependent on where these are going to be cited. And so, you know, it depends on, is it a regulated market, is it an unregulated market? So, that's just going to vary depending on the market location. John Mackay -- Goldman Sachs -- Analyst I appreciate that. And just second question. You guys talked a little bit about some kind of portfolio optimization here. There's the CO2, I guess, you could call it, you know, asset swap. There's a line in the release on maybe some divesters in the net gas segment. I guess I'd just be curious overall for an updated view on how you're thinking about kind of portfolio pruning and optimization over time. Kimberly Allen Dang -- Chief Executive Officer OK. So, you know, on natural gas, I'm not sure, we did have a divestiture earlier in the year, which was a gathering asset, but that wasn't during this quarter. And so, that was just -- it was an asset that wasn't core to our portfolio, and we had someone approach us. And so the price made sense, and so we sold it. On the CO2 sale, you know, we had three -- four fields where there was limited opportunity for incremental CO2 floods. And, you know, that is our business, is, you know, injecting CO2 to produce more oil. And so, we sold those fields that had limited opportunity. And then, we acquired a field called North McElroy, which we think has very good flood potential. And then, we acquired a leasehold interest and some property that is adjacent to some of our most, you know, prolific areas at SACROC that we think will also be a great CO2 flood opportunity. Thank you. Our next question is from Keith Stanley with Wolfe Research. You may go ahead. Hi. Wanted to follow up on the SNG South System project. Can you just talk to the timeline for regulatory approval, start of construction? And is it all coming into service in late 2028 and/or phased over time? And then, sorry for the multi-part question, is it also fair to assume your customer here is your partner, Southern, on the project, or is it a broader customer base supporting this project? Sital Mody -- President, Natural Gas Pipelines So, Keith, this is Sital. One, we had an open season. We do have a broad customer base. You know, in terms of regulatory timeline, you know, with an in-service of 2028, you know, clearly, you know, we plan a project of this scale to pre-file and then do a FERC filing. Probably, you know, without getting into too much detail, you know, there is always competition sometime next summer with a targeted in-service date of late '28. So, that's probably the 50,000-foot view on -- did I answer your question? Keith Stanley -- Wolfe Research -- Analyst Yeah, and then just on -- yes, yes, you did. Oh, does it -- does the contribution come in all in the end of 2028, or is it phased in overtime as you see it? Sital Mody -- President, Natural Gas Pipelines So, we have -- we do have, you know, initial phases in '28, and we do have some volumes trickling into year after. Keith Stanley -- Wolfe Research -- Analyst OK, great. Thank you. Second question, I wanted to touch back on the Texas loan program for gas-fired power plants. How can we think about the opportunity for Kinder here? So, say Texas builds 20 gigawatts of new gas-fired power plants over the next five years, what type of market share do you have in the Texas market today in connecting to power plants? What's a typical sort of capital investment to do, a plant tie-in? Any thoughts of what it could mean for opportunities for the intrastate system? Sital Mody -- President, Natural Gas Pipelines So, you know, if I had to take a snapshot, and don't quote me on this, probably, today, we're about 40%. You know, we have the 40% share in Texas. In terms of connecting and the cost to connect, I really think it's going to vary depending on where that ultimate location is going to be. We do have some unique opportunities where it's actually, you know, quite low in terms of it's very capital efficient. And there are some targeted opportunities that might involve a little bit more capital. Kimberly Allen Dang -- Chief Executive Officer It really gets to how -- you know, are they going to be located on our existing system, or are we going to need to build a lateral and how far is -- you know, how long is that lateral going to need to be? And then, you know, are there going to be opportunities where it requires some expansion of like some mainline capacity. So, that's what Sital means. You know, it's just going to depend with respect to, you know, how big the capital opportunity is. Thank you. Our next question is from Jeremy Tonet with JPMorgan. You may go ahead. Just wanted to pivot back to the Double H conversion here. And how -- did you say how the NGLs are getting out of Guernsey at this point on -- you know, with this project? And I guess, you know, are you working with any other midstreamers on this project overall? Sital Mody -- President, Natural Gas Pipelines So, one, our goal is to get it to market, market being Conway and Mont Belvieu. And I think when you think about it broadly, you know, a couple of calls ago, you know, we talked about the basin in general and our desire to get egress both on the revenue side, and this is an opportunity to get egress on the NGL side. We see the basin growing quite significantly, you know, the GORs are rising. And so, you know, without getting into the complicated structures here because we are in a very competitive situation. I'll just leave it at this, that we are, you know, able to get to both the Conway and the Mont Belvieu market. Kimberly Allen Dang -- Chief Executive Officer Yeah, and I'd say the other thing, Jeremy, when Sital says the market's growing, we don't expect some big growth in crude. He's really talking about the NGLs and the gas because of the increase in GOR. Got it. OK. And maybe just pivoting, when talking about highly competitive market as far as Permian natural gas egress is concerned, just wondering any updated thoughts you could provide with regards to the potential for brownfield expansion, be it through GCX expanding, or greenfield as well getting to a different market, or even the potential to market a joint solution at the same time. Just wondering how you see this market evolving given that 2026 Permian gas egress looks like deja vu all over again. Sital Mody -- President, Natural Gas Pipelines Yeah, look, good question. And question is your, you know, unfortunately I don't have a different answer for you this time. You know, we still aren't prepared to sanction the GCX project, still in discussions with our customers on the broader Permian egress opportunity. You know, we've been, you know, as I said, pursuing opportunity. We don't have anything firmed up. There is a competitive space. We are open to all sorts of structures on that front and are willing to consider what's best for the basin. Thank you. Our next question is from Theresa Chen with Barclays. You may go ahead. Theresa Chen -- Barclays -- Analyst Hi. I wanted to follow up on the Double H line of questions. Can you tell us how much capacity the pipe will be in -- once converted to NGL service? And would you expect the line to be highly utilized right away in first quarter 2026, or will there be, you know, potentially multi-quarter, multi-year rampant commitments? Sital Mody -- President, Natural Gas Pipelines So, in terms of capacity, this is all -- you know, this is going to depend on the hydraulic combinations of our, you know, suppliers and ultimately what market they take that to. So, you know, I think the takeaway here is, we've got a firm commitment that will likely start day one. And then, as we scale the project, it is scalable, both from the Bakken and from the Powder River. And really, the ultimate capacity is going to depend on the customer. Thank you. Our next question is from Spiro Dounis with Citi. You may go ahead. Spiro Dounis -- Analyst Thanks, operator. Afternoon, everybody. First question, maybe just talk about capital spending longer term. You know, historically, you've talked about spending near the upper end of that sort of $1 billion to $2 billion range. For Rich and Kim, if I sort of combine your statements at the outset, it seems to suggest like there's a pretty robust opportunity set ahead, and maybe it wasn't contemplated when you sort of last gave us that update. So, curious if you're thinking about these larger projects coming in, like SNG and then the broader power demand you referenced earlier, yeah, you still sort of on track to be in that $2 billion zone long term? Kimberly Allen Dang -- Chief Executive Officer Yeah, I'd say we wouldn't say one to two anymore. We would just say around two. And, you know, around two could be two. It could be 2.3. I mean, just in that general area is what I would say. You know, when you think about something like in SNG, you know, it's got a 2028 in-service, and so that's going to be capital that you're spending, you know, just call it rough math, two years of construction. So, most of that capital will be, you know, in '27 and '28. And so, you know, that's filling out the outer years of potential capex. OK. So, it sounds like not a material departure from before. Got it. And then, can you just -- Kimberly Allen Dang -- Chief Executive Officer I'd say -- look, I'd say on the stuff that Rich and I are talking about, as I said, you know, the $5 billion project -- I mean the 5 bcf a day of projects that we're pursuing, that's stuff that we're pursuing today, right? That's not things that are in the backlog today. And so, you know, part of my point on the -- you know, is -- was we continue to see great opportunity beyond SNG. SNG, that 1.2 bcf a day is not included in the 5 bcf a day of potential opportunity. So, you know, I think projects like SNG continue to fill out that capex in the outer years and give us more confidence that we'll be spending $2 billion for a number of years to come. Spiro Dounis -- Analyst Got it. OK, that's helpful color. And then, switching gears a bit here, Kim, you talked about some of the sort of regulatory events that are sort of becoming tailwinds now, headwinds at first. And I know one other sort of macro factor that sort of got you last year or two was interest rates that were on the rise. I guess, as we look forward, you know, I'm not sure what your view is, but it seems like we're setting up for some rate cuts later this year. So, maybe, David, maybe you could just remind us, as we think about your floating rate exposure, what does that look like in 2025? And is this a potential tailwind for you? Kimberly Allen Dang -- Chief Executive Officer Yeah, and I'll let -- it is a potential tailwind. The forward curve today is -- you know, for 2025 is below, you know, what we've experienced in 2024 today and what the balance of the year is. So, 25 curve is below 24, but I'll let David give you an update on our floating rate exposure. David Michaels -- Chief Financial Officer Yeah. It could be -- we'll see if we actually get these rate cuts or not. Remember, we all expected a bunch of rate cuts in 2024 as well, but we didn't get them. We do have a fair amount of floating rate debt exposure. We've intentionally brought it down a little bit because it's been unfavorable to layer on additional swaps in the last couple of years. And so our floating rate debt exposure has come down from about $7.5 billion to about $5.3 billion. Additionally, we've locked in a little bit of that 5.3 for 2025, similar to past practice, to take advantage of some of the forward curve, the favorable interest rate forward curves that we're seeing for next year. So, about 10% of that, I think, is locked in for 2025 at favorable rates. The rest of it gives us a good opportunity to take advantage of any short-term interest rate cuts that we see coming to the market. Thank you. Our next question is from Michael Blum with Wells Fargo. You may go ahead. Michael Blum -- Analyst Thanks. Good afternoon, everyone. So, I wanted to get back to the discussion on the data centers. It seems like the hyperscalers are much less price sensitive and they're willing to pay higher PPAs to secure power. So, do you think that could translate into you earning higher returns that you've gotten historically on some of these potential gas pipeline projects? And is there any way to quantify that? Kimberly Allen Dang -- Chief Executive Officer You know, I think that -- I think we're early in the game. I think that's hard to judge at this point. I would say, again, you know, their two priorities are going to be reliability and speed to market. And I think that's what you're seeing -- you know, that's what you're hearing from the power guys on the -- you know, when they're getting the PPAs. So, I think, you know, we will get -- I think we are confident that we'll be able to meet our return hurdles on these projects but exactly what we're going to get on these projects at this point. I think, you know, it's too early to say that. And, you know, generally, these things will be -- there'll be some competition. And so, I wouldn't expect us to get outrageous returns by any stretch. Michael Blum -- Analyst OK, that makes sense. Thanks for that. And then, just one more follow-up on Double H. I believe the capacity, the oil capacity of that pipe was, I think, 88 million barrels a day so -- 88,000 barrels a day. So, I'm just wondering, should we assume that the NGL capacity will be kind of similar? Sital Mody -- President, Natural Gas Pipelines Well, I mean, it depends on the receiving delivery. You know, just think about it this way. I'll just make it real simple. If you were at the beginning of the pipe and at the end of the pipe, it could be. If you're in the middle of the pipe and bringing in volumes, it could be more. I mean, it just depends. So -- It depends on downstream as well. But yeah, I mean, I think for the Double H pipe itself, I mean, if you're coming in at the origin and going out at the terminus. Yeah, I mean that's fair, but to Sital's point, it's out there. You know, maybe people coming in at various points and then the downstream points are going to matter as well. Thank you. Our next question is from Tristan Richardson with Scotiabank. You may go ahead. Tristan Richardson -- Analyst Hi, good afternoon. Maybe just one more on the CO2 portfolio. Can you talk about capital needs or opportunities with the new portfolio? Historically, you've spent, you know, 200 to 300 annually here, and you noted that there are greater flood opportunities with the new assets. Curious kind of how these changes capital deployment in CO2. And then, also in the context of, I think in the past, you've noted a 10-year development plan of around 900 million. Just curious sort of what the new portfolio kind of looks like going forward. Anthony B. Ashley -- President, CO2 and Energy Transition Ventures Hi, Tristan, it's Anthony. You know, I think I wouldn't expect a material change in the capital numbers, the annual capital numbers for CO2. We weren't spending a lot on any of the divested assets. There are the opportunities that you mentioned with regards to the two new assets. You know, I think the undeveloped acreage that we're talking about, that'll become part of our annual SACROC numbers. And then, North McElroy, we think there's excellent opportunity there as Kim and Tom said, but we've got to do it pilot first. And so, we'll be proving out that opportunity. And once we prove it out that opportunity, I think we'll have more to say on that. Tristan Richardson -- Analyst Thanks, Anthony. And then, maybe just on refined products, it seems like the Lower 48 maybe saw a later start to the summer driving season, but it also seems like perhaps volumes have picked up in late June and into July. Can you talk about what you're seeing this season and maybe what's contributing to that 1% below your initial budget? Sital Mody -- President, Natural Gas Pipelines Yeah, I would say, you know, gasoline overall is reasonably flat. We've actually seen a bit of a pickup in jet fuel, primarily on the West Coast as you saw in the release. And then, on renewable diesel, we've seen a decent pickup on renewable diesel. We're still a decent bit below our total capacity on the renewable diesel hub capacity. I think we did 48 a day in the third quarter -- I mean, sorry, in the second quarter. We've got 57 a day of capacity. You know, as that additional refinery comes on later this year, I think that will continue to pick up. But with respect to being just, you know, slightly below our budget, we had probably slightly higher gasoline numbers in there. Yeah, the other thing I'd say on the volume is the volumes are one component of the revenue right, price is the other. And what we've generally seen out in California is that we're moving longer-haul barrels rather than some of the shorter haul. So, you know, from an overall revenue standpoint, I think we're in good shape on the refined products. Thank you. Our next question is from Harry Mateer with Barclays. You may go ahead. Harry Mateer -- Barclays -- Analyst Hi. Good afternoon. So, first question, for South System Expansion 4, how should we think about funding that given you have the JV opco structured SONGAS? And I guess, specifically, how much of an opportunity is there for some nonrecourse debt financing to be used at the SONGAS entity itself? David Michaels -- Chief Financial Officer Yeah, it's a good question. I think we're -- it's still early stages and we're still evaluating all of our options. Generally, with these JV arrangements, we prefer to fund at the parent level because our cost of capital is attractive. But we are evaluating our different funding opportunities. I don't -- we've never really been big fans of project financing. It puts a lot of pressure on the project and so forth, but we're still evaluating the best course forward. Because of the build time, it's going to take some amount of time to get the pipeline into service, so there's likely going to be a fair amount of equity contributions in order to fund that. And of course, you have the entity level itself. OK, thank you. And then, second, in energy transition ventures, I'm curious where and whether acquisition opportunities in RNG, you know, might fit right now when you're looking at growth potential in that business. Kimberly Allen Dang -- Chief Executive Officer Yeah. I'll say a couple things on that, and then Anthony can follow up. But you're -- I think that business has been harder to operate than we would have expected. And as a result of that, until we get our hands fully around the existing operations, you know, we have sort of stood down, if you will, you know, looking at any significant acquisition opportunities. And, you know, I think that, you know, once we have these plans operating on a more consistent basis that we can reevaluate that. But at this point in time, I think we've got to get those plants up and operating consistently. We think we are on the path to do that. And hopefully, that will be the case for the second half of this year. Thank you. Our next question is from Samir Quadir with Seaport Global Securities. You may go ahead. So, starting off on the new projects that you announced, could you talk a little bit about contractual construct behind those? What kind of contract durations you have supporting those two projects? Kimberly Allen Dang -- Chief Executive Officer Yeah, generally on the South System 4, we've got, you know, 20-year take-or-pay contracts with creditworthy shippers. And then, you know, we also have a contract that's underpinning the double H project. So, consistent with how we've done, you know, how we do our other projects, I mean, we want to make sure that we've got good credit and good quality cash flow that are supporting capital bills. Sunil Sibal -- Analyst Understood. Then on the on the full year expectations, I think you mentioned you're tracking a little bit below budget as well as gathering volumes are concerned. Could you talk a little bit about, you know, which basins, etc., are tracking below what we're expecting in the start of the year? Kimberly Allen Dang -- Chief Executive Officer Yeah, I think just so -- you know, you know, I mean, what we're assuming for the balance of the year is volumes that are relatively flat with the volumes the first half of this year. So, we're not assuming a big ramp-up in volumes the second half of this year, pretty consistent with what we saw in the first half. And then, you know, in terms of, you know, the big -- the three big basins where we are going to be, you know, South are going to be Eagle Ford, Haynesville, and Bakken. And so, you know, we've seen a little bit of weakness, I think, in each of those, probably a little more in the Haynesville than in the others. Sital Mody -- President, Natural Gas Pipelines Yeah, I mean, you saw, you know, producers react to the pricing in Haynesville, which is why we've had a little bit of a pullback. But it's prudent. Thomas A. Martin -- President But we expect that to ramp later this year and the next year as demand picks up. Thank you. And at this time, we are showing no further questions. Richard D. Kinder -- Executive Chair All right, thank you very much for listening, and have a good evening. Operator Thank you. That does conclude today's conference. Thank you all for participating. [Operator signoff] This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Kinder Morgan (KMI) Q2 2024 Earnings Call Transcript

Welcome to the quarterly earnings conference call. All lines have been placed on a listen-only mode until the question-and-answer session of today's call. Today's call is also being recorded. If you do have any objections, you may disconnect at this time. And I would now like to turn the call over to Rich Kinder, executive chairman of Kinder Morgan. Thank you. You may begin. Richard D. Kinder -- Executive Chair Thank you, Sue. As usual, before we begin, I'd like to remind you that KMI's earnings released today and this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Security Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Now, on these investor calls, I'd like to share with you our perspective on key issues that affect our midstream energy segment. I previously discussed increased demand for natural gas, resulting from the astounding growth in LNG export facilities. And last quarter, I talked about the expected growth in the need for electric power as another significant driver of natural gas demand. Since that call, there has been extensive discussion on this topic with a consensus developing that electricity demand will increase dramatically by the end of the decade, driven in large part by AI and new data centers. I'm a firm believer in anecdotal evidence, particularly when it comes from the actual users of that power and the utilities who will supply it and from the regulators who have to make sure that the need gets satisfied. And the anecdotal evidence over the last few months has been jaw-dropping. Let me give you just a few examples. In Texas, the largest power market in the U.S., ERCOT now predicts the state will need 152 gigawatts of power generation by 2030. That's a 78% increase from 2023's peak power demand of about 85 gigawatts. This new estimate is up from last year's estimate of 111 gigawatts for 2030. Other anecdotal evidence also supports a vigorous growth scenario. For example, one report indicates that Amazon alone is expected to add over 200 data centers in the next several years, consistent with the large expansions being undertaken by other tech companies chasing the need to service AI demand. Annual electricity demand growth over the last 20 years has averaged around one-half of 1%. Within the last 60 days, we've seen industry experts predict annual growth from now until 2030 at a range of 2.6% to one projection of an amazing 4.7%. So, the question becomes, how will that demand be satisfied and how much of a role will natural gas play? Many developers of data centers would prefer to rely on renewables for their power, but achieving the needed 24-7 reliability by relying only on renewables is almost impossible. And growth in usage is limited by the need for new electric transmission lines, which are difficult to permit and build on a timely basis. Batteries will help some, and some tech companies now want to use dedicated nuclear power for their facilities, but as The Wall Street Journal recently pointed out, they will likely increase reliance on natural gas to replace the diverted nuclear power. Again, anecdotal evidence is key. In Texas, a program that would extend low-cost loans for new natural gas-fired generating facilities was massively oversubscribed, which an ERCOT official predicted in a day's gas daily could result in an additional 20 to 40 gigawatts just in the state of Texas. And the governor has already suggested expanding this low-cost loan program. That oversubscription, I think, is clear evidence that the generators are projecting increased demand for natural gas-fired facilities. Perhaps, Ernest Moniz, secretary of energy under President Obama, summed it up best when he said, and I quote, "There's some battery storage, there's some renewables. But the inability to build electricity transmission infrastructure is a huge impediment, so we need the gas capacity." As an example of how industry players see the world developing, S&P Global Insights, as quoted in Gas Daily, reports that U.S. utilities plan to add 133 new gas plants over the next several years. And this view is reflected in the significant new project in the southeastern United States that we are announcing today. While it's hard to peg an exact estimate of increased demand for natural gas as a result of all this growth and the need for electric power, we believe it will be significant and makes the future even more robust for natural gas demand overall and for our midstream industry. And with that, I'll turn it over to Kim. Kimberly Allen Dang -- Chief Executive Officer OK. Thanks, Rich. I'll make a few overall points and then I'll turn it over to Tom and David to give you all the details. We had a solid quarter. Adjusted EPS increased by 4%. EBITDA increased by 3%. And those were driven by growth in our natural gas segment and our two refined products business segments. We ended the quarter at 4.1 times debt to EBITDA, and we continue to return significant value to our shareholders. Today, our board approved a dividend of $0.2875 per share, and we expect to end the year roughly on budget. Now, let's turn and talk about natural gas for a minute. The long-term fundamentals in natural gas have gotten stronger over the course of this year with the incremental demand expected from power and backing up data centers that Rich just took you through. Overall, WoodMac projects gas demand to grow by 20 bcf between now and 2030 with a more than doubling of the LNG exports, as well as an almost 50% increase in exports to Mexico. However, they are projecting a 3.9 bcf a day decrease in power demand. As Rich's comments indicated, we simply do not believe that will be the case given the anticipated power-related growth in gas demand associated with AI and data centers, coal conversions, and new capacity to shore up reserve margins and back up renewables. Let's start with the data center demand. Utility IRPs and press releases published since 2023 reflect 3.9 bcf a day of incremental demand, and we would expect that number to grow as other utilities update their IRPs. It's early in the process, but we're currently evaluating 1.6 bcf a day of potential opportunities. Most estimates we have seen are between three and 10 of incremental gas demand associated with AI. Rich took you through the 20 bcf a day of natural gas power that Texas is contemplating, subsidizing -- I should have said 20 gigawatts, as well as the U.S. projection of 133 new gas plants over the next several years. At Kinder Morgan, we're having commercial discussions on over 5 bcf a day of opportunities related to power demand, and that includes the 1.6 of data center demand. Certainly, not all these projects will come to fruition, but that gives you a sense of the activity levels we're seeing and supports our belief that growth in natural gas between now and 2030 will be well in excess of the 20 bcf a day. Not included in the 5 bcf of activity that we're seeing, is capacity SNG signed up on its successful open season for its proposed approximately 3 billion South System 4 expansion that's designed to increase capacity by 1.2 bcf a day. Upon this completion, this project will help to meet the growing power demand and local distribution company demand in the South Eastern markets. Mainly as a result of this project, our backlog increased by 1.9 billion to 5.2 billion during the quarter. In the past, we have indicated that we thought the demand for natural gas would allow us to continue to add to the backlog, and South System 4 project is an example of that. We continue to see substantial opportunities beyond this project to add to our backlog. The current multiple on our backlog is about 5.4 times. During the quarter, we also saw some very nice decisions from the Supreme Court. On the Good Neighbor Plan, the court stayed the plan, finding that we are likely to prevail on the merits. There's still a lot to play out here, but I do not think the Good Neighbor Plan will be implemented in its current form. It is likely to be at least a few years before a new or revised plan could be put together, and a few years beyond that for compliance. And in the interim, we've got the presidential election. The overturning of the Chevron doctrine, which gave deference to regulatory agencies when the law is not clear, is also a positive. Together, these decisions will help mitigate the regulatory barrage we've seen over the last couple of years. And with that, I'll turn it over to Tom to give you some details on our business performance for the quarter. Thomas A. Martin -- President Thanks, Kim. Starting with the natural gas business unit, transport volumes increased slightly in the quarter versus the second quarter of 2023. Natural gas gathering volumes were up 10% in the quarter compared to the second quarter of 2023, driven by Haynesville and Eagle Ford volumes, which were up 21% and 8%, respectively. Given the current gas price environment, we now expect gathering volumes to average about 6% below our 2024 plan, but still 8% over 2023. We view the slight pullback in gathering volumes as temporary. The higher production volumes will be necessary to meet demand growth from LNG expected in 2025. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation capacity and storage capabilities in support of growing natural gas markets between now, 2030, and beyond. In our products pipeline segment, refined product volumes were up 2%. Crude and condensate volumes were flat in the quarter compared to the second quarter 2023. For the full year, we expect refined product volumes to be slightly below our plan, about 1%, but 2% over 2023. Regarding development opportunities, the company plans to convert its Double H Pipeline system from crude oil to natural gas liquid service, providing Williston Basin producers and others with NGL capacity to key market hubs. The approximately $150 million project is supported by definitive agreements. And the initial phase of the project is anticipated to be in service in the first quarter of 2026, with the pipe remaining in crude service well into 2025. Future phases could provide incremental capacity, including in support of volumes out of the Powder River Basin. In our terminals business segment, our lease liquid capacity remains high at 94%. Utilization and project opportunities at our key hubs at the Houston Ship Channel and the New York Harbor remain very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased in 2025, assuming likely options are exercised. And currently, market rates remain well above our vessels' currently contracted rates. The CO2 segment experienced lower oil production volumes at 13%, lower NGL volumes at 17%, and lower CO2 volumes at 8% in the quarter versus the second quarter 2023. For the full year, we expect oil volumes to be 2% below our budget and 10% below 2023. During the quarter, the CO2 segment optimized its asset portfolio in the Permian Basin through two transactions for a net outlay of $40 million. The segment divested its interest in five fields and acquired the North McElroy unit, currently producing about 1,250 barrels a day of oil, and an interest in an undeveloped leasehold directly adjacent to our SACROC field. The impact of these two transactions is to replace fields with high production decline rates and limited CO2 flood opportunities with fields that have attractive potential CO2 flood projects. In the Energy Transition Ventures group, they continue to have many carbon capture sequestration, project discussions that utilize our CO2 expertise for potential projects that take advantage of our existing CO2 network in the Permian Basin, and our recently leased 10,800 acres of pore space near sources of emissions in the Houston Ship Channel. These transactions take time to develop, but the activity level and customer interest are picking up. With that, I'll turn it over to David Michels. David Michaels -- Chief Financial Officer All right. Thanks, Tom. So, a few items before we cover the quarterly performance. As Kim mentioned, we're declaring a dividend of $0.2875 cents per share, which is $1.15 per share annualized, up 2% from our 2023 dividend. As disclosed in the press release, we're changing our investor day presentation from annual to biannual. We'll plan to continue to publish our detailed annual budget early in the first quarter as normal. Also, last one before we get to the quarterly performance, I'd like to recognize our accountants, planners, legal teams, business unit teams, everyone involved in the preparation for our earnings release and our 10-Q filing. We already have a tough close at this time of year with many working during the July 4th holiday period. And additionally, many of our Houston-based colleagues were impacted by Hurricane Beryl. I want to thank you all for going above and beyond to meet the challenges presented by power outages and damage and not missing a beat with regards to our quarterly reporting and analysis schedule. For the quarter, we generated revenue of $3.57 billion, up $71 million from the second quarter of last year. Our cost of sales were down $4 million, so our gross margin increased by 3%. We saw our year-over-year growth from natural gas products and terminals businesses, the main drivers with contributions from our acquired South Texas midstream assets, greater contributions from our natural gas transportation and storage services, and higher contributions from our SFPP asset. Our CO2 business unit was down versus last year, mainly due to lower crude oil volumes, due to some timing of recovery of oil in the second quarter of 2023. Interest expense was up due to the higher short-term debt balance due in part to our South Texas Midstream acquisition. We generated net income attributable to KMI of $575 million. We produced EPS of $0.26, which is flat with last year. On an adjusted net income basis, which excludes certain items, we generated $548 million, up 1% from Q2 of 2023. We generated adjusted EPS of $0.25, which is up 4% from last year. Our average share count reduced by 18 million shares or 1% due to our share repurchase efforts. The DCF is up 2% from last year. Our second quarter DCF was impacted by higher sustaining capex and lower cash taxes, both of which are, at least in part, due to timing. We expect cash taxes to be favorable for the full year and sustaining capital to be in line with budget for the full year. On a year-to-date basis, EPS is up 5% to last year, and our adjusted EPS is up 9% from last year, so good growth. On our balance sheet, we ended the second quarter with $31.5 billion of net debt and a 4.1 times net debt to adjusted EBITDA ratio, which is consistent with where we budgeted to end the quarter. Our net debt has decreased $306 million from the beginning of the year, and I'll provide a high-level reconciliation of that change. We generated $2.9 billion cash flow from operations year to date. We've paid out dividends of 1.3 billion. We've spent capex of 1.2 billion. And that includes growth, sustaining, and contributions to our joint ventures. And we've had about $100 million of other uses of capital, including working capital. And that gets you close to the $306 million decrease in net debt for the year. OK. And so, now, we'll open it up for questions. Sue, if you could come on, please. [Operator instructions] Our first question is from Manav Gupta with UBS. You may go ahead. Manav Gupta -- UBS -- Analyst Thank you, guys. First quick question here. The backlog went up pretty much. I mean, a good note, which is very positive, but the multiple also went up just a little. So, if you could just talk about the dynamics of those two things here. Kimberly Allen Dang -- Chief Executive Officer OK, sure. So, you know, the backlog, as I said, was up by $1.9 billion. That's really two projects that are driving that. It's the South System 4 that we mentioned, and then it is also Double H is the other one. And it's our share of South System 4. And then, with respect to the multiple, yes, it increased a little bit. As, you know, we always say, the reason that we give you the multiple is to give you guys some idea of the returns that we're getting on these projects so that you can be able to model the EBITDA. Now, it is not our goal ever, you know, to -- we're not targeting a specific multiple and getting a specific multiple on the backlog when we look at these projects. When we look at these projects, we're looking at an internal rate of return. And so -- and we have a threshold for that. And we have a pretty high threshold for our project. And that threshold is well, well, well in excess of our cost of capital. And then, we vary around that threshold, you know, what I'd say marginally, depending on the risk of a project. And so, you know, if we have -- and projects that we do that are connected to our existing infrastructure, you know, where it's not, you know, greenfield tend to have a much higher multiple associated with it. You know, when we're having to loop a pipeline or something, those typically might have a little bit higher multiple. But they're still meeting our return thresholds. And so, you know, I think these are very -- despite the fact that the multiple on the backlog is going up a little bit because of these projects, these are still very, very attractive return projects. Manav Gupta -- UBS -- Analyst Thank you for a very detailed response. My quick follow-up here is you mentioned the demand coming from data centers, and we completely agree with you. When you are having these discussions with the data center operators, we believe at one point, you know, these data center operators were not even talking to natural gas companies. They were only talking to renewable sources. Have you seen a change in sentiment where reliability has become a key factor so you are a bigger part of these conversations than you were probably 18 or 24 months ago? Kimberly Allen Dang -- Chief Executive Officer Yeah, I'd say -- you know, our initial reaction was similar to yours when we started to see this demand was they're probably going to target renewables. But as we have had discussions with them, I think that, you know, two things are key from their perspective. One is reliability and two is speed to market. And so, I think natural gas -- and Rich said this last quarter, you know, given the reliability of natural gas, it is going to play, we believe, a key role in supplying energy to these data centers. Thank you. Our next question is from John Mackay with Goldman Sachs. You may go ahead. John Mackay -- Goldman Sachs -- Analyst Hey, team. Thanks for the time. Maybe we'll pick up a little bit on that last one, surprisingly. So, if you guys are talking about 5 bcf of power demand discussions right now. We'd just be curious to hear a little bit from you on, you know, where you're seeing that geographically. You know, is it primarily Texas? Is it elsewhere in the portfolio? And anything you can comment on in terms of speed to market. And again, that might be a Texas versus kind of more FERC jurisdictions kind of discussion, but both of those would be interesting. Thanks. Kimberly Allen Dang -- Chief Executive Officer I think that and Sital and Tom, you guys supplement here, but, you know, the 5 bcf is overall power, so some of that's related to AI and some of it's just related to coal replacements, you know, shoring up reserve margins, backing up renewables. So, it's across the board. We're seeing it in Texas. We're seeing it in Arkansas. We're seeing it in Kentucky. We're seeing it in Georgia, desert -- in Arizona, desert southwest. I mean, it's -- you know, it is in almost all the markets we serve. We're seeing, you know, some sort of increase in power demand. John Mackay -- Goldman Sachs -- Analyst And maybe just on the kind of time to market in terms of how long it could bring -- how long it could take to bring those on -- Kimberly Allen Dang -- Chief Executive Officer Yes, how long it's going to be is very much dependent on where these are going to be cited. And so, you know, it depends on, is it a regulated market, is it an unregulated market? So, that's just going to vary depending on the market location. John Mackay -- Goldman Sachs -- Analyst I appreciate that. And just second question. You guys talked a little bit about some kind of portfolio optimization here. There's the CO2, I guess, you could call it, you know, asset swap. There's a line in the release on maybe some divesters in the net gas segment. I guess I'd just be curious overall for an updated view on how you're thinking about kind of portfolio pruning and optimization over time. Kimberly Allen Dang -- Chief Executive Officer OK. So, you know, on natural gas, I'm not sure, we did have a divestiture earlier in the year, which was a gathering asset, but that wasn't during this quarter. And so, that was just -- it was an asset that wasn't core to our portfolio, and we had someone approach us. And so the price made sense, and so we sold it. On the CO2 sale, you know, we had three -- four fields where there was limited opportunity for incremental CO2 floods. And, you know, that is our business, is, you know, injecting CO2 to produce more oil. And so, we sold those fields that had limited opportunity. And then, we acquired a field called North McElroy, which we think has very good flood potential. And then, we acquired a leasehold interest and some property that is adjacent to some of our most, you know, prolific areas at SACROC that we think will also be a great CO2 flood opportunity. Thank you. Our next question is from Keith Stanley with Wolfe Research. You may go ahead. Hi. Wanted to follow up on the SNG South System project. Can you just talk to the timeline for regulatory approval, start of construction? And is it all coming into service in late 2028 and/or phased over time? And then, sorry for the multi-part question, is it also fair to assume your customer here is your partner, Southern, on the project, or is it a broader customer base supporting this project? Sital Mody -- President, Natural Gas Pipelines So, Keith, this is Sital. One, we had an open season. We do have a broad customer base. You know, in terms of regulatory timeline, you know, with an in-service of 2028, you know, clearly, you know, we plan a project of this scale to pre-file and then do a FERC filing. Probably, you know, without getting into too much detail, you know, there is always competition sometime next summer with a targeted in-service date of late '28. So, that's probably the 50,000-foot view on -- did I answer your question? Keith Stanley -- Wolfe Research -- Analyst Yeah, and then just on -- yes, yes, you did. Oh, does it -- does the contribution come in all in the end of 2028, or is it phased in overtime as you see it? Sital Mody -- President, Natural Gas Pipelines So, we have -- we do have, you know, initial phases in '28, and we do have some volumes trickling into year after. Keith Stanley -- Wolfe Research -- Analyst OK, great. Thank you. Second question, I wanted to touch back on the Texas loan program for gas-fired power plants. How can we think about the opportunity for Kinder here? So, say Texas builds 20 gigawatts of new gas-fired power plants over the next five years, what type of market share do you have in the Texas market today in connecting to power plants? What's a typical sort of capital investment to do, a plant tie-in? Any thoughts of what it could mean for opportunities for the intrastate system? Sital Mody -- President, Natural Gas Pipelines So, you know, if I had to take a snapshot, and don't quote me on this, probably, today, we're about 40%. You know, we have the 40% share in Texas. In terms of connecting and the cost to connect, I really think it's going to vary depending on where that ultimate location is going to be. We do have some unique opportunities where it's actually, you know, quite low in terms of it's very capital efficient. And there are some targeted opportunities that might involve a little bit more capital. Kimberly Allen Dang -- Chief Executive Officer It really gets to how -- you know, are they going to be located on our existing system, or are we going to need to build a lateral and how far is -- you know, how long is that lateral going to need to be? And then, you know, are there going to be opportunities where it requires some expansion of like some mainline capacity. So, that's what Sital means. You know, it's just going to depend with respect to, you know, how big the capital opportunity is. Thank you. Our next question is from Jeremy Tonet with JPMorgan. You may go ahead. Just wanted to pivot back to the Double H conversion here. And how -- did you say how the NGLs are getting out of Guernsey at this point on -- you know, with this project? And I guess, you know, are you working with any other midstreamers on this project overall? Sital Mody -- President, Natural Gas Pipelines So, one, our goal is to get it to market, market being Conway and Mont Belvieu. And I think when you think about it broadly, you know, a couple of calls ago, you know, we talked about the basin in general and our desire to get egress both on the revenue side, and this is an opportunity to get egress on the NGL side. We see the basin growing quite significantly, you know, the GORs are rising. And so, you know, without getting into the complicated structures here because we are in a very competitive situation. I'll just leave it at this, that we are, you know, able to get to both the Conway and the Mont Belvieu market. Kimberly Allen Dang -- Chief Executive Officer Yeah, and I'd say the other thing, Jeremy, when Sital says the market's growing, we don't expect some big growth in crude. He's really talking about the NGLs and the gas because of the increase in GOR. Got it. OK. And maybe just pivoting, when talking about highly competitive market as far as Permian natural gas egress is concerned, just wondering any updated thoughts you could provide with regards to the potential for brownfield expansion, be it through GCX expanding, or greenfield as well getting to a different market, or even the potential to market a joint solution at the same time. Just wondering how you see this market evolving given that 2026 Permian gas egress looks like deja vu all over again. Sital Mody -- President, Natural Gas Pipelines Yeah, look, good question. And question is your, you know, unfortunately I don't have a different answer for you this time. You know, we still aren't prepared to sanction the GCX project, still in discussions with our customers on the broader Permian egress opportunity. You know, we've been, you know, as I said, pursuing opportunity. We don't have anything firmed up. There is a competitive space. We are open to all sorts of structures on that front and are willing to consider what's best for the basin. Thank you. Our next question is from Theresa Chen with Barclays. You may go ahead. Theresa Chen -- Barclays -- Analyst Hi. I wanted to follow up on the Double H line of questions. Can you tell us how much capacity the pipe will be in -- once converted to NGL service? And would you expect the line to be highly utilized right away in first quarter 2026, or will there be, you know, potentially multi-quarter, multi-year rampant commitments? Sital Mody -- President, Natural Gas Pipelines So, in terms of capacity, this is all -- you know, this is going to depend on the hydraulic combinations of our, you know, suppliers and ultimately what market they take that to. So, you know, I think the takeaway here is, we've got a firm commitment that will likely start day one. And then, as we scale the project, it is scalable, both from the Bakken and from the Powder River. And really, the ultimate capacity is going to depend on the customer. Thank you. Our next question is from Spiro Dounis with Citi. You may go ahead. Spiro Dounis -- Analyst Thanks, operator. Afternoon, everybody. First question, maybe just talk about capital spending longer term. You know, historically, you've talked about spending near the upper end of that sort of $1 billion to $2 billion range. For Rich and Kim, if I sort of combine your statements at the outset, it seems to suggest like there's a pretty robust opportunity set ahead, and maybe it wasn't contemplated when you sort of last gave us that update. So, curious if you're thinking about these larger projects coming in, like SNG and then the broader power demand you referenced earlier, yeah, you still sort of on track to be in that $2 billion zone long term? Kimberly Allen Dang -- Chief Executive Officer Yeah, I'd say we wouldn't say one to two anymore. We would just say around two. And, you know, around two could be two. It could be 2.3. I mean, just in that general area is what I would say. You know, when you think about something like in SNG, you know, it's got a 2028 in-service, and so that's going to be capital that you're spending, you know, just call it rough math, two years of construction. So, most of that capital will be, you know, in '27 and '28. And so, you know, that's filling out the outer years of potential capex. OK. So, it sounds like not a material departure from before. Got it. And then, can you just -- Kimberly Allen Dang -- Chief Executive Officer I'd say -- look, I'd say on the stuff that Rich and I are talking about, as I said, you know, the $5 billion project -- I mean the 5 bcf a day of projects that we're pursuing, that's stuff that we're pursuing today, right? That's not things that are in the backlog today. And so, you know, part of my point on the -- you know, is -- was we continue to see great opportunity beyond SNG. SNG, that 1.2 bcf a day is not included in the 5 bcf a day of potential opportunity. So, you know, I think projects like SNG continue to fill out that capex in the outer years and give us more confidence that we'll be spending $2 billion for a number of years to come. Spiro Dounis -- Analyst Got it. OK, that's helpful color. And then, switching gears a bit here, Kim, you talked about some of the sort of regulatory events that are sort of becoming tailwinds now, headwinds at first. And I know one other sort of macro factor that sort of got you last year or two was interest rates that were on the rise. I guess, as we look forward, you know, I'm not sure what your view is, but it seems like we're setting up for some rate cuts later this year. So, maybe, David, maybe you could just remind us, as we think about your floating rate exposure, what does that look like in 2025? And is this a potential tailwind for you? Kimberly Allen Dang -- Chief Executive Officer Yeah, and I'll let -- it is a potential tailwind. The forward curve today is -- you know, for 2025 is below, you know, what we've experienced in 2024 today and what the balance of the year is. So, 25 curve is below 24, but I'll let David give you an update on our floating rate exposure. David Michaels -- Chief Financial Officer Yeah. It could be -- we'll see if we actually get these rate cuts or not. Remember, we all expected a bunch of rate cuts in 2024 as well, but we didn't get them. We do have a fair amount of floating rate debt exposure. We've intentionally brought it down a little bit because it's been unfavorable to layer on additional swaps in the last couple of years. And so our floating rate debt exposure has come down from about $7.5 billion to about $5.3 billion. Additionally, we've locked in a little bit of that 5.3 for 2025, similar to past practice, to take advantage of some of the forward curve, the favorable interest rate forward curves that we're seeing for next year. So, about 10% of that, I think, is locked in for 2025 at favorable rates. The rest of it gives us a good opportunity to take advantage of any short-term interest rate cuts that we see coming to the market. Thank you. Our next question is from Michael Blum with Wells Fargo. You may go ahead. Michael Blum -- Analyst Thanks. Good afternoon, everyone. So, I wanted to get back to the discussion on the data centers. It seems like the hyperscalers are much less price sensitive and they're willing to pay higher PPAs to secure power. So, do you think that could translate into you earning higher returns that you've gotten historically on some of these potential gas pipeline projects? And is there any way to quantify that? Kimberly Allen Dang -- Chief Executive Officer You know, I think that -- I think we're early in the game. I think that's hard to judge at this point. I would say, again, you know, their two priorities are going to be reliability and speed to market. And I think that's what you're seeing -- you know, that's what you're hearing from the power guys on the -- you know, when they're getting the PPAs. So, I think, you know, we will get -- I think we are confident that we'll be able to meet our return hurdles on these projects but exactly what we're going to get on these projects at this point. I think, you know, it's too early to say that. And, you know, generally, these things will be -- there'll be some competition. And so, I wouldn't expect us to get outrageous returns by any stretch. Michael Blum -- Analyst OK, that makes sense. Thanks for that. And then, just one more follow-up on Double H. I believe the capacity, the oil capacity of that pipe was, I think, 88 million barrels a day so -- 88,000 barrels a day. So, I'm just wondering, should we assume that the NGL capacity will be kind of similar? Sital Mody -- President, Natural Gas Pipelines Well, I mean, it depends on the receiving delivery. You know, just think about it this way. I'll just make it real simple. If you were at the beginning of the pipe and at the end of the pipe, it could be. If you're in the middle of the pipe and bringing in volumes, it could be more. I mean, it just depends. So -- It depends on downstream as well. But yeah, I mean, I think for the Double H pipe itself, I mean, if you're coming in at the origin and going out at the terminus. Yeah, I mean that's fair, but to Sital's point, it's out there. You know, maybe people coming in at various points and then the downstream points are going to matter as well. Thank you. Our next question is from Tristan Richardson with Scotiabank. You may go ahead. Tristan Richardson -- Analyst Hi, good afternoon. Maybe just one more on the CO2 portfolio. Can you talk about capital needs or opportunities with the new portfolio? Historically, you've spent, you know, 200 to 300 annually here, and you noted that there are greater flood opportunities with the new assets. Curious kind of how these changes capital deployment in CO2. And then, also in the context of, I think in the past, you've noted a 10-year development plan of around 900 million. Just curious sort of what the new portfolio kind of looks like going forward. Anthony B. Ashley -- President, CO2 and Energy Transition Ventures Hi, Tristan, it's Anthony. You know, I think I wouldn't expect a material change in the capital numbers, the annual capital numbers for CO2. We weren't spending a lot on any of the divested assets. There are the opportunities that you mentioned with regards to the two new assets. You know, I think the undeveloped acreage that we're talking about, that'll become part of our annual SACROC numbers. And then, North McElroy, we think there's excellent opportunity there as Kim and Tom said, but we've got to do it pilot first. And so, we'll be proving out that opportunity. And once we prove it out that opportunity, I think we'll have more to say on that. Tristan Richardson -- Analyst Thanks, Anthony. And then, maybe just on refined products, it seems like the Lower 48 maybe saw a later start to the summer driving season, but it also seems like perhaps volumes have picked up in late June and into July. Can you talk about what you're seeing this season and maybe what's contributing to that 1% below your initial budget? Sital Mody -- President, Natural Gas Pipelines Yeah, I would say, you know, gasoline overall is reasonably flat. We've actually seen a bit of a pickup in jet fuel, primarily on the West Coast as you saw in the release. And then, on renewable diesel, we've seen a decent pickup on renewable diesel. We're still a decent bit below our total capacity on the renewable diesel hub capacity. I think we did 48 a day in the third quarter -- I mean, sorry, in the second quarter. We've got 57 a day of capacity. You know, as that additional refinery comes on later this year, I think that will continue to pick up. But with respect to being just, you know, slightly below our budget, we had probably slightly higher gasoline numbers in there. Yeah, the other thing I'd say on the volume is the volumes are one component of the revenue right, price is the other. And what we've generally seen out in California is that we're moving longer-haul barrels rather than some of the shorter haul. So, you know, from an overall revenue standpoint, I think we're in good shape on the refined products. Thank you. Our next question is from Harry Mateer with Barclays. You may go ahead. Harry Mateer -- Barclays -- Analyst Hi. Good afternoon. So, first question, for South System Expansion 4, how should we think about funding that given you have the JV opco structured SONGAS? And I guess, specifically, how much of an opportunity is there for some nonrecourse debt financing to be used at the SONGAS entity itself? David Michaels -- Chief Financial Officer Yeah, it's a good question. I think we're -- it's still early stages and we're still evaluating all of our options. Generally, with these JV arrangements, we prefer to fund at the parent level because our cost of capital is attractive. But we are evaluating our different funding opportunities. I don't -- we've never really been big fans of project financing. It puts a lot of pressure on the project and so forth, but we're still evaluating the best course forward. Because of the build time, it's going to take some amount of time to get the pipeline into service, so there's likely going to be a fair amount of equity contributions in order to fund that. And of course, you have the entity level itself. OK, thank you. And then, second, in energy transition ventures, I'm curious where and whether acquisition opportunities in RNG, you know, might fit right now when you're looking at growth potential in that business. Kimberly Allen Dang -- Chief Executive Officer Yeah. I'll say a couple things on that, and then Anthony can follow up. But you're -- I think that business has been harder to operate than we would have expected. And as a result of that, until we get our hands fully around the existing operations, you know, we have sort of stood down, if you will, you know, looking at any significant acquisition opportunities. And, you know, I think that, you know, once we have these plans operating on a more consistent basis that we can reevaluate that. But at this point in time, I think we've got to get those plants up and operating consistently. We think we are on the path to do that. And hopefully, that will be the case for the second half of this year. Thank you. Our next question is from Samir Quadir with Seaport Global Securities. You may go ahead. So, starting off on the new projects that you announced, could you talk a little bit about contractual construct behind those? What kind of contract durations you have supporting those two projects? Kimberly Allen Dang -- Chief Executive Officer Yeah, generally on the South System 4, we've got, you know, 20-year take-or-pay contracts with creditworthy shippers. And then, you know, we also have a contract that's underpinning the double H project. So, consistent with how we've done, you know, how we do our other projects, I mean, we want to make sure that we've got good credit and good quality cash flow that are supporting capital bills. Sunil Sibal -- Analyst Understood. Then on the on the full year expectations, I think you mentioned you're tracking a little bit below budget as well as gathering volumes are concerned. Could you talk a little bit about, you know, which basins, etc., are tracking below what we're expecting in the start of the year? Kimberly Allen Dang -- Chief Executive Officer Yeah, I think just so -- you know, you know, I mean, what we're assuming for the balance of the year is volumes that are relatively flat with the volumes the first half of this year. So, we're not assuming a big ramp-up in volumes the second half of this year, pretty consistent with what we saw in the first half. And then, you know, in terms of, you know, the big -- the three big basins where we are going to be, you know, South are going to be Eagle Ford, Haynesville, and Bakken. And so, you know, we've seen a little bit of weakness, I think, in each of those, probably a little more in the Haynesville than in the others. Sital Mody -- President, Natural Gas Pipelines Yeah, I mean, you saw, you know, producers react to the pricing in Haynesville, which is why we've had a little bit of a pullback. But it's prudent. Thomas A. Martin -- President But we expect that to ramp later this year and the next year as demand picks up. Thank you. And at this time, we are showing no further questions. Richard D. Kinder -- Executive Chair All right, thank you very much for listening, and have a good evening. Operator Thank you. That does conclude today's conference. Thank you all for participating. [Operator signoff]

Citizens Financial Group, Inc. (CFG) Q2 2024 Earnings Call Transcript

Kristin Silberberg - Executive Vice President, Investor Relations Bruce Van Saun - Chairman and Chief Executive Officer John Woods - Chief Financial Officer Brendan Coughlin - Head of Consumer Banking Don McCree - Head of Commercial Banking Good morning, everyone, and welcome to the Citizens Financial Group Second Quarter Earnings Conference Call. My name is Alan and I'll be your operator today. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded. Now I'll turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristin, you may begin. Kristin Silberberg Thank you, Alan. Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Saun and CFO, John Woods will provide an overview of our second quarter results. Brendan Coughlin, Head of Consumer Banking and Don McCree, Head of Commercial Banking are also here to provide additional colour. We will be referencing our second quarter earnings presentation located on our investor relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. Okay. Thanks, Kristen, and good morning, everyone. Thanks for joining our call today. We announced solid results today and we continue to execute well through an uncertain environment. Highlights for the quarter include very strong fee performance, good deposit cost management, tight expense control, and credit metrics which were within expectations. Our balance sheet remains robust with a CET1 ratio of 10.7%. Our loan to deposit ratio was 80%. Our ACL ratio was 1.63%. And Federal Home Loan Bank advances are now below $600 million. Of note, we saw our revenues tick up relative to Q1. Our underlying PPNR grew by 2% over Q1. Our underlying net income grew by $13 million or 3%. We repurchased $200 million in shares over the quarter with our sequential EPS up 4%. The combination of our strong capital position, solid returns, and capital freed up from non-core rundown has allowed us the capital flexibility to support our customers and return capital to shareholders. Share count is down over 5% versus a year ago. Our fee growth was relatively broad as capital market fees continued their rebound, led by low syndications and bond underwriting. Wealth and card fees, both hit record levels. We also are seeing nice momentum in our well-positioned payments business. Our private bank had a terrific quarter. We reached $4 billion in deposits, up from $2.4 billion in Q1, and tracking well towards our year-end 2025 goal of $11 billion. We brought in two leading private wealth teams in the quarter, one from San Francisco and one from Boston, and we've reached $3.6 billion in assets under management at quarter end with nice momentum. Our commercial bank hired a middle market leader for Florida and for California during the quarter, two increasingly important states for us. Our overall commercial franchise continues to be well positioned in serving the middle market, private capital, and key growth verticals, and we look for our strong performance to continue in the second half. I should pause to give a shout-out to Don McCree for his appointment as Senior Vice Chair in June. Great recognition for his efforts over the years at Citizens. We have done a good job in executing on our strategic initiatives. TOP 9 is tracking well to targets, and we have commenced work on TOP 10, which will push into new areas like AI. Our BSO work is progressing well. Non-Core ran down $1.1 billion in the quarter. Commercial C&I is refocusing on deep relationships, and we have a medium-term plan to reduce our CRE exposure. Credit metrics are holding up fine outside of General Office. We continue the lengthy workout of General Office, which will take several more quarters before we see improvement. Roughly 70% of our office exposure is suburban versus central business district, where loss given defaults have been about half of CBD properties. The good news is that, we have our arms around the issue and we don't expect to see major surprises. Looking forward, we continue to be upbeat about our prospects. While there are still many uncertainties in the external environment, we feel we are in good position to navigate the challenges that may arise, and we maintain a positive outlook for Citizens over the balance of the year, as well as the medium term. Our strategy rests on a transformed consumer bank, the best positioned super regional commercial bank, and the aspiration to have the premier bank-owned private bank. We will continue to execute with the financial and operating discipline that you come to expect from us. Thanks, Bruce. And good morning, everyone. As Bruce mentioned, second quarter results were very solid in a number of key areas, starting with the excellent fee performance driven by strong capital markets fees and record results in Wealth and Card. Also, we managed our deposit portfolio quite well, with stable balances and lower interest bearing costs in a competitive environment which positively impacted NII and NIM. Rounding out quarterly results, expenses and credit came in largely as expected. With respect to balance sheet strength, we continue to maintain a healthy credit reserve position and capital and liquidity levels near the top of our peer group. And importantly, we are executing well against our various multi-year strategic initiatives, including the buildout of our private bank. I'll summarize further highlights of the second quarter financial results, referencing Slides 3 to 6. We generated underlying net income of $408 million for the second quarter, EPS of $0.82, and ROTCE of 11.1%. Maintaining a strong balance sheet position is a top priority, and we ended the second quarter with CET1 at 10.7% or about 9% adjusted for the AOCI opt-out removal. We also maintained our strong funding and liquidity profile in the second quarter. Our pro forma LCR is 119%, which is well in excess of the large bank Category 1 requirement of 100%. And our period end LDR improved to 80.4%. On the funding front, we've reduced our period end FHLB borrowings by about $1.5 billion linked quarter to $553 million. We continued our programmatic approach to increasing our structural funding base with a successful $750 million senior debt issuance during the second quarter, and we added about another $1 billion of auto-backed borrowings. That was our fourth issuance, essentially completing our auto program, and it was executed at our tightest credit spreads to date. We also refinanced preferred stock in the second quarter by issuing $400 million of new preferred and redeeming $300 million of higher-coupon floating rate preferred on July 8. Credit losses of approximately $180 million were in line with our expectations. The NCO rate rose a little to 52 basis points reflecting loan balances coming in a little lower than expected. Our ACL coverage ratio of 1.63% is up 2 basis points from the prior quarter. This includes an 11.1% coverage for General Office, up from 10.6% in the prior quarter. Regarding our strategic initiatives, the private bank is doing very well, having generated $4 billion of deposits and $3.6 billion of AUM through the second quarter. Also, our investments over the years in the private capital and capital market space are playing out nicely, as demonstrated this quarter. Finally, we are excited about our top of house initiatives, including the ongoing benefits from BSO and TOP, as well as growing contributions expected from data and technology-related initiatives, such as generative AI and cloud migration. Next, I'll talk through the second quarter results in more detail, starting with net interest income on Slide 7. As expected, NII is down 2% linked quarter, reflecting lower net interest margin and loan balances. With respect to NIM, as you can see in the walk at the bottom of our slide, our margin was down 4 basis points to 2.87%, reflecting a 6 basis point increase in swap expense due to the 60 basis point decline in average receive rate in the quarter. This is partly offset by a net increase in NIM of 2 basis points from all other sources, including higher asset yields, non-core runoff, and good deposit cost performance, with interest bearing deposit costs down 3 basis points. Overall, our deposit franchise continues to perform well in a very competitive environment with our interest-bearing deposit data at 51%, which was down from 52% in Q1. Moving to Slide 8, our fees were up 7% linked quarter given strong results in capital markets and record card and wealth results. Our capital markets business improved 14% linked quarter with higher bond underwriting and loan syndication fees given strong refinancing activity. M&A advisory fees were down slightly off a strong first quarter. However, our deal pipelines remain strong and we expect to see positive momentum in the second half of 2024. It's great to see our capital markets business holding the number one middle market sponsor book runner position for the second quarter in a row. This reflects the benefit of the investments we've made in our capabilities since the IPO and demonstrates the diversification of the business. Card fees were a record, primarily given the full quarter benefit of the first quarter transition to a new debit card platform as well as seasonally higher purchase volume. We delivered record results in Wealth driven by increased sales activity, as well as higher asset management fees given the constructive market environment and contribution from the private bank which will continue to grow given the AUM increase in the second quarter from our wealth team hires. Mortgage banking fees are up modestly with a benefit from the MSR valuation net of hedging and an improvement in servicing P&L. Production fees were down slightly given a decline in margins. On Slide 9, underlying expenses were down slightly as we saw the normal seasonal benefit in compensation and we did a nice job managing our expenses while continuing to invest in our strategic initiatives. Our TOP 9 program is progressing well and we continue to expect to deliver a $135 million pre-tax run rate benefit by the end of the year. We have commenced work on our TOP 10 program and will provide more details later this year. On Slide 10, period end and average loans are down 1% linked quarter as we continue to optimize our balance sheet and prioritize relationship-based lending. The linked quarter decline was driven by the runoff of our Non-Core portfolio of $1.1 billion. Core loans were broadly stable with a slight reduction in commercial balances, largely offset by an increase in retail. The decrease in commercial loans reflects paydowns and exits of lower return in credit only relationships, lower client loan demand, and corpus continuing to issue in the debt markets. Next, on Slides 11 and 12, we continue to do an excellent job on deposits in an extremely competitive environment. Period-end deposits are broadly stable linked quarter as seasonally lower retail deposits was offset by strong growth in the private bank. We continue to see a slowing rate of migration from demand and lower-cost deposits to higher-cost interest bearing accounts with the Fed holding steady, as well as the benefit of deposit market share gains with the private bank. As a result, non-interest bearing deposits are stable at about 21% of total deposits. Our deposit franchise is highly diversified across product mix and channels. About 69% of our deposits are granular, stable consumer deposits, and approximately 70% of our overall deposits are insured or secured. This attractive deposit base has allowed us to efficiently and cost-effectively manage our funding costs in the higher rate environment. Our interest bearing deposit costs were down 3 basis points linked quarter given proactive management of our pricing strategy. Moving to credit on Slide 13. Net charge-offs were 52 basis points, up 2 basis points linked quarter reflecting broadly stable charge-offs and lower average loans. The commercial charge-offs in the quarter were largely driven by CRE General Office and the fact that C&I recoveries were higher in 1Q versus 2Q. This increase in commercial was largely offset by a decrease in retail, primarily due to seasonal trends in auto and runoff. Non-accrual loans increased 4% linked quarter, driven by increases in CRE General Office and multifamily, which has been reflected in the reserve level for the quarter. Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.63%, which is a 2 basis point increase from the first quarter, reflecting broadly stable reserves and lower loan balances given non-core runoff and commercial paydowns and balance sheet optimization. Our reserve of $369 million for the $3.3 billion General Office portfolio represents 11.1% coverage, up from 10.6% in the first quarter. Additionally, since the second quarter of 2023, we have absorbed $319 million of cumulative losses in the General Office portfolio. When you add these cumulative losses to the reserves outstanding, this represents roughly a 17% loss rate based on the March 2023 balance of $4.1 billion. Over the past six quarters, the General Office portfolio was down roughly $900 million to $3.3 billion at June 30, given paydowns of about $500 million and the charge-offs I just mentioned. The loss experienced so far has been concentrated in the central business district properties with approximately 2 times the loss rate of suburban properties. Suburban exposure is 70% of our total at this point. On the bottom left of the page, you can see some of the key assumptions driving the General Office reserve coverage level, which we believe represents a severe scenario that is much worse than we've seen in historical downturns, so we feel the current coverage is very strong. Moving to Slide 15, we have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.7%, up 10 basis points from 1Q. And if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio would be 9%. Both our CET1 and TCE ratios have consistently been among the top of our peers. You can see on Slide 16 where our CET1 stands currently relative to peers. Given our strong capital position, we repurchased another $200 million in common shares and including dividends, we returned a total of $394 million to shareholders in the second quarter. Moving to Slide 17, our strategy is built on a transformed consumer bank, the best positioned commercial bank amongst our regional peers, and our aspiration to build the premier bank-owned private bank and wealth franchise. First, we have a strong transformed consumer bank with a robust and capable deposit franchise grounded in primary relationships and high-quality customer growth. Notably, the transformation of our consumer deposit franchise is the chief reason that our deposit performance has dramatically improved from the last upgrade cycle. We are much more nimble in our deposit raising capabilities now with more levers to pull and better analytical tools. And where our beta performance lagged our regional peers last time, so far this cycle we are better than peer median. We also have a differentiated lending platform where we are prioritizing building durable relationships with our customers and we are focused on scaling our Wealth business. Importantly, we continue to make great progress improving digital engagement with our customers and increasing deposit shares we build our customer base, particularly in New York Metro. Next, we believe we have built the leading commercial bank amongst the super-regional banks. We are focusing on serving sponsors and middle market companies in the high growth sectors of the economy and we have full set of product and advisory capabilities to deliver to our clients. In particular, we are uniquely positioned to serve the private capital ecosystem which appears poised for a strong recovery after one of the slowest dealmaking periods in decades. We are starting to see a more constructive capital markets environment develop and our consistent position near the top of the middle market and sponsor league tables gives us confidence that we have a right to win as activity picks up. Finally, we're building a premier private bank, and that is going very well and gaining momentum. We're growing our client base and now have about $4 billion of attractive deposits, a $1.6 billion increase from the prior quarter, with roughly 30% non-interest bearing. Also, we are now at $1.4 billion of loans and continuing to grow. We recently opened private banking offices in Mill Valley, California and Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Citizens Wealth Management business as the center piece of that effort. We added two exceptional asset management teams in the second quarter, one from San Francisco and the other from Boston, bringing the total private bank AUM to $3.6 billion, well on our way to hit our $10 billion target by the end of 2025. Importantly, our private bank revenue increased 68% to about $30 million in the second quarter, and we are on track to break even on the bottom line later this year. Moving to Slide 18, we provide the guide for the third quarter. This outlook contemplates a 25 basis point rate cut in each of September and December. We expect NII to be down 1% to 2%, driven by one last step up in swap costs this cycle. Noninterest income should be up slightly, reflecting seasonally lower capital markets, more than offset by a pickup across other categories. We expect non-interest expense to be stable. Net charge-offs are expected to be down modestly, and the ACL should continue to benefit from non-core runoff. Our CET1 ratio is expected to come in about 10.5% with approximately $250 million to $300 million of share reports currently planned. With respect to the full year 2024 guide we provided in January, we feel good about the overall level of PPNR. Revenues are tracking broadly in line with some puts and takes. NII is expected to come in at the upper end of the down 6% to 9% range, reflecting lower loan balances, with NIM trending modestly better. Fee should come in modestly above the range of 6% to 9% originally expected. You should expect us to continue to do well on expenses, which will be broadly in line with the January guide. We expect NII and net interest margin to rebound in the fourth quarter given swap costs that peaked in the third quarter with a return to positive operating leverage in the fourth quarter. In addition, net charge-offs are trending in line with our January expectations. We continue to expect to end the year with a target CET1 ratio of approximately 10.5% and the level of share repurchases will be dependent on our view of the external environment and loan growth. To wrap up, we delivered a strong quarter with good momentum in capital markets, record results in wealth and card, and credit performance that continues to play out largely as expected. Our capital levels are strong, near the top of our peer group, and we are maintaining robust liquidity and funding. Our unique multi-year strategic initiatives, including the buildout of our private bank are progressing well, and our consumer and commercial banking businesses are well positioned to drive strong performance over the medium term. Given these tailwinds, combined with strong execution and tight expense management, we remain confident in our ability to hit our medium-term 16% to 18% return target. Thank you, Mr. Van Saun. We are now ready for the Q&A portion of the call. [Operator Instructions] Our first question will come from the line of Peter Winter with D.A. Davidson. Go ahead. Peter Winter Good morning. Can you provide an update on the loan outlook in the second half of the year and maybe just talk about customer sentiment and what it's going to take to kind of move them off the sidelines? John Woods Yes, I'll go ahead and jump on that one. So, I mean, I think we're seeing pretty positive signs, for 2H as it relates to loan growth. When we look at the three different businesses that really will drive that, we've got the private bank, which has demonstrated the ability to not only grow deposits and AUM, but the private bank is actually penetrating its customer base and growing loans in the second quarter, and we expect that to actually continue and begin to accelerate into the second half. In the commercial space, customer activities picking up, we do expect to see, particularly in our sort of, you call it, M&A, advisory-related driven finance arena, we're seeing some opportunities in the subscription line space as well as some pick up in fund finance. And then in retail, we've been seeing some opportunities in HELOC and mortgage. So all three legs of our stool, as we call it, are starting to demonstrate the ability to really deliver on that loan growth expectation as you look out into the second half. Don McCree Yes, John, I'll jump in on that. It's Don. I think one of the interesting things we've seen, and this goes to capital markets also, is a real pick up in new money activity over the last six to eight weeks as the interest rate cycle appears to be abating and the economy seems to be okay. So that's driving growth in subscription lines. That's driving a little bit more bullishness among our core C&I customers and it's certainly driving opportunistic activity among the PE firms. So, I think we'll see some decent growth in the second half of the year. Exact timing, I'm not exactly sure, but we did see at the end of the second quarter the beginnings of some pretty significant draws on our subscription loans. Bruce Van Saun Yes, and I'll jump in too on the consumer and private banking side. The consumer story is a little complicated given the non-core run down. We're running down $800 million to $1 billion each quarter, but if you put that aside, the fundamentals of our core loan business are actually growing at a reasonable clip, really led by residential lending and a little bit in card. Our HELOC position remains incredibly strong. And with rates being higher than we had expected going into the year and our customers having the most home equity in their personal balance sheet in the history of the United States, our HELOC market position is reaping a lot of benefits for us. So we're seeing very strong HELOC growth despite the mortgage challenges, some modest growth in the mortgage portfolio. And we're starting to see a bit of a tick-up on the card book. And then turning to the private bank, really our offering is much broader than what the team that we hired was used to. So we're starting to see a diversification of that book. Early days it was really led by private equity and venture capital call lines. That's still a strength of the business model. We did see in this last quarter in Q2 a diversification towards consumer. So consumer is now 36% of the loan book versus in the low 20s earlier in the year. So mortgage is starting to pick up, some HELOC lending, and still continued strength in business banking and private equity. We expect that trend to continue. Peter Winter That's a great color. Thank you. And just on a separate question, the stress capital buffer came in higher than I was expecting. I'm sure it's higher than what you were expecting. Are there any plans to kind of reassess any of the businesses to help drive a lower [SCB] (ph)? Bruce, you mentioned some plans over the medium term to reduce the CRE exposure. Peter Winter Yeah, I guess we were a bit disappointed in the SCB result. And I'd say, I think the Fed overall does a pretty good job on credit. They are very conservative, but they have a lot of data to work from. And where we've consistently been frustrated has been on their modeling of PPNR. And so, our own modeling of PPNR is kind of much more robust. I think we do things like we pick up forward to starting swaps. We tailor the situation to the scenario where if rates are much lower, then we're going to see a pickup in mortgage fees and a pickup in capital markets fees, depending on the scenario. But anyway, I'd say the good news is, we have sufficient capital. We run at a conservative level. So having a higher SCB than we think is appropriate isn't really hindering our strategy. And so, I don't think, Peter, that we need to make significant changes to the business model. I think we're on the right track. Having said that, the balance sheet optimization is still places where there's work to do to optimize the risk-adjusted return that we make off the balance sheet and to hopefully improve some of the stress results on the credit side. And so, CRE, we can see, that run down, we popped up after we did the investors acquisition. A lot of that was low risk, multifamily. But certainly, we want to create the capacity to lend in areas that really further deeper relationships and we'll have more C&I kind of fill some of that void as we bring down CRE would probably be the biggest shift that you'd see on the balance sheet over time. Your next question comes from the line of Erika Najarian with UBS. Your line is now open. Erika Najarian Hi, good morning. This question -- this first question is for John. John, I think you were at a conference in June, and you talked about, very positively, about an exit rate for the fourth quarter of 2024 and the net interest margin. I'm wondering if you could readdress that again and maybe put it in context of -- you noted that the swap costs were peaking in the third quarter. If you can give that in context on how you expect asset yields to traject as we think about that September and December rate cut. And obviously the 3 basis point improvement in interest bearing deposit costs are notable. It's often the trajectory from here, whether it's in context of the rate cuts and without. John Woods Yes, sure, Erika. I guess what I'll start off with is that, at the beginning of the year, we did indicate that we thought the exit NIM would be in that neighborhood of 2.85% or so. I'd say that as we've gotten into the middle part of the year, we expect that to come in a little better. So I think I did mention that at conference earlier last quarter and I think we can confirm that those trends continue to be looking good that we're going to end up a little better than what we expected. And broadly, what we said at the time was that, we saw loans coming in a little lower and pushed out a little bit more than we had originally expected, but that was getting offset, in part from better net interest margin trends, we were pleased to be able to print a very strong interest-bearing deposit costs number that was down 3 basis points this quarter. I think it's very likely that our interest-bearing deposit costs have peaked in the first quarter, that we had some nice opportunity to kind of price our rollovers of CDs in the second quarter, and that was a tailwind. I think there'll be some variability there, but I think 1Q is probably the peak, and that will provide a nice tailwind as you get into the second half of the year. I mean, broadly, the trends when you get into the fourth quarter are along the following lines. Every quarter, we're generating a couple of basis points of positive benefit from all other sources outside of swaps. And so given the third quarters, the last time that we'll see a step up in swap costs, really that the rest of the bank will be able to drive net interest margin rising off of that NIM trough in 3Q into 4Q. And the big drivers would be, there's a number of them. I mean, we've got non-core, which continues to run off and is providing about 2 basis points a quarter of net interest margin all by itself. You've got asset yields around 5 basis points or so, ex-swaps, given the front book, back book dynamic that we're seeing, which is in that 200 basis point to 300 basis point range from the standpoint of what's happening with securities and loans. And then, you have the initiatives with the private bank, which is accretive across the board, which is contributing. So all of those things I think you'll see contribute. And I'd say that getting that first Fed cut in late September would be also helpful. It's not necessary for us to stay on track for having a really strong rebound in 4Q, but it does help, I'd say, address the higher for longer pressures that -- pricing pressures on deposits that will continue to bump along until that first cut comes out from the Fed. So let me stop there and see if that addresses the number of the points that you made. Erika Najarian That does. And as you lay out the past, and you said a third -- from a rising past for the net interest margin from what you mentioned as a 3Q 2024 trough. I'm wondering about the size of the balance sheet. Do you feel like your mix is optimized? In other words, as your investors think about a normalizing NIM and multiply that by your balance sheet, is your balance sheet growth going to be in line with business growth, or will there be moves that you're making in terms of wholesale funding or whatever else that could move balance sheet growth sort of underneath business growth or above business growth? John Woods Yes, it's a good question. I'd say, I think there might be two different answers here. One is, in the second half of 2024, we have a -- at the balance sheet date here at June 30, we have a significant amount of excess liquidity. And so, you could see us deploy some of that into lending through the second half. And that's very powerful in terms of the ability to drive net interest margin. And so, we're pleased to be able to do that, given how strong our balance sheet position is at June 30. But I'd say when you zoom out and think about the median term, we without a doubt have opportunity to grow the balance sheet over time in line with business growth adjusted for the balance sheet optimization initiatives that we have in place, but that powerful combination of net interest margin reflating into that, call it, what do we say, 3.25% to 3.40% range plus the opportunity to grow the balance sheet over the medium term is really one of the -- is the primary and majority driver of our ROTCE targets over the medium term. So, I think maybe a little bit of transition in 2H where we'll probably deploy some liquidity, but then growing into 2025 and 2026 and beyond. Bruce Van Saun I would just add to that, Erika, is I do think we have one thing that's pretty unique to us, which is the launch of the private bank. So, if we just grow at kind of nominal GDP, kind of in the medium term for consumer and commercial, we should grow a little faster, because the private bank is scaling up. And certainly as the customer base grows and we keep adding and investing in the business, we should see additional growth there. Your next question will come from the line of Ryan Nash with Goldman Sachs. Your line is now open. Mr. Nash, if you could please check your mute feature on your phone. Kristin Silberberg Alen, maybe we can come back to Ryan. Let's move on to the next question and we'll circle back to Ryan. Yes, one moment please. [Operator Instructions] We'll go next to Scott Siefers with Piper Sandler. Your line is now open. Scott Siefers Thanks for taking the question. Maybe we could sort of pivot to the fee story for a moment. That's been a pretty solid story this quarter. And John, it sounded like we'll see maybe some seasonal capital markets weakness in the third quarter, but it feels like it's on a good trajectory. So just maybe some thoughts on the overall investment banking pipeline, how it looks, and then just broader thoughts on the main drivers as you see them for the fee-based outlook? John Woods I'll start off with the broader picture and maybe let Don tell us a little bit more about the capital markets pipeline outlook. But more broadly, I mean we're really pleased with our performance in the second quarter and printing another number one middle market sponsor position on the table. It's nice to see the second quarter in a row. 3Q is the typical seasonal period where it's a little down for capital markets and we expect that that may play out as it's done in prior years. But I think the floor in that seasonally down period is actually higher this year than it's been in prior years. So that's something to keep in mind, that given all of the investments, we actually sure will be down off a great 2Q, but the floor is probably higher than prior years, number one. Number two, the diversification not only within capital markets but outside of capital markets and all the investments we've been making in wealth. We had those two significant asset management teams that we brought on board plus all of our organic investments inside the private bank and broadly is really driving wealth fees. So here to see wealth fees be a bigger contributor in the third quarter. And just as you see the rate environment moving around, we're seeing opportunities in helping our customer hedge the exposure to rates. And so, we expect to see some benefit there. And just a number of other categories, including service charges and ability for possibly some mortgage banking opportunities, as rates seem to be stabilizing and down. So there's just a number of other categories, given the diversification of the platform, that will allow us to stay on track here as you head into the third quarter. Bruce Van Saun And also, just to add to that, we did take some regulatory cleanup items in other incomes, so that was suppressed in the quarter, which should bounce back next quarter. But with that, Don, why don't you give a little more color on kind of... Don McCree Yes, so it's interesting. The characteristics of the market are very favorable right now. There's enormous amounts of liquidity. And that drove really the first half of the year, which was primarily like a refinancing market. So if you look at transactions done in the core capital markets being syndicated lending and bonds, it was about 85% refinancing of existing exposures that were on people's balance sheet and extending maturities and the like. What we didn't see and what we're beginning to see is new money activity led by the private equity team. So as we move into a more favorable interest rate environment, a decent economic environment, we're starting to see the pipelines really grow on the PE side of the business. And frankly, that's where the big underwritings are, and that's where the profitability drives. M&A is hanging in there pretty well. Remember, we are primarily a middle market investment bank, so we do the mid-sized deals, $100 million valuation to $1 billion valuation, $100 million capital raise to $1 billion capital raise. So those have actually been more resilient than the really big ticket M&A deals, which are getting government scrutiny and getting held up in regulatory approval. So those seem to be moving along reasonably well. The place we haven't seen a lot, we've seen actually more than we saw last year, is in the IPO side of the business. There are a lot of IPOs that are kind of prepped and ready, but people aren't pulling the trigger and going to market. And some of that's been the aftermarket performance of the IPOs that have happened so far. But if we can continue to get the broadening of the equity markets and the high rise of the equity markets, you could see some of that begin to come. And then we have a pretty decent pipeline in the convert side and the follow on side. So it's broad-based. It's pretty encouraging. And I think the backdrop is very favorable for a good second half and a great 2025, frankly. And we think we've got all the pieces we need to take advantage of the markets. Brendan Coughlin I'd maybe just very quickly add on the consumer side, our improvement is very durable, sticky fee revenue. So the card changes that both John and Bruce mentioned, we reissued 3.5 million debit cards last quarter in a new contract that just drops directly to the bottom line. It's predictable and will stick around. Service charges has bottomed out. Mortgage we think will be in the zone, it could get a little bit of favorability if rates drop a little bit. And then the wealth AUM growth is sticky, durable, repeatable fee income. So that's what we're calling for, a steady continued upward momentum on consumer without a lot of volatility. Bruce Van Saun I'll just add one more thing, as we're beginning to see, it's interesting because the private banking teams never had a capital market business at their prior employer. And so we're starting to see some crossover activity among the private banking clients here coming on board into capital markets. I don't know if that's a second half thing, but I think that's a brand new opportunity from a client base that was never really resident at Citizens before. Scott Siefers Perfect. Thank you for that color. And then wanted to ask a little bit about the reserve and specifically the office reserve. I think we're up at 11.1% now, which is, of course, very, very high. I guess I'm curious about the factors, as you might think about them, that would allow you to start sort of absorbing losses with that existing reserve. In other words, what sort of allows that office reserve to start to come down rather than to continue to take off? I think when you talk about the reserve more broadly, you've pointed to non-core runoff as being the thing that might allow the reserve to benefit, but just curious about how office fits in there in particular. Bruce Van Saun Yes, I would say -- I'll start and let John add color, but I'd say that office, there's still a lot of uncertainty in that space. Just what we're seeing in terms of valuations, cap rates, the path of future interest rates. And so, I think we've played it conservatively with having a big reserve and then just kind of letting the charge-offs run through, while maintaining the reserve. I think you'd have to get to a point where you started to see things solidify a little bit and start to move in the right direction, so to speak. And I don't really see that happening actually for certainly this year. It will happen maybe sometime in next year. So we're kind of prepared for a slog here on office that we've got our arms around the properties. We know what the maturity schedules are. We've got good people working with the borrowers to deliver good outcomes. I don't expect we'll see any big surprises, but we'll continue to, I think, just work our way through it. At the point where we hit a kind of feel better moment when things start to look like they're moving in the right direction, that's when we'll be able to start to draw down on the reserve and we'll reap a nice benefit when that happens. John? John Woods Yes. I would just echo that point. I mean just having some growing confidence in valuations and seeing maybe transactions occur could be a likelihood of 2025 outcome. And so this is a multi-quarter probably multiyear journey that we're on. But given all the balance sheet strength, that we have with our capital position, we feel really confident that any uncertainties are expressed in the reserves and any other -- anything else would be supported by the capital. I would also mention that we're working the book down. I mean we started out at $4.2 billion, we're down to $3.3 billion. So we're lowering the exposure every quarter we're working... Bruce Van Saun That's a good way through repayments and some of it is through [indiscernible] Nonetheless, it is coming down. John Woods Exactly. And we're getting some kind of payoffs and paydowns. We're getting -- we're working through the riskier credits and we're having conversations that have been accelerated given our maturity profile that we've had the opportunity to really lean in with our borrowers and when and if we've come to sort of extensions, we've been able to extract, in many cases, better positioning and collateral. So this is, as I said, a multi-quarter journey, and we're feeling good about our [indiscernible]. Bruce Van Saun I'll just elevate too, to the second part of your question is that, away from that, away from the General Office, we're still feeling good about what we're seeing in the consumer metrics, in commercial C&I and we run our reserve calculations based on scenarios. And clearly, the risk of recession seems to be less than it was a couple of quarters ago. And so, our need to keep adding to reserves for rest of the book would seem to be abating somewhat. So that's why when we say we'll continue to see -- we're calling out a slightly lower charge-off number in Q3, and then we have the trend of being able to draw down on those reserves, which I think will accelerate in coming quarters. Your next question comes from the line of Ken Usdin with Jefferies. One moment please while we open your line Mr. Usdin. Your line is open, go ahead. Ken Usdin Okay, great. Good morning. Hey, John and Bruce, on the cost side, so you guys are doing early job keeping costs flat. You mentioned earlier, you're hiring some bankers. You obviously have the wealth management people. And I'm just wondering if you can help us understand like the growth that you have there and like where the top and extra cost program are in terms of the offsets to be able to kind of still hold the line? I know that it's kind of in line with your full year guidance, but just the puts and takes of kind of where we are at this point of the year in terms of -- is there just more to come on top to offset those hires and the growth and the strong investment banking results, et cetera? Thanks. John Woods Yes. Thanks, Ken, for the question. Just talking about TOP, it's been emblematic of who we are, as you know, for a number of years. The top line program is going to generate, call it, $135 million or so of run rate benefits when you get to the end of this year in 2024, the underpinnings of that program, we often have vendor contributions. That's a big driver. We launched the data and analytics contribution this year, which will continue into future years. We've had a really interesting ability to invest in our [fraud] (ph) program and a number of other opportunities, including branch rationalization that have underpinned a really strong TOP program this year. And that, of course, is the way over time, we have been able to invest in entrepreneurial and innovative initiatives, while not needing to cover that and to sell fund, those kinds of things. The TOP 10 program we're working on. And we're feeling good about the early opportunities. I think we have launched some analysis in the generative AI space, and we're live on a couple of use cases. And I think we're going to see an ability to broaden out there pretty nicely in terms of underpinning the next TOP program. There's a half a dozen of other areas, expanding data and analytics. What we're doing in our technology space, which converging our platforms with our ability to converge our mainframes and so I do think that we feel very good about the ongoing ability to make investments and self-fund those investments to the TOP program in -- as you get into the end of 2024 and into 2025 and maybe I'll just stop there and see if there's anything else I would like to add. Ken Usdin Okay. Great. All right. Second question, I know that you issued 400 preferreds and redeemed 300 at the -- in early July. And I think with that, you're still kind of in the 1.2%, 1.3% zone, maybe 1.3%, preferred to RWAs as you contemplate the buyback as you think about the SEB and all of that, like how do you just think about the overall capital stack in terms of like what your ultimate goals are for optimization of your capital position? Thanks. John Woods We're feeling pretty good about where we stand in the capital space. I mean, I think we basically think that around 1.25% is fine. We end up with -- we probably have more CET1, so when you look at the overall Tier 1 stack, we've got higher quality capital given the fact that we have more CET1 driving our overall Tier 1. 1.25% is fine, it's probably -- we probably won't go much below that and a range of 1.25% to 1.50% of RWAs is probably where we'll operate. We have a number of issues out there that are coming into the ability to -- into call periods and into 2025. And so there could be some opportunities to refinance, just like we did this year, there are some very interesting refinance opportunities to lower our preferred coupon that we're paying on the preferred capital. So that's something we'll keep an eye on as we go forward into 2025. Ken Usdin Okay. Great. And sorry, just one to follow up on that last one. Just the -- so the RWAs have been coming down and your average earning assets have been kind of flat. And I know you talked a little bit about this earlier. But is kind of flattish on total balance sheet size, average earning assets. Is that the right way to think about things going forward given all the moving parts on both sides of the balance sheet? John Woods Yes. I mean, for 2024, I think the answer to that is yes, with growing RWAs. As I mentioned, we have excess liquidity at June 30 and you could see the overall balance sheet being basically in the same zone as where we are today, but the ability to basically deploy some excess liquidity into lending in the second half is really the plan. So we would see RWAs and loans growing from June 30 to the end of the year. Bruce Van Saun We can see some growth, though, in I'd say, spot deposits and spot loans in Q4 above that, about just deploying the liquidity. So just to be clear. John Woods Yes, agreed. We're going to see deposit growth and loan growth. It's just that given the excess securities that we have on balance sheet overall interest-earning assets are about where they will be maybe just a little bit higher. Your next question will come from the line of Manan Gosalia with Morgan Stanley. Your line is now open. Manan Gosalia Hey, good morning. If I try to back into the 4Q NII number using your full year guide and the 3Q guide, it implies 3% to 4% quarter-on-quarter increase in NII in 4Q. My question there is, what do you need to see that uptick in NII? I know there's some benefit from the -- on the swaps front, but do you also need to see loan growth. Do you need to see deposit costs continuing to come down? Do you need any help from rates? Can you help us frame that? John Woods Sure. Yes. And I'd say broadly that the majority of the increase in 4Q is really coming from net interest margin rebounding. So just allowing all of those positive tailwinds from net interest margin across the whole platform from noncore, the front book, back book dynamics and all of those drivers is the majority of the increase in NII for 4Q. However, there is a meaningful contribution expected from loan growth as well, and we talked about loan growth earlier in the call and how all three businesses, Private Bank, consumer and commercial are all expected to contribute to that in terms of how that plays out for the second half. When it comes to just that net interest margin number, as I mentioned, noncore front book, back book -- you also have increase in deposits that you just heard Bruce talk about that increase -- that's a better funding mix where we'll have more deposits and less wholesale funding as you get into the second half. Your other question about that deposit pricing and the rate cut. I think we're somewhat well balanced around whether the Fed cuts or not. We tend to have some offsetting forces there where we have some asset sensitivity and a net floating position that benefits with rates being a little higher, but then that often the higher for longer impact on deposit migration tends to keep us close to neutral. And so, whether we get a cut or not, I think we're feeling pretty good about the fourth quarter NII being a nice rebound and a meaningful increase versus 3Q. And then the last part I'll throw out there is, again, all the initiatives and how -- for example, balance sheet optimization and Private Bank are all accretive to net interest margin on a quarterly basis. Bruce Van Saun Yes. And I would just add to that as well that we also think that reminder that the Q4 is a seasonally strong quarter for fees. So I think there could be that rebound in NII kicking in Q4, strong feed quarter, continued discipline on expenses, credit seemingly moving in the right direction. So -- and then continued share repurchase. So you put that all together, you could have kind of a nice uptick in the Q4 results. Manan Gosalia That's really helpful. And then as a follow-up on the commercial middle market side, you outlined several positive drivers for lines picking up in the back half. Does that come with higher utilization? Or do you need to see lower rates for utilization to pick up? And maybe how does the uncertainty around the election? How is that factoring into your conversations with clients? Don McCree Yes, what we're assuming in our utilization growth as it's largely in the capital call and subscription lines. So we're seeing a little bit in the middle market. So I think the middle market trend will be a little bit longer. What we've seen our middle market companies do is kind of take their leverage levels down with economic uncertainty. So as the economy begins to show signs of stabilization, more certainty stabilization, maybe they get a little more aggressive investing in their businesses. And I was with a whole bunch of middle-market CEOs last week and every single one of them said they have were new investment plans over the next 18 months. So that will take a little bit longer. And I don't really see massive impact of -- from the election. I think you may get some market volatility based on what someone says day in, day out. But I think the medium-term trend is intact. And we are seeing -- I mean, the playbook we're going to run in California and Florida, which Bruce mentioned, is going to mirror the playbook we ran in New York, where we're having just extremely strong client acquisition as we bring experienced market bankers onto the platform, and they their clients with them. So very early days, but those pipelines are building kind of literally within two months of hiring the new bankers. So there won't be huge numbers of the asset, but that will be another tailwind for us, I think. Your next question comes from the line of John Pancari with Evercore. Your line is now open. Bruce, I think you talked about the expectation, the medium-term plan to shrink the CRE exposure incrementally from here. Just wanted to get an idea of where you think that could settle out? I mean, right now, your commercial real estate loans are about 130% of your risk-based capital plus reserves, where do you think it goes from that perspective post this expected runoff. Bruce Van Saun Yes. I'd say over the medium term, we'd probably take the pure commercial book down at least 25%. And that will come across the asset classes, obviously, want to be smaller in office, multifamily, we can lead that down a bit since we took a big upsurge with the investors deal. We will make room for some CRE opportunities with the private bankers since it's important part of their customer base. And so, there'll be a little bit of offset to that. But that kind of directionally gives you a sense as to kind of what the plans are. And as I said earlier in the call, I think we're making room for more C&I growth that we'd like to kind of flex and have a bigger loan capital allocation to C&I and a smaller to CRE over time. John Pancari Right. Okay. Thank you. That's helpful. And related to that, my second one is on the private banking side. First, on the deposit side, the $4 billion in deposits, I know 81% of that is commercial, 36% of that is DDA. How much of those deposits are deposits with venture capital and private equity firms are related to that industry. Brendan Coughlin Yes. Of the commercial and business banking oriented deposits, the majority are from private equity and venture firms. But I would note that it's heavily led by operating deposits. And so the way that the relationship actually works is starting as their cash management operating bank, which is why the DDA and [indiscernible] percentages is so high in the business. So they're stable, predictable and generally lendable deposits. So we're pleased with the profile. If you think of the loans that have come in, obviously, the LDR of the private bank is quite low, and we've got a good amount of liquidity padding when you look at the lendability of the deposit base to continue to drive loan growth even within the profile of just the private bank. So we're pleased with the quality that you're seeing the loan book diversify to consumers. The deposit book has still remained in that sort of 80-20 split. But given the pace of growth, that obviously suggests that the consumer business is also growing at a pretty healthy clip. That just takes some time, and we do expect that to catch up. And it will diversify over time to more of a 60-40, maybe over the longer-term horizon 50-50. But... Both deposits and loans, I mean the higher rates have held back on mortgage, obviously, and then the business banking and commercial deposit growth is quicker and lumpier, but we do expect that to continue to change over time, and we're pleased with the strength of the consumer opening these private banking offices, which should attract more of a high net worth individual as well. John Pancari Okay. Thank you. Then one last one. If you could just maybe update us on the likelihood of additional team hires on the private banking side. And then the Wealth AUM going up to about $3.6 billion there. I know you acknowledged that might be a tougher slog and -- but it looks like towards the end of the quarter that you had that big jump in AUM. Just curious if you could give a little bit of color around what's driving that recent upturn. Bruce Van Saun Yes, I'll start and pass it to Brendan. But I just want to make an overriding point is that, we want to demonstrate that we can run this as a profitable business. And so, when we initiated the launch of the private bank, we put some markers out there as to where -- what we were going to do this year, hitting breakeven in the fourth quarter. And then next year getting to numbers that had $9 billion of loans, $10 billion of AUM, $11 billion of deposits. That translates to 5% accretion to our bottom line. And so, we're still building the business. We're building the service levels. We're making investments in more support people, and we feel really good about the trajectory that we're on. We want to get that right, we want to get that flywheel running and hit those numbers before we start going crazy making investments in other regions and other opportunities. Having said that, if there are particularly unique situations that we can kind of fit in and execute over the next 18 months that are important locations, and they don't affect our ability to hit the numbers, we'll be open to that. And then the other thing is on the Wealth management side, we had a strong base with Card sell. We knew ultimately that we were going to have to expand the capabilities that we had by bringing in more teams. And the focus has been on a geographically situated teams that can be contiguous with the private banking teams that we've set up in San Francisco, Boston, New York and Florida. And so, so far, we've been able to bring two great teams like quality, everything, one in San Francisco, one in Boston. That's accounting for a big chunk of that rise in AUM with more to transfer in from their customer base. So we have momentum there. We also have a ton of folks interested in joining our platform. So we can have those conversations and keep bringing those wealth teams in because they don't really impact the near-term financials negatively that usually come in around breakeven with an opportunity to quickly turn into profitability. So Brendan, you can add to that. Brendan Coughlin Yes, you nailed [indiscernible] what you said. I would just say on the wealth side, we'll be very selective on the banking expansion until not only we make have confidence in hitting the financials, but also it's still built, and we're very pleased with how the build is going and we're attracting clients. The market is still quite disrupted both on the client side as well as the talent side. We're going to be very thoughtful and make sure that we're only attracting the highest of quality teams. We're being very selective on that. On the Wealth side, I would just say, look, for really the first time in our history, I think our right to win in private Wealth is at an all-time high. And there's a lot of inbounds we're getting from some of the highest quality advisers in the market. We're also being very selective there. I'd remind you all that we have long been on hunt for scale here, and we've looked at a lot of acquisitions. We've obviously done one or two over the years, but the economics have been a little out of reach with 10 plus your paybacks on tangible book value when you're buying RIAs, given the multiples that some of the private equity firms are paying. So the economics of the talent acquisition are significantly more attractive to us. Obviously, with de minimis tangible book value hit. And to Bruce's point, there's not really a large J-curve in the short term. So we're very pleased with the inbounds and talent that we're getting. We expect to continue to selectively add top end market, wealth talent to really round out the bankers that we hired. So we're looking forward to a strong second half of the year there. Your next question will come from the line of Gerard Cassidy with RBC. Your line is now open. Go ahead. Gerard Cassidy Thank you. Good morning, Bruce. Good morning, John. John, you talked and gave us good detail about the office portfolio of commercial real estate. And I think you said that some of your assumptions in the bottom left-hand corner of Slide 14 show that this downturn is far worse than historical downturns. Can you share with us two ideas or two answers. First is, when you look back, I think you guys have been aggressively attacking this portfolio for just over a year now. When you look back at those early workouts in the second quarter of 2023, how are the assumptions that you're using then compared to today? And then second, and I'm with Bruce that maybe this office problem doesn't resolve itself until sometime next year. What are you seeing incrementally in terms of valuations or losses? Is it still deteriorating in office? Or has it just stabilized and we just got to work through these portfolios? John Woods Yes. I'll go ahead and start off, Gerard. I mean, I think that earlier -- what's evolved over the last year or so has been our outlook with respect to valuations and NOI and what the rent rollovers would actually entail and at what speed we would see deterioration. So of course, our reserve levels are higher now than they were a year ago. Every quarter, we endeavor to put a ring fence around our exposures and give it our best attempt at forecasting what we think the evolution will be in valuations and NOI. I'd say that this quarter, we've done that again. And we feel like we've leaned in with this 11.1%, which really -- when you look at the property valuations steep to trough, that 72% has grown over the last year. And those have been the main drivers for why after charging off, we still end up with this reserve of 11.1%. But I'd say that there's still a lot of uncertainty left, but I think the variability, we're hopeful that the variability in this will start to decline as we continue to work through our maturities and have conversations with our borrowers and extract additional collateral and work through paydowns where we can -- this will be a multi-quarter event and it will take into 2025 [indiscernible] Bruce Van Saun I would just add that I do think the Fed starting to move rates lower will certainly be help here. So part of the reason the losses ended up higher than what potentially we thought back in early 2023 because those cap rates going up at inflation that was impacting NOI and things like that. And so, I think we've seen inflation now leveling off. And if the Fed starts to move rates down, that could also start to move things in the other direction. It's too early to call a victory here, but there are some positive signs. And I think lease up rates generally are actually holding or potentially getting a little better as return to office picks up. But again, that's not that significant in the big scheme of things. Gerard Cassidy Can we -- is it fair to say that the second derivative of the rate of deterioration that you guys are seeing, is it slowing in the office or... Okay. It's yes. Okay, good. Thank you. Okay, and then as a follow-up, you guys talked a lot about private equity in your Slide 17, you show some great numbers. Obviously, number one in the sponsor business and your capital markets business is benefiting from that. So the question I have is, and it's not on the capital call or subscription lines, but it seems over the years for banks to win in this capital markets business with sponsors, you have to use your balance sheet to win this business. You've got to lend money to the sponsors. So can you share with us your exposure to, I guess, one of the line items and one of the regulatory reports is non-depository financial lenders that you lending to them. Can you share with us your exposure there? How you manage that risk? Because it seems like banking initial has been derisked, but maybe it's in the private credit side and the indirect exposure for the industry could come through that channel. Can you give us some color there, Bruce, or Don? Don McCree Yes. Hi, Gerard, why don't I take that? It's Don. So we bank the private capital sector in several different ways. We obviously have capital call and subscription lines, which are based on LPs, we have financing lines to some of the private credit organizations, which are kind of structured as almost like asset-backed lending, where we have diversified pools of loans underneath it, we have advance rates and the like. So it's actually relatively safe, almost investment-grade like lending, even if those complexes begin to take some losses on their underwriting portfolios. So we like those two businesses a lot. We're probably not going to grow them too much more across the entirety of the company because it is a large concentration already. But when you look at those non-bank financial numbers that includes insurance companies. There's a whole bunch of other exposures in there also. And then, of course, we land the riskiest stuff we do is to the underlying leverage buyouts and our strategy there forever has been very large holds. It's an underwrite to distribute business. The average outstanding is like $12 million on a given deal. So very diversified across a large group of leveraged credit. The book is actually shrinking, given the lack of market activity over the last kind of 1.5 years or so. So we feel like we're very well diversified and I've been doing this business, as you know, for a very long time and where you get really hurt is when you have big concentrations in leveraged loans and we see that with some of our competition, but we're not going to go there just because that's the way you run those businesses. So those are the really big pops. Your next question will come from the line of Matt O'Connor with Georgia Bank. One moment while we open your line Mr. O'Connor. Your line is now open. Matt O'Connor Thank you. Good morning. Can you guys talk about how you think deposits will reprice down. I guess, the first kind of, call it, two or three Fed cuts versus and more sustained reduction? John Woods Yes, sure. I'll take that. I mean I think what we're likely to see under the first couple of cuts we're modeling out approximately 20% to 30% down betas in those first couple of cuts. The way the forwards have it playing out overall. The longer those cuts are in place, the more there's the opportunity to see rollovers of CDs, et cetera, and to lean in and price down. So the fact that we have, I think the forwards get down to around 4% by the end of 2025 and may start to get into the 3.50% range in terms of our outlook when you get out into 2026 and beyond. Through that full tightening cycle, we think that the full round trip could be -- could approach -- the down beta is good approach where up betas were. Our up beta is around 51%. I think the down beta could get up to that level over the full cycle, but it will be $20 million to $30 million for the first couple. Matt O'Connor Okay. And then thoughts on does deposit growth pick up a bit for, I guess, the industry and you've got some specific initiatives, obviously, but do you see some pickup in kind of broader deposit trends as well with some Fed cuts? John Woods Yes. I mean, I think broadly, we believe we're going to have deposit growth in the second half contributing from all three of our businesses. So 2Q is a seasonally down quarter. We saw that, and we're expecting that plus all of our initiatives that we have in place are going to contribute to deposit growth in the second half. We've got that one cut in September, and our outlook that will be helpful. I don't think that it's absolutely necessary to have that cut in order to continue to have deposit growth. But certainly, it would be helpful to get that deposit growth to stop kind of the migration aspects and the mix shifts that the industry has been seeing. And then as you broaden that out, when we have overall deposit growth and average deposits are higher, that will be consistent with a very positive funding mix because wholesale funding can be lower in terms of funding the balance sheet, and that's a tailwind for NII and NIM into the second half as well. Bruce Van Saun Yes. I would just add some color there, the uptick in private bank deposits in the quarter was $1.6 billion. And so you can see that we've really got a cadence and a rhythm in terms of kind of growing the book there and the private bank and bringing in the customer base. So we would expect to have again, something that most other banks don't have to drive deposit growth and having that unique business opportunity. And then there's generally some seasonality that's favorable in the consumer business and the commercial business. So I think the outlook for deposit growth in the second half is pretty solid. Brendan Coughlin The one point I would add on the consumer side is that, we a number of years in a row where we've outperformed on a relative basis on DDA low-cost deposits and with benchmarking that we see so far this year, we believe we're number one in the peer set and consumer for relative DDA performance, and we see that continuing. So we think the trends have stabilized up so much of our deposit strategy is grounded in the health of our DDA base and we expect whatever the market throws us that we'll continue to outperform peers and doing that for a long time now. And certainly, this year has been a real strength. Okay. I think that's it for the queue. Thank you, everybody, for dialing in today. We certainly appreciate your interest and your support. Have a great day. That concludes today's conference call. Thank you for your participation. You may now disconnect.

Kinder Morgan, Inc. (KMI) Q2 2024 Earnings Call Transcript

Manav Gupta - UBS John Mackay - Goldman Sachs Keith Stanley - Wolfe Research Jeremy Tonet - JPMorgan Theresa Chen - Barclays Spiro Dounis - Citi Michael Blum - Wells Fargo Tristan Richardson - Scotiabank Harry Mateer - Barclays Sunil Sibal - Seaport Global Securities Welcome to the Quarterly Earnings Conference Call. All lines have been placed on a listen-only mode until the question-and-answer session of today's call. Today's call is also being recorded. If you do have any objections, you may disconnect at this time. And I would now like to turn the call over to Rich Kinder, Executive Chairman of Kinder Morgan. Thank you. You may begin. Rich Kinder Thank you, Sue. As usual, before we begin, I'd like to remind you that KMI's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Now on these investor calls, I'd like to share with you our perspective on key issues that affect our Midstream Energy segment. I previously discussed increased demand for natural gas resulting from the astounding growth in LNG export facilities. And last quarter, I talked about the expected growth in the need for electric power as another significant driver of natural gas demand. Since that call, there has been extensive discussion on this topic with the consensus developing that electricity demand will increase dramatically by the end of the decade, driven in large part by AI and new data centers. I'm a firm believer in anecdotal evidence, particularly when it comes from the actual users of that power and the utilities who will supply it, and from the regulators who have to make sure that the need gets satisfied. And the anecdotal evidence over the last few months has been jaw-dropping. Let me give you just a few examples. In Texas, the largest power market in the US, ERCOT now predicts the state will need 152 gigawatts of power generation by 2030. That's a 78% increase from 2023's peak power demand of about 85 gigawatts. This new estimate is up from last year's estimate of 111 gigawatts for 2030. Other anecdotal evidence also supports a vigorous growth scenario. For example, one report indicates that Amazon alone is expected to add over 200 data centers in the next several years, consistent with the large expansions being undertaken by other tech companies chasing the need to service AI demand. Annual electricity demand growth over the last 20 years has averaged around one-half of 1%. Within the last 60 days, we've seen industry experts predict annual growth from now until 2030 at a range of 2.6% to one projection of an amazing 4.7%. So the question becomes, how will that demand be satisfied and how much of a role will natural gas play? Many developers of data centers would prefer to rely on renewables for their power, but achieving the needed 24/7 reliability by relying only on renewables is almost impossible and growth in usage is limited by the need for new electric transmission lines, which are difficult to permit and build on a timely basis. Batteries will help some and some tech companies now want to use dedicated nuclear power for their facilities. But as the Wall Street Journal recently pointed out, they will likely increase reliance on natural gas to replace the diverted nuclear power. Again, anecdotal evidence is key. In Texas, a program that would extend low-cost loans for new natural gas-fired generating facilities was massively oversubscribed, which an ERCOT official predicting a day's gas daily could result in an additional 20 gigawatts to 40 gigawatts just in the state of Texas. And the Governor has already suggested expanding this low-cost loan program. That oversubscription, I think, is clear evidence that the generators are projecting increased demand for natural gas-fired facilities. Perhaps Ernest Moniz, Secretary of Energy under President Obama summed it up best when he said and I quote, there's some battery storage, there's some renewables, but the inability to build electricity transmission infrastructure is a huge impediment, so we need the gas capacity. As an example of how industry players see the world developing, S&P Global Insights has quoted in Gas Daily reports that US utilities plan to add 133 new gas plants over the next several years. And this view is reflected in the significant new project in the Southeastern United States that we are announcing today. While it's hard to peg an exact estimate of increased demand for natural gas, as a result of all this growth and the need for electric power, we believe it will be significant and makes the future even more robust for natural gas demand overall and for our midstream industry. Okay. Thanks, Rich. I'll make a few overall points and then I'll turn it over to Tom and David to give you all the details. We had a solid quarter. Adjusted EPS increased by 4%, EBITDA increased by 3%, and those were driven by growth in our natural gas segment and our two refined products business segments. We ended the quarter at 4.1 times debt-to-EBITDA and we continue to return significant value to our shareholders. Today, our Board approved a dividend of $0.2875 per share and we expect to end the year roughly on budget. Now, let's turn and talk about natural gas for a minute. The long-term fundamentals in natural gas have gotten stronger over the course of this year with the incremental demand expected from power and backing-up data centers that Rich just took you through. Overall, Wood [Mackenzie] (ph) projects gas demand to grow by 20 Bcf between now and 2030, with a more than doubling of the LNG exports as well as an almost 50% increase in exports to Mexico. However, they are projecting a 3.9 Bcf a day decrease in power demand. As Rich's comments indicated, we simply do not believe that will be the case given the anticipated power-related growth in gas demand associated with AI and data centers, coal conversions, and new capacity to shore up reserve margins and backup renewables. Let's start with the data center demand. Utility IRPs and press releases published since 2023 reflect 3.9 Bcf a day of incremental demand, and we would expect that number to grow as other utilities update their IRPs. It's early in the process, but we're currently evaluating 1.6 Bcf a day of potential opportunities. Most estimates we have seen are between 3 and 10 of incremental gas demand associated with AI. Rich took you through the 20 Bcf a day of natural gas power that Texas is contemplating, subsidizing, I should have said 20 gigawatts as well as the US projection of 133 new gas plants over the next several years. At Kinder Morgan, we're having commercial discussions on over 5 Bcf a day of opportunities related to power demand, and that includes the 1.6 of data center demand. Certainly, not all these projects will come to fruition, but that gives you a sense of the activity levels we're seeing and supports our belief the growth in natural gas between now and 2030 will be well in excess of the 20 Bcf a day. Not including -- not included in the 5 Bcf of activity that we're seeing is capacity SNG signed up on its successful open season for its proposed approximately $3 billion South System 4 Expansion that's designed to increase capacity by 1.2 Bcf a day. Upon this completion, this project will help to meet the growing power demand and local distribution company demand in the Southeastern markets. Mainly as a result of this project, our backlog increased by $1.9 billion to $5.2 billion during the quarter. In the past, we have indicated that we thought the demand for natural gas would allow us to continue to add to the backlog, and South System 4 project is an example of that. We continue to see substantial opportunities beyond this project to add to our backlog. The current multiple on our backlog is about 5.4 times. During the quarter, we also saw some very nice decisions from the Supreme Court. On the Good Neighbor Plan, the court stayed the plan, finding that we are likely to prevail on the merits. There's still a lot to play out here, but I do not think the Good Neighbor Plan will be implemented in its current form. It is likely to be at least a few years before a new or revised plan could be put together and a few years beyond that for compliance. And in the interim, we've got a presidential election. The overturning of the Chevron doctrine, which gave deference to regulatory agencies when the law is not clear is also a positive. Together, these decisions will help mitigate the regulatory barrage we've seen over the last couple of years. And with that, I'll turn it over to Tom to give you some details on our business performance for the quarter. Tom Martin Thanks, Kim. Starting with the natural gas business unit, transport volumes increased slightly in the quarter versus the second quarter of 2023. Natural gas gathering volumes were up 10% in the quarter compared to the second quarter of 2023, driven by Haynesville and Eagle Ford volumes, which were up 21% and 8% respectively. Given the current gas price environment, we now expect gathering volumes to average about 6% below our 2024 plan, but still 8% over 2023. We view the slight pullback in gathering volumes as temporary that higher production volumes will be necessary to meet demand growth from LNG expected in 2025. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation capacity and storage capabilities in support of growing natural gas markets between now, 2030 and beyond. At our products pipeline segment, refined product volumes were up 2%, crude and condensate volumes were flat in the quarter compared to the second quarter of 2023. For the full year, we expect refined product volumes to be slightly below our plan about 1%, but 2% over 2023. Regarding development opportunities, the company plans to convert its Double H Pipeline system from crude oil to natural gas liquid service, providing Williston Basin producers and others with NGL capacity to key market hubs. The approximately $150 million project is supported by definitive agreements and the initial phase of the project is anticipated to be in service in the first quarter of 2026, with the pipe remaining in crude service well into 2025. Future phases could provide incremental capacity, including in support of volumes out of the Powder River Basin. In our Terminals business segment, our leased liquid capacity remains high at 94%. Utilization and project opportunities at our key hubs at the Houston Ship Channel and the New York Harbor remain very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased in 2025, assuming likely options are exercised. And currently, market rates remain well above our vessels at current -- currently contracted rates. The CO2 segment experienced lower oil production volumes at 13%, lower NGL volumes at 17%, and lower CO2 volumes at 8% in the quarter versus the second quarter of 2023. For the full year, we expect oil volumes to be 2% below our budget and 10% below 2023. During the quarter, the CO2 segment optimized its asset portfolio in the Permian Basin through two transactions for a net outlay of $40 million. The segment divested its interest in five fields and acquired the North McElroy Unit currently producing about 1,250 barrels a day of oil and an interest in an undeveloped leasehold directly adjacent to our SACROC field. The impact of these two transactions is to replace fields with high production decline rates and limited CO2 flood opportunities with fields that have attractive potential CO2 flood projects. In the Energy Transition Ventures group, they continue to have many carbon capture sequestration project discussions that utilize our CO2 expertise for potential projects to take advantage of our existing CO2 network in the Permian Basin and our recently leased 10,800 acres of pore space near sources of emissions in the Houston ship channel. These transactions take time to develop, but the activity level and customer interest are picking up. All right. Thanks, Tom. So a few items before we cover the quarterly performance. As Kim mentioned, we're declaring a dividend of $0.2875 per share, which is $1.15 per share annualized, up 2% from our 2023 dividend. As disclosed in the press release, we're changing our Investor Day presentation from annual to biannual. We plan to continue to publish our detailed annual budget early in the first quarter as normal. Also, last one before we get to the quarterly performance, I'd like to recognize our accountants, planners, legal teams, business unit teams, everyone involved in the preparation for our earnings release and our 10-Q filing, we already have a tough close at this time of year with many working during the July 4th holiday period. And additionally, many of our Houston-based colleagues were impacted by Hurricane Beryl. I want to thank you all for going above and beyond to meet the challenges presented by power outages and damage and not missing a beat with regards to our quarterly reporting and analysis schedule. For the quarter, we generated revenue of $3.57 billion, up $71 million from the second quarter of last year. Our cost of sales were down $4 million, so our gross margin increased by 3%. We saw our year-over-year growth from natural gas products and terminals businesses, the main drivers were contributions from our acquired South Texas Midstream assets, greater contributions from our natural gas transportation and storage services and higher contributions from our SFPP asset. Our CO2 business unit was down versus last year, mainly due to lower crude oil volumes due to some timing of recovery of oil in the second quarter of 2023. Interest expense was up due to higher short-term debt balance due in part to our South Texas Midstream acquisition. We generated net income attributable to KMI of $575 million. We produced EPS of $0.26, which is flat with last year. On an adjusted net income basis, which excludes certain items, we generated $548 million, up 1% from Q2 of 2023. We generated adjusted EPS of $0.25, which is up 4% from last year. Our average share count reduced by 18 million shares or 1% due to our share repurchase efforts. [Technical Difficulty] up 2% from last year. Our second-quarter DCF was impacted by higher sustaining CapEx and lower cash taxes, both of which are at least in part due to timing. We expect cash taxes to be favorable for the full year and sustaining capital to be in line with budget for the full year. On a year-to-date basis, EPS is up 5% to last year and our adjusted EPS is up 9% from last year, so good growth. On our balance sheet, we ended the second quarter with $31.5 billion of net debt and a 4.1 times net debt to adjusted EBITDA ratio, which is consistent with where we budgeted to end the quarter. Our net debt has decreased $306 million from the beginning of the year and I'll provide a high-level reconciliation of that change. We generated $2.9 billion of cash flow from operations year-to-date. We've paid out dividends of $1.3 billion. We've spent CapEx of $1.2 billion and that includes growth sustaining and contributions to our joint ventures. And we had about $100 million of other uses of capital, including working capital. And that gets you close to the $306 million decrease in net debt for the year. Okay. And so now we'll open it up for questions. Sue, if you could come on, please. [Operator Instructions] Our first question is from Manav Gupta with UBS. You may go ahead. Manav Gupta Thank you, guys. First, a quick question here. The backlog went up pretty much, I mean, on a good note, which is very positive, but the multiple also went up just a little. So if you could just talk about the dynamics of those two things here. Kim Dang Okay. Sure. So the backlog, as I said, was up by $1.9 billion. That's really two projects that are driving that. It's the South System 4 that we mentioned and then it is also Double H is the other one. And it's our share of South System 4. And then with respect to the multiple, yes, it increased a little bit. As we always say, the reason that we give you the multiple is to give you guys some idea of the returns that we're getting on these projects so that you can be able to model the EBITDA. Now it is not our goal ever to -- we're not targeting a specific multiple and getting a specific multiple on the backlog when we look at these projects. When we look at these projects, we're looking at an internal rate of return. And so -- and we have a threshold for that, and we have a pretty high threshold for our projects. And that threshold is well, well, well in excess of our cost of capital. And then we vary around that threshold, what I'd say, marginally depending on the risk of a project. And so if we have -- and projects that we do, that are connected to our existing infrastructure, where it's not greenfield, tend to have a much higher multiple associated with it. When we are having to loop a pipeline or something, those typically might have a little bit higher multiple, but they're still meeting our return thresholds. And so I think these are very -- despite the fact that the multiple on the backlog is going up a little bit because of these projects, these are still very, very attractive return projects. Manav Gupta Thank you for a very detailed response. My quick follow-up here is, you mentioned the demand coming from data centers and we completely agree with you. When you are having these discussions with the data center operators, we believe at one point, these data center operators were not even talking to natural gas companies, they were only talking to renewable sources. Have you seen a change in sentiment where reliability has become a key factor, so you are a bigger part of these conversations than you were probably 18 or 24 months ago? Kim Dang Yeah. I'd say our initial reaction was similar to yours when we started to see this demand was, they're probably going to target renewables. But as we have had discussions with them, I think that the two things are key from their perspective. One is reliability, and two is feed the market. And so I think natural gas, and Rich said this last quarter, given the reliability of natural gas, it is going to play, we believe, a key role in supplying energy to these data centers. Thank you. Our next question is from John Mackay with Goldman Sachs. You may go ahead. John Mackay Hey, team. Thanks for the time. Maybe we'll pick up a little bit on that last one, surprisingly. So if you guys are talking about 5 Bcf of power demand discussions right now, would just be curious to hear a little bit from you on where you're seeing that geographically. Is it primarily Texas? Is it elsewhere in the portfolio? And anything you can comment on in terms of speed-to-market? And again, that might be a Texas versus kind of more FERC jurisdiction kind of discussion, but both of those would be interesting. Thanks. Kim Dang Okay. No, I think the -- and Sital and Tom, you guys supplement here. But this the 5 Bcf is overall power, so some of that's related to AI and some of it's just related to coal replacements, shoring up reserve margins, backing up renewables. So it's across the board, we're seeing it in Texas, we're seeing it in Arkansas, we're seeing it in Kentucky, we're seeing it in Georgia. Desert in Arizona, desert Southwest, I mean it's -- it is in almost all the markets we serve. We're seeing, some sort of increase in power demand. John Mackay And maybe just on the kind of time-to-market in terms of how long it could bring -- how long it could take to bring to the market? Kim Dang It's very much dependent on where these are going to be cited. And so it depends on, is it a regulated market? Is it an unregulated market? So that's just going to vary depending on the market location. John Mackay Yeah. Appreciate that. And just a second question, you guys talked a little bit about some kind of portfolio optimization here. There's the CO2, I guess, you could call it asset swap. There's a line in the release on maybe some divestitures in the nat gas segment. I guess, I'd just be curious overall for an updated view on how you're thinking about kind of portfolio pruning and optimization over time. Kim Dang Okay. So on natural gas, I'm not sure. We did have a divestiture earlier in the year, which was a gathering asset, but not -- that wasn't during this quarter. And so that was just -- it was an asset that wasn't core to our portfolio and we had someone approach us, and so the price made sense, and so we sold it. On the CO2 sale, we had three -- four fields where there was limited opportunity for incremental CO2 floods. And that is our business, is injecting CO2 to produce more oil. And so we sold those fields that had limited opportunity. And then we acquired a field called North McElroy, which we think has a very good flood potential. And then we acquired a leasehold interest in some property that is adjacent to some of our most prolific areas of SACROC, that we think will also be a great CO2 flood opportunity. Thank you. Our next question is from Keith Stanley with Wolfe Research. You may go ahead. Keith Stanley Hi, good afternoon. Wanted to follow up -- hi. I wanted to follow up on the SNG South System project. Can you just talk to the timeline for regulatory approval, start of construction? And is it all coming into service in late 2028 and/or phased over time? And then it -- sorry for the multipart question, is it also fair to assume your customer here is your partner, Southern, on the project or is it a broader customer base supporting this project? Sital Mody Yeah. So, Keith, this is Sital. One, we had an open season. We do have a broad customer base in terms of regulatory timeline with an in-service of 2028. Clearly, we plan a project of this scale to pre-file and then and then do a [firm filing] (ph), probably without getting into too much detail, there is always competition sometime next summer with a targeted in-service date of late '28. So that's probably the 50,000 foot view on bottom line. Did I answer your question? Keith Stanley Yeah. And then just on -- yes, yes, you did. Does it on -- does the contribution come in all in the end of 2028 or has it phased in over time as you see it? Sital Mody So we have -- we do have initial phase in '28 and we do have some volumes trickling into year after. Keith Stanley Okay, great. Thank you. Second question. Wanted to touch back on the Texas loan program for gas-fired power plants. How can we think about the opportunity for Kinder here? So, say Texas builds 20 gigawatts of new gas-fired power plants over the next five years. What type of market share do you have in the Texas market today [in] (ph) connecting to power plants? What's a typical sort of capital investment to do a plant tie-in? Just any sort of thoughts of what it could mean for opportunities for the intrastate system? Sital Mody So, if I had to take a snapshot and don't quote me on this, probably today we're about 40%, probably have a 40% share in Texas in terms of connecting and the cost to connect, I really think it's going to vary depending on where the ultimate location is going to be. We do have some unique opportunities where it's actually quite low in terms of -- it's very capital-efficient and there are some targeted opportunities that might involve a little bit more capital. Kim Dang It really gets to how -- are they going to be located on our existing system or are we going to need to build a lateral and how far is -- how long is that lateral going to need to be? And then are there going to be opportunities where it requires some expansion of like some mainline capacity? So that's what Sital means. So it's just going to depend with respect to how big the capital opportunity is. Thank you. Our next question is from Jeremy Tonet with JPMorgan. You may go ahead. Just wanted to pivot back to Double H conversion here and how the -- did you say how the NGLs are getting out of Guernsey at this point on -- with this project and I guess, are you working with any other midstreamers on this project overall? Sital Mody So, one, our goal is to get it to market, the market being Conway and Mont Belvieu. And I think when you think about it broadly, a couple of calls ago, we talked about the basin in general and our desire to get egress both on the residue side and this is an opportunity to get egress on the NGL side. We see the basin are growing quite significantly. The GORs are rising. And so without getting into the complicated structures here because we are in a very competitive situation, I'll just leave it at this that we are able to get to both the Conway and the Mont Belvieu markets. Kim Dang Yeah. And I'd say the other thing, Jeremy, when Sital says the market is growing, we don't expect some big growth in crude. He's really talking about the NGLs and the gas because of the increase in GOR. Got it. Okay. And maybe just pivoting when talking about a highly competitive market as far as Permian natural gas egress is concerned. Just wondering any updated thoughts you could provide with regards to the potential for brownfield expansion, be it through GCX expanding or greenfield as well getting to a different market or even the potential to market a joint solution at the same time. Just wondering how you see this market evolving, given that 2026 Permian gas egress looks like a deja vu all over again. Sital Mody Yeah. Look, good question, and the question is your -- unfortunately, I don't have a different answer for you this time. We still aren't prepared to sanction the GCX project, still in discussions with our customers on the broader Permian egress opportunity. We've been, as I said, pursuing opportunity. We don't have anything firmed up. There is -- it's a competitive space. We are open to all sorts of structures on that front and are willing to consider what's best for the basin. Thank you. Our next question is from Theresa Chen with Barclays. You may go ahead. Theresa Chen Hi, I wanted to follow-up on the Double H line of questions. Can you tell us how much capacity the pipe will be in once it converted to NGL service? And would you expect the line to be highly utilized right away in first quarter of 2026, or will there be potentially a multi-quarter or multi-year ramp in the commitments? Sital Mody So, in terms of capacity, this is all -- this is going to depend on the hydraulic combinations of our suppliers and ultimately what market they take that to. So, I think the takeaway here is, we've got a firm commitment that will likely start day one. And then as we scale the project, it is scalable, both from the Bakken and from the Powder River, and really the ultimate capacity is going to depend on the customer. Thank you. Our next question is from Spiro Dounis with Citi. You may go ahead. Spiro Dounis Thanks, operator. Afternoon, everybody. First question, maybe just to talk about capital spending longer term. Historically, you've talked about spending near the upper end of that sort of $1 billion to $2 billion range, but Rich and Kim, if I sort of combine your statements at the outset, it seems to suggest, like, there's a pretty robust opportunity set ahead that maybe wasn't contemplated when you sort of last gave us that update. So, I'm curious, as you think about these larger projects coming in, like SNG and then the broader power demand you referenced earlier, are you still sort of on track to be in that $2 billion zone long term? Kim Dang Yeah. I'd say we wouldn't say $1 billion to $2 billion anymore. We would just say around $2 billion. And, around $2 billion could be $2 billion, it could be $2.3 billion. I mean, just in that general area is what I would say. When you think about something like an SNG, it's got a 2028 in-service, and so that's going to be capital that you're spending, just call it rough math two years of construction. So, most of that capital will be in '27 and '28. And so, that's filling out the outer years of potential CapEx. So, around $2 billion. Spiro Dounis Okay. So, it sounds like not a material departure from before. Got it. And then... Kim Dang And I'd say, look, I'd say on the stuff that Rich and I are talking about, as I said, the $5 billion project -- I mean, the 5 Bcf a day projects that we're pursuing, that's stuff that we're pursuing today, right? That's not things that are in the backlog today. And so, part of my point on the -- is -- was, we continue to see great opportunity beyond SNG. SNG, the 1.2 Bcf a day is not included in the 5 Bcf a day of potential opportunity. So, I think projects like SNG continue to fill out that CapEx in the outer years and give us more confidence that we'll be spending $2 billion for a number of years to come. Spiro Dounis Got it. Okay. That's helpful color. And then switching gears a bit here, Kim, you talked about some of the sort of regulatory events that are sort of becoming tailwinds now, headwinds at first, and I know one other sort of macro factor that sort of got you last year or two was with interest rates that were on the rise. I guess as we look forward, I'm not sure what your view is, but it seems like we're setting up for some rate cuts later this year. So, maybe, David, maybe you could just remind us, as we think about your floating rate exposure, what does that look like in 2025, and is this a potential tailwind for you? Kim Dang Yeah. And I'll let -- it is a potential tailwind because the forward curve today is -- for 2025, is below what we've experienced in 2024 to date and what the balance of the year is. So, '25 curve is below '24, but I'll let David give you an update on our floating rate exposure. David Michels Yeah. It could be -- we'll see if we actually get these rate cuts or not. Remember, we all expected a bunch of rate cuts in 2024 as well, but we didn't get them. We do have a fair amount of floating rate debt exposure. We've intentionally brought it down a little bit because it's been unfavorable to later on additional swaps in the last couple of years, and so our floating rate debt exposure has come down from about $7.5 billion to about $5.3 billion. Additionally, we've locked in a little bit of that $5.3 billion for 2025, similar to past practice to take advantage of some of the forward curve, the favorable interest rate forward curves that we're seeing for next year. So, about 10% of that, I think, is locked in for 2025 at favorable rates. The rest of it gives us a good opportunity to take advantage of any short-term interest rate cuts that we see coming to the market. Thank you. Our next question is from Michael Blum with Wells Fargo. You may go ahead. Michael Blum Thanks. Good afternoon, everyone. So, I wanted to get back to the discussion on the data centers. It seems like the hyperscalers are much less price-sensitive, and they're willing to pay higher PPAs to secure power. So, do you think that could translate into you earning higher returns than you've gotten historically on some of these potential gas pipeline projects, and is there any way to quantify that? Kim Dang I think that -- I think we're early in the game. I think that's hard to judge at this point. I would say, again, their two priorities are going to be reliability and speed to market. And I think that's what you're seeing -- that's what you're hearing from the power guys on the -- when they're getting the PPAs. So, I think we will get -- I think we are confident that we'll be able to meet our return hurdles on these projects, but exactly what we're going to get on these projects at this point, I think it's too early to say that. And, generally these things will be -- there'll be some competition. And so, I wouldn't expect us to get outrageous returns by any stretch. Michael Blum Okay. That makes sense. Thanks for that. And then, just one more follow-up on Double H. I believe the capacity -- the oil capacity of that pipe was, I think, 88 million barrels a day, so -- 88,000 barrels a day. So, I'm just wondering, should we assume that the NGL capacity will be kind of similar? Sital Mody Well, I mean, it depends on the receiving delivery. Just think about it this way. I'll just make it real simple. If you're at the beginning of the pipe and at the end of the pipe, it could be. If you're in the middle of the pipe and bringing in volumes, it could be more. I mean, it just depends. So... It depends on downstream as well. But yeah, I mean, I think for the Double H pipe itself, I mean, if you're coming in at the origin and going out at the terminus, yeah, I mean, that's fair. But as Sital points out there, maybe people coming in at various points, and then the downstream points are going to matter as well. Thank you. Our next question is from Tristan Richardson with Scotiabank. You may go ahead. Tristan Richardson Hi, good afternoon. Maybe just one more on the CO2 portfolio. Can you talk about sort of capital needs or opportunities with the new portfolio? Historically, you've spent $200 million to $300 million annually here and you noted that there are greater flood opportunities with the new assets. Curious kind of how this changes capital deployment in CO2? And then also in the context of -- I think in the past, you've noted a 10-year development plan of around $900 million. Just curious sort of what the new portfolio kind of looks like going forward. Anthony Ashley Okay. Tristan, it's Anthony. I think I wouldn't expect a material change in the capital numbers -- the annual capital numbers for CO2. We weren't spending a lot on any of the divested assets. There are obviously opportunities that you mentioned with regards to the two new assets. I think the undeveloped acreage that we're talking about, that will become part of our annual SACROC numbers. And then North McElroy, we think there's excellent opportunity there, as Kim and Tom said. But we've got to do a pilot first. And so, we'll be proving out that opportunity. And once we prove out that opportunity, I think we'll have more to say on that. Tristan Richardson Thanks, Anthony. And then maybe just on refined products, it seems like the lower 48 maybe saw a later start to the summer driving season. But it also seems like perhaps volumes have picked up in late June and end of July. Can you talk about what you're seeing this season and maybe what's contributing to that 1% below your initial budget? Anthony Ashley Yeah. I would say gasoline overall is reasonably flat. We've actually seen a bit of a pickup in jet fuel, primarily on the West Coast, as you saw in the release. And then on renewable diesel, we've seen a decent pickup on renewable diesel. We're still a decent bit below our total capacity on the renewable diesel hub capacity. And I think we did 48 a day in the third quarter -- I'm sorry, in the second quarter. We've got 57 a day of capacity. As that additional refinery comes on later this year, I think that'll continue to continue to pick up. But with respect to being just slightly below our budget, we had probably slightly higher gasoline numbers in there, but we're reasonably flat with the prior year. Kim Dang Yeah, the other thing I'd say on the volumes is, the volumes are one component of the revenue, right, price is the other. And what we've generally seen out in California is that we're moving longer haul barrels rather than some of the shorter haul. So, from an overall revenue standpoint, I think we're in good shape on the refined products. Thank you. Our next question is from Harry Mateer with Barclays. You may go ahead. Harry Mateer Hi. Good afternoon. So, first question for South System Expansion 4, how should we think about funding that given you have the JV opco structure [Songas] (ph)? And I guess specifically, how much of an opportunity is there for some non-recourse debt financing to be used at the [Songas] (ph) entity itself? David Michels Yeah, it's a good question. I think we're -- it's still early stages and we're still evaluating all our options. Generally with these JV arrangements, we prefer to fund at the parent level because our cost of capital is attractive, but we are evaluating our different funding opportunities. I don't -- we've never really been big fans of project financing, puts a lot of pressure on the project and so forth, but we're still evaluating the best course forward. Because of the build time, it's going to take some amount of time to get the pipeline into service. So, there is likely just to be going to be a fair amount of equity contributions in order to fund that as opposed to at the entity level itself. But it's something that we're looking at actively. Harry Mateer Okay. Thank you. And then second in Energy Transition Ventures, I'm curious where and whether acquisition opportunities in RNG might fit right now when you're looking at growth potential in that business. Kim Dang Yeah. I'll say a couple of things on that and then Anthony can follow up. But look, I think that business has been harder to operate than we would have expected. And as a result of that, until we get our hands fully around the existing operations, we have sort of stood down, if you will, looking at any significant acquisition opportunities. And I think that once we have these plants operating on a more consistent basis, that we will -- we can reevaluate that. But at this point in time, I think we've just -- we've got to get those plants up and operating consistently. But we think we are on the path to do that and hopefully, that will be the case for the second half of this year. Thank you. Our next question is from Samir Quadir with Seaport Global Securities. You may go ahead. Sunil Sibal Yeah, hi, good afternoon. This is Sunil Sibal. So, starting off on the new projects that you announced, could you talk a little bit about the contractual construct behind those? What kind of contract durations you have supporting those two projects? Kim Dang Yeah. Generally on the South System 4, we've got 20-year take-or-pay contracts with creditworthy shippers. And then we also have a contract that is -- that's underpinning the Double H project. So, consistent with how we've done -- how we do our other projects, I mean, we want to make sure that we've got good credit and good quality cash flow that are supporting a capital builds? Sunil Sibal Understood. Then on the full year expectations, I think you mentioned you're tracking a little bit below budget as far as gathering volumes are concerned. Could you talk a little bit about which basins et cetera are tracking below what we were expecting at the start of the year? Kim Dang Yeah. I think just -- I mean, what we're assuming for the balance of the year is volumes that are relatively flat with the volumes the first half of this year. So, we're not assuming a big ramp-up in volumes the second half of this year, pretty consistent with what we saw in the first half. And then in terms of the big -- the three big basins where we are going to be South are going to be Eagle Ford, Haynesville, and Bakken. And so, we've seen a little bit of weakness, I think, in each of those, probably a little more in the Haynesville than in the others. Sital Mody Yes, I mean, you saw producers react to the pricing in the Haynesville, which is why we've had a little bit of a pullback. But it's prudent. Tom Martin But we expect that to ramp up later this year and the next year as demand picks up. Thank you. And at this time, we are showing no further questions. Rich Kinder All right. Thank you very much for listening and have a good evening. Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.

The Charles Schwab Corporation (SCHW) Q2 2024 Earnings Call Transcript

Jeff Edwards - Head of Investor Relations Walt Bettinger - Co-Chairman and Chief Executive Officer Rick Wurster - President Peter Crawford - Chief Financial Officer Good morning, everyone, and welcome to the Schwab 2024 Summer Business Update. This is Jeff Edwards, Head of Investor Relations; and I'm joined today by our Co-Chairman and CEO, Walt Bettinger; President, Rick Wurster; and CFO, Peter Crawford. We got a bit of an early start today to beat the Texas heat, so let's run through our housekeeping items and get in today's remarks. The slides for today's business update will be posted to their usual spot on the IR website at the beginning of Peter's section. Q&A remains structured as one question, no follow-ups, please, but you can certainly reenter the queue to ask another question if time permits. And as always, please don't hesitate to reach out with any follow-up questions for the IR team. And lastly, the wall of words, which showcases our forward-looking statements, reminding us that the future is uncertain, so please stay in touch with our disclosures. Thank you, Jeff, and good morning, everyone. Thanks for joining us for our July business update. Earlier this year, we spoke about 2024 being a transition year for the firm. We define this year as transitional for a series of reasons. We were anticipating completing the last transition groups from the Ameritrade acquisition. And we anticipated that former Ameritrade clients would move from negative asset flows to positive levels of net new assets. We further anticipated that former Ameritrade retail clients would begin to utilize Schwab capabilities in the areas of investment advisory, financial planning and banking. We anticipated the investment advisers, who formerly used Ameritrade for custodial services, would also begin to bring net new assets to Schwab, and their evaluation of our service levels would improve rather dramatically. We anticipated that Schwab users of StreetSmart would begin to take advantage of the powerful trading capabilities in the Thinkorswim platforms. From a capital standpoint, we anticipated that we would organically build capital throughout the year toward our long-term objectives. And from a financial standpoint, we anticipated improving, albeit somewhat uneven, earnings results during the year with Q4 2024 delivering somewhere between $0.80 and $0.90, and then with strong growth continuing into 2025 and beyond. Halfway through the year, this definition of a transition year is being realized, again, as we anticipated. And all of these issues position us for a strong period of growth in client metrics and financial results in the coming years. So, with these critical indicators of success unfolding in such a positive manner, let's take a quick look tactically at how the second quarter of this year looked. Inflation showed some encouraging signs of moderating, closer to the Fed target of 2%, which continued pushing a select number of primarily technology stocks ever higher during the quarter. Investor sentiment remained solidly positive at quarter-end with investors purchasing stocks throughout the quarter and overall trading activity was a bit higher than in the prior year. Now as I stated earlier, as we anticipated, we completed the last client transition group during the second quarter. That's almost $2 trillion in assets, 17 million client accounts, and over 3.5 million daily average trades, all done with the attrition levels that are well below other integrations in our industry, as well as our estimates at the time of the acquisition, which were 5% to 6% asset attrition and 4% revenue attrition. And while it's still somewhat early, the client response to the combined platform has been even stronger than we anticipated. Promoter Scores for former Ameritrade retail clients are now increasing about 50 points nine months post conversion date. While the Promoter Scores for advisory services, including the former Ameritrade adviser clients, have returned to pre-conversion levels. Impressively, former Ameritrade retail clients who converted in 2023 are already bringing in assets on a net basis. However, their level of net new assets still remains below our target range. Clearly, this illustrates that we're reaching an inflection point as attrition continues to abate and we rebuild back to firm-wide net new asset levels in our targeted 5% to 7% range. And lastly, former Ameritrade retail clients are already making up about one-third of our overall enrollments in advisory solutions, an early illustration of the power of combining the two firms and their interest in Schwab's broader offering of wealth management solutions. The overall client engagement was solid in the second quarter with the equity buy-sell ratio at about 1.1, while daily average trades remained at relatively high levels for a second quarter and above the same period from last year. Meanwhile, we've seen a large increase in interest among our clients in our Managed Investing solutions. So overall, key client metrics continue to be solid. Net new assets year-to-date were over $150 billion, including Q2 asset gathering of about $60 billion, up 17% from the same period last year, again, still somewhat below our long-term goal of 5% to 7% to an economic cycle but growing closer to that figure as the impact from former Ameritrade client attrition begins to wane. New brokerage accounts were again almost $1 million -- I'm sorry, 1 million accounts during the quarter. Looking deeper at the types of clients we're attracting. These new-to-firm households continue to set us up well for the long term with almost six out of 10 new clients under the age of 40. And investment adviser clients of all sizes continue to entrust their client assets to our custodial services. For years, we've emphasized that Schwab Advisor Services is the premier offering for RIAs of all sizes, and we are equally committed to each segment of advisers. And these net new asset results are particularly encouraging as they reflect our success serving again every size adviser. Let me take a brief step back to take a more big-picture look at Schwab and the growth trajectory we've been on for over 50 years. From our origins as a discount broker, we have continually listened to client needs, as well as anticipated client needs, and added services and capabilities along the way. What is key is that we have always done so in a Schwab Way, through clients' eyes, at a great value and without the client having to accept trade-offs. We call that modern wealth management. And when we look to the future, we believe this formula will only serve to build our market share larger and larger. Of course, one of the key capabilities we have added along the way has been banking services to meet the needs of our clients on both sides of their personal balance sheets. Now some have asked us after the regional banking crisis of 2023 whether we remain committed to serving our clients' banking needs. And the answer is a definite yes. That said, we have studied our approach to offering banking services in recent quarters and wanted to share a few additional perspectives on how we see banking unfolding in the future at Schwab. Offering lending services to our retail clients and the clients of the investment advisers we serve is important. Arguably, it's critical as it meets client needs and deepens relationships in a meaningful way. Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs. We believe firms that do not offer lending services are at a strategic disadvantage that will show itself more and more over time. So, we are committed to offering quality lending services in a manner consistent with how we lend today, exclusively for our clients, residential mortgages, HELOCs for clients who have their first mortgage with us, and pledged asset lines. And to support lending for our clients, we continue to invest in both technology to make the application and approval process streamlined and efficient, as well as experienced bankers who can help shepherd the more complex loans through. From the standpoint of the investments we make at the bank for deposits in excess of those needed for lending to our clients, over time, and by that, I mean, years, not months or quarters, we would envision some shortening of our overall balance sheet investment portfolio duration. That could lead to some modestly higher earnings volatility through an interest rate cycle but should help reduce volatility of our capital levels and the need to access supplemental borrowing when interest rates potentially rise rapidly. One of our objectives is to increase our emphasis on attracting transactional bank deposits like checking balances with our award-winning checking product. This would serve as a means of increasing liquidity and further stabilizing our overall deposit base. And we envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals, deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from the third-party banks that make sense for us. Net, these various actions should lead, again, over time to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients' banking needs, lower our capital intensity and, importantly, protect the economics we are able to generate from owning a bank. So, while we see some modest changes in the way we manage and operate our bank, one thing you can count on, we will continue to operate our business in the Schwab Way, making decisions through clients' eyes, offering clients great value, and delivering service and advice to our valued clients without asking for any trade-offs. So Rick, let me turn it over to you for some more discussion on our efforts as well as results during the second quarter. Rick Wurster Thanks, Walt, and good morning, everyone. With the successful completion of the Ameritrade conversion behind us, we are looking ahead to an exciting new chapter as we continue to advance our four strategic focus areas. And we will do so from a position of strength, having fully combined the best of Schwab and Ameritrade to offer our clients a no trade-offs experience. Our ability to increase our scale while also continuously driving efficiency in our operations remains one of our key competitive advantages. The Ameritrade integration is a clear example of how we have vastly increased our scale while cutting costs. And by the end of this year, we'll realize the remaining 10% of run rate expense synergies from the acquisition. Over time, our growing client base, our cost discipline and our ongoing investments in technology will continue to help us reduce our cost to serve our clients, in the same way it has over the past decade as we've decreased our cost per client account by 25% and by around 50% when you consider inflation. We plan to build on this competitive advantage. We will invest in technology, including artificial intelligence, that will ultimately help us lower our costs. We will implement operational enhancements and process transformation so we can serve our clients even more efficiently than we do today. And as we continue to increase our scale and enhance our efficiency, we'll reinvest in our clients over time and support our growth for the long term, just as we've done historically. Win-win monetization is about meeting more of our clients' total financial needs. By offering the ease and convenience of having more of their financial life in one place, we're also able to bolster our revenue growth and our wealth business is growing quickly. And this is a win for clients as Client Promoter Scores for our advice solutions are among the highest at the firm. So, these are our happiest clients. And it is a win for us. Year-to-date, we've attracted nearly $25 billion in Managed Investing net flows, a 56% increase over last year. And we see strong net flows across our spectrum of solutions. And you can see the growth on this page: 40% in Schwab Wealth Advisory, 53% in Wasmer Schroeder, and 127% and in Schwab Personalized Indexing. By offering our clients a broad spectrum of the wealth solutions they need, we're also supporting growth in our fee-based revenue streams, as you can see with the growth in our revenue on the right-hand side of this page. Looking within our Wealth Solutions, I wanted to do a bit of a deeper dive into our Wasmer strategies. These fixed income strategies provide clients with a wide range of tax-exempt and taxable solutions. Clients also have access to a dedicated team of portfolio managers and portfolio personalization capabilities, all at a lower cost than competitive offerings. With total assets under management of $25 billion, we've seen assets in these strategies grow at a compound annual growth rate of 23% since our acquisition in July of 2020 and have grown by nearly 80% in the last two years where we've had a higher interest rate environment. This year-to-date alone, we've seen net flows of $4 billion, demonstrating that these solutions are indeed meeting client needs. Turning now to client segmentation. At Schwab, we will always meet the needs of a wide spectrum of investors and RIA firms, but we also need to serve our distinct client segments. And strong relationships are the foundation of our ability to do this. When we build relationships by meeting client needs and meeting clients where they are and with the service models, the tailored education and the specialized capabilities they need, we will retain our existing clients and attract new ones. RIAs, which are one of our key client segments, we strengthened our relationships with RIAs of all sizes through an unparalleled offer that helps each of them grow, compete and succeed. For example, we offer advisers turnkey asset management solutions, flexible technology, and highly specialized business consultant teams, all at an incredible value with zero custody fees and no intention of changing that. Turning to our retail business, high net worth retail clients are another important segment where the power of strong relationships is clear. Our high net worth retail investors who have a financial consultant, bringing more than 3x the average household net new assets, 2.8x the Managed Investing net flows, and have better TOA ratios, and notably higher Client Promoter Scores compared to retail high net worth clients who do not have an FC. Continuing to invest so we can build and expand on these valuable client relationships will help support our growth over the long term. Our fourth strategic focus area is the Brilliant Basics. We know that we can make it even easier for our clients to do business with us, and if we can deliver on the basics for our clients in every interaction they have at Schwab, we'll build loyalty and our delighted clients will grow their wealth with us and refer their friends and family members to us. One example of how we're delivering on this for clients is the enhancements we continue to make to the best-in-class Schwab mobile app. We know clients and third parties like it today. Our mobile app has a 4.8-star rating on the App Store. And for the second year in a row, Corporate Insight has ranked us the number one mobile app experience among brokerage firms. And we continue to invest in and enhance that experience. We're introducing features our former Ameritrade clients love, like the recently launched customizable dashboard. Other recent and planned enhancements will simplify the client experience by reducing clicks and expanding on our customization capabilities. Guided by our consistent through client-size strategy, we remain well positioned for continued growth. While there are several factors that can influence asset gathering in the near term, things like the macroeconomic environment, seasonality and some behavioral differences we see in the former Ameritrade client base, we believe our through-the-cycle growth recipe remains intact. Over the longer term, we expect we'll continue to see 5% to 7% annualized NNA growth from existing and new clients, bolstered by delivering on our four strategic focus areas. As we've shared, 2024 is a transition year, with strong client engagement, a successful integration, continued progress on our strategic focus areas, and opportunities to introduce our client base to the best of Schwab and Ameritrade, we remain well positioned to continue serving our growing client base and delivering profitable long-term growth to stockholders. Well, thank you very much, Rick. So, Walt and Rick talked about the exciting results we've already seen from the Ameritrade integration and the opportunities it enables, our strong momentum in the market and the success we have enjoyed in attracting a diverse mix of clients, the progress we have made in continuing to enhance our leading value proposition at the same time that we continue to drive greater efficiency throughout our business. And finally, our commitment to continuing that journey, combining ever greater efficiency with sustained investments in improving the client experience. For my time today, I'll review our solid financial performance in the second quarter and over the first half of the year. I'll provide some high-level perspective on what we're seeing with regard to our clients' transactional cash, and I'll share an updated scenario for 2024. The important point is that we are proceeding through what we've described previously, and what Walt talked about at the outset, as a transitional year. But frankly, at a slightly faster pace than we had anticipated just six months ago, with our organic growth rebounding towards historical levels, a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, sequential growth in our net interest margin, continued expense discipline with adjusted expenses basically flat year-over-year excluding some unusual items, and finally, a steady increase in our capital levels, both our regulatory levels and those inclusive of AOCI. And all of that sets the stage for what we expect will be more of a return to normal, the unlocking of our core earnings power and, frankly, a much simpler financial story in the quarters and years ahead, but one featuring strong growth in revenue and earnings in the back half of 2024 and over the next several years. As Walt mentioned, the first half of the year has been characterized by strong equity markets, increased client engagement and solid organic growth. We saw that reflected in external benchmarks such as the S&P 500 and NASDAQ, as well as key drivers of our business performance, including margin balances up 15% from the end of 2023, trading activity up slightly from the first six months of last year, and as Rick mentioned, a real surge in interest among clients for our advisory solutions. Our clients' transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024. But even so, we continue to see a moderation of the rate-driven client cash realignment activity. Now that backdrop helped support solid financial performance in the second quarter, with revenue up 1% year-over-year to $4.7 billion. Adjusted expenses in Q2 were up just under 2% year-over-year, but that included several onetime and/or unusual items without which our adjusted expenses would have been down more than 1%. We produced an adjusted pretax margin of roughly 41% and adjusted EPS of $0.73. Turning our attention to the balance sheet. Total assets dropped by 4%, driven primarily by tax-related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. And the overall level of realignment within Bank Sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023. Now as I mentioned earlier, we have seen strong growth in margin utilization to start the year. And to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter. What I want to emphasize again, that this is a good thing. We are more than happy to absorb a bit more borrowing on which we're paying just over 5% to support margin loans on which we're earning just under 8%. And finally, despite rates that increased slightly during the quarter, our capital position continued to get even stronger. With our adjusted Tier 1 leverage ratio, again, reminding you that's the one that's inclusive of AOCI and, therefore, what our binding constraint would be if we lose the AOCI opt-out, at Schwab Bank now well over 6% and just under 6% for the Company overall. Meaning, we are marching steadily towards our new operating objective for capital. Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year. And all indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from Bank Sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing. Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked, meaning, in the absence of this catalyst, we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time, we believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again. Now that solid start to the year lays the foundation for what we expect will be an even stronger end of the year, propelling us into growth through 2025 and beyond. We now expect our full year revenue to range between flat to up 2% versus 2023 or roughly in the middle of the mathematical illustrations you may recall we shared back in January. And as I shared back in May at our Investor Day, we now expect our adjusted expenses to be approximately 2% higher than 2023. And as a reminder, about half that change from the previous guidance is due to unanticipated onetime items such as the FDIC surcharge and the regulatory accrual, with the remainder coming from the increase in the SEC 31 fee, which is, again, is a pass-through expense and, therefore, P&L neutral. But to use the transitional word again, that annualized view masks the progression in earnings power by the end of the year. We're expecting flattish earnings from Q2 to Q3, but assuming the Fed cuts rates in September as is widely expected, we could see our NIM reach the mid-2.20s in Q4 on its way to approaching 3% by the end of 2025, which we believe will support adjusted earnings per share in the middle of the $0.80 to $0.90 range we outlined at the beginning of the year, with our earnings power building in 2025 and beyond. Despite long-term rates moving a little bit higher during the quarter, our capital levels are climbing steadily, and we continue to expect our consolidated adjusted Tier 1 leverage ratio to approach our slightly updated operating objective of 6.75% to 7% on a consolidated basis by the end of 2024, at which point it becomes more of a live conversation regarding whether and how we want to do further capital return, our number one priority for capital is always to support business growth. Now to the extent that we have capital in excess of what is needed to do that, we have, throughout our history, taking steps to return that to stockholders. That can be through increasing our dividend, which generally rises alongside earnings. That can be by redeeming outstanding preferreds to create additional dry powder for the future, especially preferreds that might be or might become relatively expensive, and that can also be, of course, through stock buybacks, which we do opportunistically. There is one additional consideration right now, which is to the extent that we have outstanding supplemental borrowing, we may choose to utilize some of the liquidity we'd otherwise use for buybacks to reduce some of that bank-level debt. Now doing that reduces our reliance on nonbusiness-as-usual funding sources, and given the relatively higher cost of the supplemental borrowing, it's likely more accretive to earnings in the near term, while preserving the capacity, the ability to implement stock repurchases at a later date. So by doing that, we can kind of have our cake and eat it too. Now those of you who have followed the Company for a while know that we don't tend to communicate bold, long-term financial targets. Rather, we continue to talk about our long-term financial formula, a relatively simple and straightforward formula that is based on our clear and straightforward business strategy, which we articulated, as you know, is through clients' eyes. And what makes that financial formula simple and straightforward is that it's based on a set of a pretty reasonable assumptions, for Schwab at least, around organic growth, revenue growth, expense containment and capital return, assumptions that we have delivered through the cycle over multiple decades. Over the last two-plus years, that formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances. But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we're nearing the point where that simple and straightforward formula, that simple and straightforward financial story should become more clear, one that without making some big leap of faith combined strong organic growth, strong profitability and substantial capital return. With that, I'll turn it over to Jeff to facilitate our Q&A. Jeff? Jeff Edwards Thank you very much, Peter. Operator, can you please remind everyone how they may ask a question? [Operator Instructions] Our first question comes from Brian Bedell from Deutsche Bank. Please go ahead. Brian Bedell Great. Thanks very much for the presentation. Maybe just, Peter, could you talk about your view on how you make deposit rates as the Fed cuts -- and I guess, first and foremost is your assumption in your targets based on, I guess, how many Fed cuts are based on that? And then just maybe just talk about how you might reduce direct deposit rates in sweep and the banking deposits as the Fed cuts -- essentially the deposit beta to that? Peter Crawford Sure. So, thanks, Brian. So, the scenario that I outlined is based off the Fed cutting rates a single time in the rest of this year in September. In terms of deposit betas, I wouldn't necessarily assume that deposit betas are symmetrical. If you look historically, deposit betas tend to be a bit higher on the -- in the easing cycle than they are in a tightening cycle. And so, while we certainly haven't made any decisions exactly about what we'll do with deposit rates, I think that's a reasonable expectation. And we also would expect that as rates come down, the cost of any replacement supplemental funding that we have to access comes down as well. And we'd also expect that, on the margin, that rate cuts would, over time, bring about higher levels of clients' transactional cash as the incentive for them to utilize alternative solutions like purchase money funds and CDs become somewhat less. Next, we'll go to the line of Ken Worthington from JPMorgan. Please go ahead. Ken Worthington In terms of the use of third-party banks like TD, how much of your bank assets might migrate to third-party banks over time at sort of steady state? And how would you expect the economics to compare to the fees that you currently earn on a money market fund or in the Schwab Bank spread over rate cycle? And I guess lastly, given the Wells comments on Friday, is there a risk that using third-party banks might risk regulators having an opinion on the yields passed on to certain end-customers in the advisory or other segments of your business? Walt Bettinger Yes. So, I think it's I think it's early to have definitive answers on the first set of questions that you asked. Although if you research our IDA agreement with TD Bank, it probably gives you a good direction with respect to the economics. The economics can be very attractive for us in terms of not needing to have capital relative to those deposits. And that's where I would probably direct you to look in terms of the economics of that. In terms of the level, we want to make sure that we maintain sufficient deposits at our bank to, again, fund the loans that our clients want, and then have appropriate levels of liquidity over and above that. With respect to the Wells Fargo issue, we have provided money market fund sweep cash and -- or money market yields on bank cash for all of our fiduciary-driven investment advisory solutions already. So, I don't really see the Wells Fargo report having any kind of meaningful implications for us. We've been doing this for an extended period of time already. Next, we'll go to the line of Kyle Voigt from KBW. Please go ahead. Kyle Voigt Good morning. Just maybe on the Ameritrade attrition abating and net new assets getting back to that 5% to 7% level as they have grown historically. I guess with the knowledge of doing prior brokerage integrations, albeit at a smaller scale than the Ameritrade integration, so do you have any expectation of when you could get back into that range? And typically, when do you see attrition effectively fully abate after the last migration, which we've obviously just went through? Walt Bettinger Let me start by saying first -- thanks for the question, Kyle. Let me start by saying when we look at our Schwab client base, we continue to grow within that 5% to 7% organic growth rate that we target over the long term. When you look at the Company level metrics, what's keeping us from the 5% to 7% overall is, in fact, behavior of the Ameritrade clients. And the great thing that we're seeing is we are seeing a change in their behavior. And it's in line with what we would expect, which is, first, we need to stop clients from leaving the firm and from Ameritrade flows being negative. And I think we're in the process of that happening. Walt referenced the significant improvement in Client Promoter Scores. That's true both on the retail side and the adviser side. So, Client Promoter Scores are getting higher. As those Client Promoter Scores are getting higher, we're moving from outflows from our Ameritrade clients to inflows. What we then need to do is to move a client base that hasn't had client flows quite in line with where Schwab organic growth rate has been historically. We need to move them from being positive contributors to net new assets to contributing at the same level as Schwab -- as our Schwab organic growth rate. And the way we'll do that is by introducing our Schwab model to Ameritrade clients, the financial consultant, the relationship model, the service, the advice, the consultants that we bring on the advisory side. All of that, we believe, will help accelerate the Ameritrade net new asset formation. So, we're confident we can grow in the 5% to 7% range. We continue to do so on the Schwab side today. And we're right where we'd expect to be in terms of the process of moving Ameritrade clients from being net detractors in net new assets to now being slightly positive. And then, we anticipate by introducing our model to them to be able to grow them to the same level as Schwab clients over time. Next, we'll go to the line of Dan Fannon from Jefferies. Please go ahead. Dan Fannon Peter, I was hoping you could elaborate on your assumptions on what's going to drive the sequential growth really after being flat in Q3 to Q4, and specifically things like margin balances, which are growing, but as you said, are drawing more short-term funding. So curious about short-term funding levels plus some of the other assumptions in that Q3 to Q4 ramp. Peter Crawford Yes. So, we can -- certainly, we can follow up with -- we have a number of assumptions on the page there, and you're welcome to follow up with the IR team in terms of some of the details. But broadly speaking, as I mentioned previously, the assumptions are as a single Fed cut in September, client cash realignment activity that continues to moderate. We expect it will flatten and then, again, ultimately resume growth. And then more of a continuation of the general -- relatively conventional assumptions on equity market depreciation, margin balance growth that goes along with that and so forth. In terms of supplemental borrowing, our priority, of course, is to pay that down as quickly as we can. But the pace at which we pay that down, it is dependent on the level of margin balance growth. And if we see -- continue to see more margin balance growth, we will, as we always do, want to make sure we support that growth. And at times, that means moving some cash out of the -- some client cash out of the bank over to the broker-dealer. But again, that is a -- we welcome the margin balance growth. It's good for clients. It means we're -- our clients are engaged, that we are supporting our active trader community, which is a very important segment for us. It's a very profitable interest-earning assets. So, we're more than happy to support that even if it means that it delays, to a certain extent, the pay-down of supplemental borrowing. It's accretive from a NIM standpoint, accretive from a net interest revenue standpoint, and so forth. So, it's why it's really, I think, I'd caution everyone not to focus on supplemental borrowing just in isolation in a vacuum, because it's influenced by other factors as well. Next, we'll go to the line of Steven Chubak from Wolfe Research. Please go ahead. Steven Chubak Hi, good morning. So, Peter, you had outlined a couple of different self-help levers. I mean, the first is the potential to migrate additional cash off balance sheet in the future. I actually wanted to focus on the potential opportunity to accelerate pay-downs of the high-cost liabilities by repositioning the securities portfolio. And I was hoping you could just unpack what are some of the constraints that we should be mindful of when thinking through the potential opportunity. And is it fair to assume that you would likely wait until you're at your capital target at which point you would maybe consider pursuing that path? Peter Crawford Yes. So, thanks for the question, Steven. So, I would say, I know we've gotten this question -- we've gotten this question a fair amount. And our thinking on repositioning trade hasn't really changed. We certainly understand the benefit of that on accelerating the paydown of supplemental borrowing, accelerating the net interest margin accretion, earnings accretion that we expect to happen over time. At the same time, we're very cognizant of, and very mindful, of doing anything that would jeopardize the trust our clients place in us, especially for the sake of, moving forward, something that we expect will happen on its own. And so that's why we haven't done that. So, I would say it's not something we, by any means, rule out altogether, but it's also not something we're looking to do in the near term. Next, we'll go to the line of Brennan Hawken from UBS. Please go ahead. Brennan Hawken I'd like to follow up on the question around the shift to third-party banks as a place for deposits. So just at a high level, I'm curious if you could explain to us the strategic shift here because we spoke about it a year ago at the last what used to be the winter business update, now is the Investor Day, although I guess -- well, in 2023, it was at a different timing. And there was a defense of using the bank subsidiary. So, what led you to shift there? And then maybe just like timing-wise, when should we expect this to happen? And how do you strike the -- you referenced that you want liquidity above the need to fund the loans. How should we be thinking about what the bank will actually look like once things settle out and you take this journey? Peter Crawford Yes. Thanks, Brennan. And so as I indicated, we're talking about years, not months and quarters. And we just want to foreshadow that, over those period of years, we think that there may be approaches that are more efficient in terms of rewarding our clients as well as rewarding our stockholders than maintaining 100% of the deposits at our bank. We want deposits, as I indicated, to be sufficient to cover the loans that we intend to do for our clients, that provide quality yields, deepen relationships and we're able to do at exceptionally low credit risk, as well as having liquidity beyond that. But we all recognize that deposit flows can be very volatile depending on rate environments. And we have in place one agreement already today that provides us substantial flexibility for client deposits with exceptional economics for us without the need for capital. And we think that there are other opportunities to consider expanding that. Again, I want to emphasize, the prepared remarks I made, that this is all subject to the economics of doing so. But we do think there are meaningful opportunities to lighten some of the capital load over time, again, measured in years, not months and quarters, that will provide us additional flexibility and also let us extend FDIC insurance to higher levels for our clients. Next, we'll go to the line of Benjamin Budish from Barclays. Please go ahead. Benjamin Budish Just thinking about the sort of cash inflows over the next maybe six to eight quarters, can you maybe provide an update on your expected pace of securities maturing off of the balance sheet? I think you've talked before about the back half of '24. But is there any update you could perhaps provide on what to expect in 2025? Peter Crawford Yes. So, I mean I think I would think about that in terms of the pace of cash flows off the investment portfolio as sort of in the $10 billion to $11 billion a quarter, somewhere in that range, as the portfolio -- the size of the portfolio goes down, that it's reasonable to expect that that level of cash flow goes down as well, sort of commensurate with that. But sort of -- and that's a general rule of thumb over the next several quarters, I think, is a reasonable expectation. Next, we'll go to the line of Alex Blostein from Goldman Sachs. Please go ahead. Alex Blostein Well, so a lot of these things we're talking about for the last several quarters are related to kind of self-help levers and improvement in the Company's earnings power ultimately start with improvement in the deposit trajectory of the business that will help supplement the borrowings, capital returns, et cetera. So maybe help us sort of refresh, now that you've had the business with Ameritrade for some time, how are you thinking about the normalized framework for growth in Schwab's deposits, sweep deposits, whether it's a percentage of net new assets or some other metric, but I guess also considering that, even if we do get rate cuts, the Fed funds rate and the market rate is still going to be probably meaningfully higher versus kind of the available deposit yield that you and the industry are offering. Peter Crawford Yes. Thanks, Alex, for the question. So, I know there's a lot of focus on kind of month-to-month, even at times week-to-week changes in deposit flows. I think it's important to maybe set a little bit of context. So, first is deposit flows over a short period of time are influenced by net new assets, of course, the cash is brought in from new accounts, and then what clients do with that cash. And that can be rate-driven allocations that they make to purchase money funds, CDs and so forth. It can also be into engagement in the markets, equities, mutual funds and so forth. And so that can create some variability. We have seen strong engagement in the markets. And when we look at the rate-driven activity among our clients, that continues to go down. The second point of context I would make, which is that you do see variability in those flows from, frankly, from day to day or month to month. And we can see $2 billion or $3 billion of net inflows or outflows on a particular day. And so, when you just look at a month's numbers, depending on what day of the week the month ends on, it can influence the level of transactional cash that we report on that monthly basis. And I'd say June was sort of -- was comparable to May. July has started off stronger. It's still early, it's about halfway through the month, so we'll see how the month ends. But it is -- it started off definitely stronger than in terms of deposit flows than May. In terms of the long term, to your question long term, we would expect in a stable environment that client transactional cash grows with the growth in accounts and the growth in total assets. We actually recently did a study to look at clients who opened their accounts roughly 20 years ago. And what we see over time is, as those clients increase the net worth in their accounts, increase assets in their accounts, their cash balances go up and they actually stay at a relatively constant percent of the assets in the account. And so, I think as you are modeling our transactional cash over a long period of time, over years, I think it's reasonable to expect that that transactional cash grows with the growth in assets and the growth in accounts. When rates are rising, it will -- growth will be a little bit lower, and rates are falling, that growth will be a little bit faster. But I think over time in a stable environment, that's a reasonable expectation over, again, over multiple years. Next, we'll go to the line of Bill Katz from TD Cowen. Please go ahead. Bill Katz Maybe a two-parter. The first one is just in terms of the Ameritrade metrics you had mentioned in terms of not up to the 5% to 7% growth rate that you're experiencing with legacy platform, can you scale and size the two relative asset pools that we're speaking to? And then the broader question I have is just as you're thinking now about migrating the growth of the bank, how should we be thinking about the end state of the size of the bank? And does this change your capital return methodology? Walt Bettinger Let me start with the Ameritrade part of the question. We brought over about $2 trillion of Ameritrade client assets. We're at $9.4 trillion overall. So, Ameritrade is clearly an important part of our business. Looking at the longer term, important to remember the enthusiasm we have for the combination of the strength of Ameritrade and Schwab. We were talking a lot about short-term dynamics around cash and net interest margin and things like that. We have an incredible franchise that we've just spent four years putting together the best of everything Ameritrade had to offer with the best of everything Schwab has to offer. And the behavior we're seeing from our clients is exactly what we would expect. We went from clients who experienced a lot of change and might have had dual relationships at Ameritrade and somewhere else, making the decision that this wasn't where they wanted to be. And so we did see some attrition. That attrition was well below what our expectations were. And now we're seeing what we'd expect to see in the next phase, which is client satisfaction from those clients that were moved, who had their experience change, improving dramatically. We're up 35 points in our advisory services business in terms of our overall client promoter scores following the conversion. And on the retail side, nine months after a client moves, their satisfaction is up 50 points. So, we have built a platform that both sets of clients love. And now what we get to do for the long term and for the foreseeable future is deliver our mission of making a difference in our clients' lives through a platform that's never been stronger on the retail side and the adviser side than it is right now today. And so, we're confident in our long-term organic growth rate. We think the behavior we're seeing is exactly in line with what we would have expected, and are very optimistic for our future growth. Next, we'll go to the line of Michael Cyprys from Morgan Stanley. Please go ahead. Michael Cyprys Maybe just circling back to the Wells Fargo announcement. Maybe you could just help clarify for us the magnitude of cash that you have in fiduciary accounts, the types of accounts these represent where you offer the money funding equivalent yields, is this just retirement only? And then just more broadly, how do you think about the risk over the long term that industry practices evolve with more account types over time that capture these money fund equivalent yields? Walt Bettinger So, I just want to clarify, in our fiduciary relationships where we -- in our Managed Investing programs, our wealth programs, cash assets are invested in a sweep government money fund. So, we don't have this exposure that Wells Fargo has. Next, we'll go to the line of Chris Allen from Citi. Please go ahead. Chris Allen I wanted to ask about the 3% NIM outlook for 2025. Just wondering what are the parameters that you're baking in to get there? Does this entail any of the changes that you talked about around the balance sheet strategy in terms of shortening duration as well? Peter Crawford Yes. Thanks, Chris. So, the 3% -- approaching -- NIM approaching 3% by the end of 2025, the primary driver of that is, again, the moderation of the client transactional cash realignment activity and the paydown of the supplemental borrowing. That is very, very accretive to our net interest margin. In terms of whether the comments that Walt provided have any influence over that, I'd just reiterate what he said, which is that is something that's evolutionary, not revolutionary. It's going to play out over multiple years. And so, it doesn't influence at all really the -- that more near-term outlook that we have for the end of -- towards the end of 2025. Thanks for the question. Jeff Edwards Operator, I think that time for one short question, and then we're going to close. Absolutely. Our final question comes from the line of Devin Ryan from Citizens JMP. Please go ahead. Devin Ryan Just had a question about lending. And obviously, it's been an area you guys have been talking about both at the Investor Day and then today as well. Just thinking about kind of where Schwab is, your 40 basis point decline assets. I think you highlighted that the industry [Technical Difficulty] [00:57:24] percent. So just would love to get some color around where -- how much of that gap do you think you could actually close just with your, I guess, suite of products, number one. And number two, what you're comfortable going to in terms of the mix of the balance sheet, especially just given some of the evolution of the balance sheet we're talking about today as well. Walt Bettinger Thanks for the question, Devin. We certainly think we can expand our lending capabilities. And the way we're focused on doing that is by creating the easiest, most straightforward, client-friendly process in the industry. We've seen that within our pledged asset line program where it's now 1.7 days average cycle time to get a pledged asset line. It's actually less than a day for individual and joint accounts, but our more complex ones drive up the average time. 85% of those originations are now done digitally. These are major enhancements. And we're making other enhancements to our mortgage process, to the way we lend to our higher net worth clients and the experience they have. So, we're trying to build an experience that makes it such that our Schwab clients never want to borrow somewhere else, they want to borrow from us. So, we do think there is lots of runway to close that gap, and we're quite bullish on our -- on the opportunity here. Now, we are in an interest rate environment where there's not as much borrowing as we've seen historically, not as much rolling over of loans and things. But we are confident that we've built the process, the experience and the offer that we should be for our clients an exceptional place to borrow. And that includes our industry-leading rates for clients that have assets with us. Final comment I'd make is it's also a terrific way to add to the service that we provide to our adviser clients. Our advisers for years have been asking us to do more lending because they don't want to have to introduce another party into the relationship. And increasingly, we're able to meet their needs, which delights them, and we think we'll be able to do more of that over time. Peter Crawford All right. Well, I think it's my opportunity or my time to close. I want to thank all of you for joining us this morning and hearing our thoughts on the business and the opportunity in front of us. I think it's very easy to focus on very near-term practical measures. And as client cash realignment activity, plus or minus $1 billion, or supplement our borrowing or net interest margin in terms of -- which we measure in terms of basis points. And those of you who follow the Company for a long time know that we manage for the long term. We have a very long-term orientation. Our faith in our clients, our faith in our strategy, our confidence in that strategy really helps us remain focused on long term. And Walt described this year at the outset as a transitional year. And I think as we sit here halfway through the year, we feel really good about how that transition is going in terms of our strategic positioning, in terms of the completion of the Ameritrade integration and the satisfaction of those clients, in terms of the organic growth, the capital levels, and even the financial performance. And we certainly recognize the journey is not over by any means. We're feeling very confident about where we are and where we're going. Thanks, everyone, again, and we look forward to speaking with you again in October.

Bank of America Corporation (BAC) Q2 2024 Earnings Call Transcript

Bank of America Corporation (NYSE:BAC) Q2 2024 Earnings Conference Call July 16, 2024 8:30 AM ET Company Participants Lee McEntire - Investor Relations Brian Moynihan - Chief Executive Officer Alastair Borthwick - Chief Financial Officer Conference Call Participants Glenn Schorr - Evercore Jim Mitchell - Seaport Global Mike Mayo - Wells Fargo Securities Steven Chubak - Wolfe Research Betsy Graseck - Morgan Stanley Erika Najarian - UBS Ken Usdin - Jefferies Gerard Cassidy - RBC Vivek Juneja - JPMorgan Matt O'Connor - Deutsche Bank Operator Good day, everyone, and welcome to the Bank of America Earnings Announcement. At this time all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Lee McEntire of Bank of America. Lee McEntire Good morning. Welcome. Thank you for joining the call to review our second quarter results. Our earnings release documents are available on the Investor Relations section of the bankofamerica.com website and they include the earnings presentation that we will make reference to during the call. I hope everyone has had a chance to review those documents. Our CEO, Brian Moynihan, will make some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Let me just remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on our website. So with that, let me turn the call over to Brian. Thank you. Brian Moynihan Thank you, Lee, and good morning and thank all of you for joining us today. Before I begin today, I just want to reflect a second on the horrible events this weekend. We at Bank of America are clear that there's no place for political violence in our great country, and we continue to wish the former President Trump a speedy recovery. And our thoughts, of course, go out to the victims and their families and others impacted by this terrible event. With that, let's turn attention to the results for the second quarter of 2024 at Bank of America Corporation. This quarter, we achieved success in a number of areas, underscoring the benefits of our diversity and the dedication of our team to deliver responsible growth. Our organic growth engine continues to add customers and activity to all our businesses, even as we see the drop in net interest income this quarter. I'm starting on slide two. Our net income for the quarter was $6.9 billion after tax or $0.83 in diluted EPS. Attesting to the balance in our franchise, the earnings were split evenly, half in our consumer and GWIM businesses, which serve people, and the other half in our institutional-focused business global banking and markets. We grew revenue from the second quarter of 2023 as improvement in non-interest income overcame the decline in net interest income. Fees grew 6% year-over-year and represented 46% of total revenue in the quarter. Our strong fee performance was led by a 14% improvement in asset management fees in our wealth management businesses. We grew investment banking fees 29% year-over-year and saw sales and trading revenue increase 7%. Global Markets had its 9th consecutive quarter of year-over-year growth in sales and trading revenue, a good job by Jimmy DeMare and his team. Card and service charge revenue also grew by 6% year-over-year in our Consumer business. Much of this fee growth is a result of our intensity around organic growth, and is a testament to the diversity of our operating model. Now on to slide three. Organic growth has been driven by several key factors. First, we focus on our customers. We continue to place them at the center of everything we do. Consumer led the way in delivering solid organic growth with high-quality accounts and engaged clients. For the 22nd consecutive quarter, we had significant net new consumer checking accounts. We expanded our customer base and our market share. Specifically, we added 278,000 net new checking accounts this quarter, which brings our first six months of 2024 to more than 500,000. In wealth management, we added another 6,100 new relationships this quarter. In our commercial businesses, we added 1,000s of small businesses and 100s of commercial banking relationships. This has led to now managing $5.7 trillion in client balances, loans, deposits, and investments across the consumer and wealth management client segments. In those areas, we saw flows of $58 billion in the past four quarters. Our emphasis on personalized financial solutions and superior customer service has strengthened customer loyalty, attracted new clients across all our businesses. Our focus on providing liquidity and risk management solutions to our institutional clients positions to continue to gain more share of the wallet as well. Second, we continue to deliver innovative digital solutions. One of the primary contributors of both attracting and retaining customers to our platforms is our digital banking capabilities for our clients across all the businesses. Our fully integrated consumer banking investment app drives the utility for our customers across their investment and consumer accounts. Our use of stats are strong proof points. Our second language capabilities in our consumer businesses further enhance our customers' capabilities. You can see the continued digital growth in the slides on pages 26, 28, and 30 in the appendix. A couple highlights. Our consumer mobile banking app now serves more than 47 million active users. They logged in 3.5 billion times this quarter. We also continue to see more sales through the use of our digital properties. Digital sales represented 53% of our total sales in the past quarter in our consumer businesses. 23 million consumers are now using Zelle. They send money on Zelle at nearly 2.5 times the rate they write checks. And, in fact, more Zelle transactions -- send transactions take place than a combination of customer ATM transactions, cash withdrawals, and tellers. Simply put, Zelle has become a dominant way to move money. In our wealth management business, we are seeing more banking accounts being opened to complement the investment business those clients do with us. Importantly, these clients are also recognizing the ease of our digital banking capability. 75% of our new accounts and our Merrill teammates were open digitally. 87% of our global banking clients also are digitally active. We have innovated and significantly streamlined service requests by enabling clients to directly initiate and track transaction inquiries within our awarded CashPro platform, using AI to accomplish that. Third, we continue to make core strategic investments in our businesses. We're not complacent with the success you see on this page. We continue to strategically invest in our core businesses. A few examples, while we have the leading retail deposit share in America, we continue to invest and have opened 11 new financial centers this quarter -- in this first-half of the year and renovated another 243. This is an investment in both our expansion markets and our growth markets. In wealth management, we continue to invest in our advisor development program. It's grown to 2,300 teammates, allowing us to continuously add more than -- teammates to our 18,000 strong best-in-class financial advisory force across all our wealth management businesses. We're also adding teams of experienced advisors strategically in areas across the country. In our banking teams, we continue to add to our regional investment banking team. We now have more than 200 regional bankers across the country to better serve our commercial clients, and they complement our industry coverage to our corporate clients. In our global markets business, we continue to extend balance sheet to our clients in adding expertise and talent to continue to lead our market share improvements seen over the last several years. We also have increased our technology initiatives and expect to spend nearly $4 billion on technology initiatives this year. We have focused projects around artificial intelligence enhancements with both clients and our teammates. A recent example of our use of AI is our advisor and client insights tool. We've delivered more than 6 million insights here today to our financial advisors, providing them proactive reasons to engage our clients. AI has moved from cost savings ideas to enhancing the quality of our customer interactions. Fourth, organic growth is driving integrated flows across our business. We invest heavily in each line of business that compete in the markets based on their particular customer segment. But importantly, we also invest across our lines of business to knit them together and gain market share in the local markets. It's a differentiated advantage for us, our banking leadership position across our businesses and our nationwide franchise. For example, we leverage our franchise by connecting business customers with wealth management teams. Our teams across all our businesses have made 4 million referrals to other businesses in the first six months of this year. Next, we drive efficiency and effectiveness, and that's through our operational excellence platform. We continue to invest heavily in the future of our franchise and growth, while we also have to manage expenses day-to-day. Our focus on operational excellence has enabled us to hold our expense growth up to 2% year-over-year, well below the inflation rates. We continue to work to achieve operating leverages as NII stabilizes and begins to grow again. As you look at it now, Alistair will explain later, a fair portion of the year-over-year increase in expense is due to the formulaic incentives of wealth management due to the peak growth of that business. And last, our capital strength allows us to deliver for all our stakeholders. Our capital remains strong as we held our CET1 ratio at 11.9% this quarter. We grew loans, increased our share repurchases to $3.5 billion and paid $1.9 billion in dividends. Average diluted shares dropped below 8 billion shares outstanding. In addition, we also announced our intent to increase our quarterly dividend 8% upon board approval. Note that with 11.9% CET1 ratio, we remain in a solid excess capital position, both above the current regulatory requirements and the increased requirement to 10.7% beginning in October as a result of the recent CCAR exam. Let's turn to slide four. A couple things to note here. First, we've noted for several quarters that the second quarter NII would be the trough for this rate cycle. We expect NII to grow in the third quarter and fourth quarter of this year. Alistair is going to provide you some points in detail about the path forward. One of the important contributors to that change is deposit behaviors of our customers. On slide four, you'll note that average deposits grew 2% year-over-year and increased modestly linked quarter. The second quarter, in reality, is typically a heavy outflow quarter. We have a lot of customers who pay a lot of taxes in that quarter. Quarter-over-quarter increases in rates paid continue to slow again this quarter across all businesses except for wealth management. And we show you that on this page, slide four, by line of business. While wealth business deposit rates have moved higher with continued rotation, we expect those rates to begin to stabilize and the rate of quarterly change to decrease going forward. Turning to slide five, in previous calls, many of you asked questions or commented upon the question about consumer net charge-offs and when would they stabilize in the second-half of 2024. That expectation we have remains unchanged as well. This quarter's net charge-offs were 59 basis points. And for context, this is a stabilization of the rate. I would just remind you that prior to this quarter, I have to go all the way back to 2014 to see a charge-off rate of that high. And that's near when we were still emerging from the financial crisis. On slide four, we highlight the 30 and 90-day-plus credit card delinquency trends, which showed delinquencies have plateaued for the second consecutive quarter. This should lead to stabilized net credit losses in credit card in the second-half of the year. At the bottom of the page, note a couple of facts. First, on the payment rates. This is the rate of paydown on balances in a given month remain 20% above index to the pre-pandemic levels, even while our card customers have plenty of capacity to borrow. And importantly, because we're relation-based businesses, look at the right-hand slide at the bottom of page five. There you can see our deposit investment balances of our customers, who also have a card with us, remain 25% above their pre-pandemic levels, illustrating continued health of these customers. So if you think about consumer credit, the card charge-offs drive it, and they flattened out in terms of delinquencies, and we expect an improvement in the second-half. With regard to commercial real estate, our usual CRA credit exposure slide is included in our appendix. We continue to aggressively work through our loans in our modest CRA office portfolio. We saw a decrease in all the categories, a decrease in reservable criticized loans, a decrease in NPLs, and a decrease in net charge-offs. This supports our previous expectation that net charge-offs in the second-half of 2024 will be lower than the first-half of 2024. Our second quarter performance highlights Bank of America's ability to generate strong, sustainable growth through a combination of customer-centric strategies, innovation, strategic investments, and a commitment to a strong balance of risk and reward. We call that responsible growth. We're confident that focused approach will continue to drive long-term success and create value for you, our shareholders. Now I will turn it to Alistair for additional results. Alastair Borthwick Thank you, Brian, and I'm going to start on slide six of the earnings presentation. I'll touch on more highlights noted on slide six as we work through the material. I just want to say upfront that we delivered strong returns with return on average assets of 85 basis points and a return on tangible common equity of nearly 14%. So let's move to the balance sheet on slide seven, where you can see we ended the quarter at $3.26 trillion of total assets, relatively unchanged from the first quarter. And not much to note here apart from a mixed shift of lower securities balances, mostly offset by an increase in reverse repo and modest loan growth, as well as global markets client activity. On the funding side, deposits declined $36 billion on an ending basis, reflecting typical seasonal customer payments of income taxes. And as Brian noted, average deposits were still modestly higher. Liquidity remained strong with $909 billion of global liquidity sources that was flat compared to the first quarter. Shareholders' equity was also flat compared to Q1, as earnings were offset by $5.4 billion in capital distributed to shareholders and a $1.9 billion redemption of preferred stock in the quarter. The $5.4 billion of capital contributions included $1.9 billion in common dividends and the repurchase of $3.5 billion in shares. AOCI improved modestly in the quarter and tangible book value per share of $25.37 rose 9% from the second quarter of last year. In terms of regulatory capital, our CET1 level improved to $198 billion and the CET1 ratio was stable at 11.9%. This 11.9% ratio remained well above our current 10% requirement, as well as our new 10.7% requirement as of October 1, 2024. Risk-weighted assets increased modestly and that was driven by lending activity. Our supplemental leverage ratio was 6% versus our minimum requirement of 5% and that leaves plenty of capacity for balance sheet growth. And our $468 billion of TLAC means our total loss-absorbing capital ratio remains comfortably above our requirements. Brian already covered deposit trends, so let's turn the balance sheet focus to loans and we'll look at average balances on slide eight. You can see average loans in Q2 of $1.051 trillion. They improved 1% year-over-year, driven by 5% credit card growth and modest commercial growth. The modest improvement in overall commercial loans included a 2% increase in our domestic commercial loans and leases, partially offset by a 4% decline in commercial real estate. Middle market lending saw an uptick in the quarter, and we saw good demand in our wealth businesses from custom lending. These areas of growth were largely offset by continued paydowns from our larger corporate clients on interest rate sentiment. Consumer growth was driven by credit card borrowing, and while home lending balances were flattish, originations picked up a bit this quarter. Lastly, and on a positive note, loan spreads continued to widen. As we turn our focus then to NII performance and slide nine, note that we moved the slide we typically use to talk about excess deposits to the appendix on slide 22, so you can see that there. Our excess deposit levels above loans remained high at $850 billion and continue to be a good source of value for shareholders. 52% of our excess liquidity is now in short-dated cash and available for sale securities. The longer-dated, lower-yielding hold-to-maturity book continues to roll off, and we reinvested again this quarter in higher-yielding assets. The blended yield of cash and securities continued to improve in the quarter and is now 160 basis points above our deposit rate paid. Regarding NII, on a GAAP [Technical Difficulty] Operator To all locations on hold. Please remain on line, we are experiencing a technical difficulty. Please remain on line. You will hear music for just a moment. Alastair Borthwick [Technical Difficulty] will materialize. And this now includes three interest rate cuts, starting in September, another in November, and one more in December. And the waterfall shows an estimated impact of those rate cuts to our quarterly NII. The next couple of categories are a result of natural management of interest rate risk in a balance sheet mixed with fixed-rate assets and variable-rate assets. And our balance sheet is split roughly half and half. So we take in liquidity from customers that we use to fund our assets, and then we store excess liquidity in cash and securities. We have fixed assets that mature and pay down, and those supply cash that then gets put back to work on the balance sheet and reprices over time. And we have two basic categories of fixed assets that mature and pay off, and those are securities and loans. On securities, you can see we've got about $10 billion a quarter of cash coming off of our securities portfolio, and we gain roughly 300 basis points of improvement on those assets when we put that money back on the balance sheet. On loans, between resi, mortgage, and auto, we've got another roughly $10 billion, which reprices with a little less yield improvement than securities. And between the securities and loans, we expect a fixed-rate asset repricing adds about $300 million to our quarterly rate of NII as we get to the fourth quarter. On the variable rate asset side, and to protect from down moves in rates, we hedge some of that with cash flow swaps. And those typically roll off in any given quarter and get replaced over time. So included in the cash flow hedges is an impact of cessation of BSBY as an alternative rate. If you recall, we took a charge in the fourth quarter of '23. It was $1.6 billion, and we said that would come back to us through time. And beginning in November, we start to see the benefit coming back into NII. And in Q4, that's about $200 million. That Q4 partial quarter benefit will grow by a slightly smaller sequential NII benefit in Q1 '25. And then it begins to taper off heading into 2026. In addition, we've got about $150 billion of received fixed cash flow hedges, protecting us from short rate moves moving over. Most are hedging floating rate commercial loans. And the cost of those hedges is reported as contra revenue in commercial loan interest income. These hedges have a weighted average life of just over two years. And they've got an average fixed rate of approximately 250 basis points. So starting in the second-half of 2025, we begin to get some additional NII tailwind, because the cash flow hedges with lower fixed rate likes where we receive, those will begin to roll off, and will likely replace those at higher current market rates at the time. The actual size of the tailwind we'll get from the expiration of those swaps will obviously be highly dependent on the level and the shape of the yield curve at the time of those maturities. And that stretches out over the course of the next four years. Okay, a couple other points to make. You'll note we don't expect much movement around our modestly, liability sensitive global markets NII activity. And lastly, our forward view has an expectation of low-single-digit growth in loans, low-single-digit growth in deposits, with continued slowing of rate paid movement through the back half of 2024. And you can see our expectation of the combined impact here as well. This last element is the one that has the most potential variability. And obviously, it will depend upon actual deposit and loan growth, and pricing and rotation. Okay, let's turn to expense and we'll use slide 11 for the discussion. We reported $16.3 billion of expense this quarter. And that's more than $900 million lower than Q1, which included $700 million for the FDIC special assessment. Not including the FDIC assessment, expenses were lower than Q1 by $229 million, driven by seasonally lower payroll tax expense. Compared to Q2 '23, we're up less than 2%. And that increase is equal to the incentives paid for improved fee revenue. Incentives for our GWIN business alone are up $200 million year-over-year. And that's obviously an expense we're happy to pay when we have a 14% improvement in fees for assets under management. Our second quarter headcount number included welcoming a diverse class of nearly 2,000 summer interns we hope will join us over the course of the next year or two upon their graduation. And absent those interns, our headcount fell by nearly 2,000. In the third quarter, we expect to add approximately 2,500 college graduates for full time. More than -- and that's from more than 120,000 applications received, showing that we remain an employer of choice for talented young people. Expense levels for the rest of 2024 are expected to bounce around this second quarter level, given the higher fee revenue and investments made for growth. So let's now move to credit and we'll turn to slide 12. There was little change in our asset quality metrics this quarter. Provision expense was $1.5 billion. That was $189 million higher than Q1, driven by a smaller reserve release in Q2. Net charge offs of $1.5 billion were little changed, with a small increase in credit card, mostly offset by lower commercial real estate office charge offs. On a weighted basis, we remain reserved for an employment rate of nearly 5% by the end of 2025, compared to the most recent 4.1% rate reported. The net charge off ratio was 59 basis points, largely unchanged for Q1. On slide 13, we highlight more credit quality metrics for both our consumer and commercial portfolios. Consumer net charge-offs increased by a modest $31 million versus the first quarter from the flow-through of higher late-stage credit card delinquencies from Q1. Highlighting the change in direction of delinquencies, consumer 90-day-plus delinquencies declined in 2Q by $57 million. Commercial net charge-offs were relatively flat as lower commercial real estate losses were mostly offset by a small increase in other commercial loans. Our office losses went from $304 million in Q1 to $226 million in Q2. Other commercial real estate loan losses were simply one hotel. Okay, let's move to the various lines of business and some brief comments on their results, and I'll start on slide 14 with consumer banking. For the quarter, consumer earned $2.6 billion on continued strong organic growth, and reported earnings declined 9% year-over-year as revenue declined from lower deposit balances, compared to the second quarter of last year. Customer activity showed another strong quarter, net new checking growth, another strong period of card openings, and investment balances for consumer clients, which climbed 23% year-over-year to a new record $476 billion. That included 12 months of strong flows at $38 billion in addition to market appreciation over the time. As noted earlier, loans grew nicely year-over-year from credit card, as well as small business where we remained the industry leader. The team held expense flat year-over-year, reflecting good work with continued business investments for growth, offset by the operational excellence work to improve processes and move more of our transactions to digital. And as you can see on the appendix page 26, digital adoption and engagement continue to improve, and customer satisfaction scores remain near record levels, illustrating customer appreciation of our enhanced capabilities due to our continuous investment. Moving to wealth management on slide 15, we produced good results, and those included good organic client activity, market favorability, and strong AUM flows, and this quarter also saw good lending results. Our comprehensive suite of investment and advisory services, coupled with our commitment to personalized wealth management planning and solutions, has enabled us to meet the diverse needs and aspirations of our clients. Net income rose 5% from the second quarter of last year to a little more than $1 billion. In Q2, we reported revenue of $5.6 billion, growing 6% over the prior year. As Brian noted, a strong 14% growth in fee revenue from investment and brokerage services overcame the NII headwind. Expense growth reflects the fee growth and other investments for future. The business had a 25% margin, and it generated a strong return on capital of more than 22%. Average loans were up 2% year-over-year, driven by strong growth we're seeing in custom lending and a pickup in mortgage lending. Both Merrill and the Private Bank continue to see good organic growth, and they produced strong assets under management flows of $58 billion since last year's second quarter, which reflects a mix of new client money, as well as existing clients putting more of their money to work. I also want to highlight the continued digital momentum in this business, and you can find that on slide 28. On slide 16, we turn to Global Banking results. And here, the business produced earnings of $2.1 billion, down 20% year-over-year, as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 6%, driven by the impact of interest rates and deposit rotation. The diversified revenue across products and regions reflects the strength of our Global Banking franchise. In our GTS business, fees for managing the cash of clients offsets a lot of the NII pressure from higher rates, and clients are accessing the capital markets for their capital needs instead of borrowing. Investment banking had a strong quarter, growing fees 29% year-over-year to nearly $1.6 billion, led by debt capital markets fees, mostly in leveraged finance and investment grade. And we finished the quarter strong, maintaining our number three investment banking fee position globally. A solid start to 2024 has left us in a good position, with top three rankings now in North America, Latin America, and EMEA, and number six in APAC. And we're seeing strong performance in important industry groups as well. An increase in provision expense from last year was driven by the commercial real estate net charge-offs I discussed earlier, and expense increased 3% year-over-year, including continued investment in the business. Switching to Global Markets on Slide 17, I'll focus my comments on results, excluding DVA as I normally do. The team had another terrific quarter as we generated good revenue growth and achieved operating leverage and continued to deliver a solid return on capital. Earnings of $1.4 billion grew 19% year-over-year, and return on average allocated capital was 13%. Revenue, and again, this is ex-DVA, improved 10% from the second quarter of 2023. Focusing on sales and trading, ex-DVA, revenue improved 7% year-over-year to $4.7 billion, and that's the highest second quarter in over a decade. FICC was down 1%, while equities increased 20% compared to Q2 '23. FICC revenues remained strong, and versus Q2 '23, they were modestly lower, driven by a weaker macro trading quarter in FX and rates, and that was largely offset by better commodities and mortgage trading. Equities was driven by strong trading results in derivatives and cash equities. Year-over-year expenses were up 4% on revenue improvement and continued investment in the business. Finally, on Slide 18, all other shows a loss of $0.3 billion, and that was little changed year-over-year, as lower expense was offset by lower provision costs as a result of reserve changes. Our effective tax rate for the quarter was 9%, and excluding discrete items and the tax credits related to investments in renewable energy and affordable housing, the effective tax rate would have been 25%. And with that, I think we'll stop there, and we'll jump into questions. Lee McEntire All right, Alistair, Brian, I just wanted to -- I did hear some feedback that maybe the audio from the call got interrupted for a moment. So at the point at which it got interrupted, I just want to reiterate a couple of points that Alistair was making. If you go back to slide nine, where I think we lost the audio, was where we started beginning a discussion about the performance from Q1 to Q2 of net interest income. That was driven by higher funding costs and the rotation of deposits seeking higher yield alternatives. And while higher again in Q2, both the rotation and the rate paid increases did continue to slow down. On the slide 10, I think the only points that I would make that Alistair began to discuss there was, we are just reiterating our expectation that quarter two would be the bottom for the NII in the rate cycle that we have been in. And our trajectory remains the same, the belief that our NII will begin to rise in Q3 compared to Q2 and then rise again in Q4. We provided the range of expectations that Alistair covered. And we expect Q4 NII to be around the $14.5 billion level, plus or minus. That would be approximately 4% to 5% higher than this quarter's NII. And he began that discussion by making sure that you know that we pick up an extra day of net interest income in the Q3, providing about $125 million of additional NII that also carries through into Q4. You see that on the slide. It also assumes that the current forward curve will materialize. That says that interest rate cuts will start in September. We will expect another one in November and December in the curve. And the waterfall includes an estimated impact of those rates to quarterly net interest income. And so then we started the discussion. He began the discussion on the fixed asset repricing, which then I think is where the audio picked back up again. And so we're happy to answer some questions on that. I know you'll have questions, but just wanted to recover that point, those points for you. Question-and-Answer Session Operator [Operator Instructions] We'll take our first question from Glenn Schorr of Evercore. Brian Moynihan Good morning, Glenn. Glenn Schorr Hi, thanks very much. Hello there. And definitely appreciate slide 10 a lot. I know you would have given us the 2025 NII guide if you wanted to give us one, so feel free to give that if you want, but that's not my question. My question is, given all the pieces of the puzzle that you gave us expectations for modest loan and deposit growth and slowing deposit-seeking behavior, if you get that 4% pickup from 2Q to 4Q this year that you're expecting, right now or at least recently, consensus had NII looking flattish with that fourth quarter number, and that doesn't make a lot of sense given all the pieces. So maybe if you can just comment directionally if you don't want to give the number of, does it make sense to you that we'd collectively be expecting flat NII with your higher fourth quarter number? Alastair Borthwick So, Glenn, you're right. We're probably not going to give guidance around 2025 for all the reasons that you would expect. What we're trying to do here is reinforce for everyone what we've been saying from the beginning of the year, and that is we think Q2 is the trough, and we believe from this point we're in a good position to grow. Now, when you look at some of the elements of this bridge, you'll draw your own conclusions with respect to fixed-rate asset pricing is going to persist for some period of time, and you'll be able to draw your own conclusions, but I just want to point out we've been pretty clear on our guidance for Q1 and Q2. We've always felt like this would be the trough. We feel like Q3 and Q4 are likely to be better. You can see our work here. We've laid it all out. Nothing's really changed in terms of that. And the most important thing I think for everybody here is we feel like 2024 is a really foundational year. It's this twist period where we just got to get through the last of the deposit rotation, and we're establishing a foundation for growth from here, so that's what we're trying to convey. Glenn Schorr Maybe I could just ask a follow-up on deposits within the wealth business. You have $4 trillion of client assets. I'm curious if you break out the split between brokerage and advisory accounts. Do you hear me okay? I'm hearing tons of feedback. Sorry, okay so $4 trillion in client assets -- great $4 trillion in client asset in wealth. I'm curious if you can give us the split between brokerage and advisory. And the reason I'm asking is, I'm curious how you've been handling rate paid on cash and advisory accounts and whether we should expect any behavioral changes following the recent wealth news. Thanks a lot. Sorry for the feedback. Alastair Borthwick Look, Glenn, I'm not sure that distinction would be the distinction I'd look to. We've gone through a massive change in cash infused in the economy and withdrawn now under monetary policy, and so as we stabilize, our instructions to our team are to grow our deposit base a little bit faster than economy. That means you have to price across the board to achieve that. And what -- if you look at the slide four or five where I showed you sort of the change, what you see is the wealth management business takes a little bit longer because those clients have more investment cash with us, not what you're thinking investment accounts puts in their money, how they think about cash, they don't need for daily cash flow, and they move that around. That largely is over. And if you look in the last four or six weeks, we're seeing those deposits in that business bounce around the $280 billion level, not a lot of movement. And it'll keep moving in and out depending on customers paying down their income taxes, taking more risk in the market and all those things, but the deposit pricing changes that we made to ensure that they were at a platform they could grow, having been as high as $350 billion down to $280 billion were made in the quarter and all through the P&L. Glenn Schorr Okay, fair [Technical Difficulty] on advisory. Thanks. Brian Moynihan Sure. Next question. Operator We'll take our next question from Jim Mitchell of Seaport Global. Jim Mitchell Hey, good morning. Maybe just a quick follow-up, and I don't need to beat a dead horse on NII, but can we just -- can you just help us think through the puts and takes on, you have rate cuts at the end of the year. Forward curve implies more next year. As that cumulative impact starts to hit next year. I guess, what gives you confidence that this is sort of a trough? What are all the puts and takes that we should think about in how we model the NII for next year when we think about the forward curve and that impact? Alastair Borthwick Jim, I think this bridge probably is all the right inputs for any given year. I mean, we've chosen to do it for 2024. We've already -- we've always resisted going out too far for the very simple reason that there's so many variables and they start to multiply with one another. If you think about even the rate cut one here we're using the three cuts, September, November, December. If I did this as of Wednesday of last week, there would have been two. Earlier in the year, there were six. So, since we don't know what that path looks like, it's very challenging then to provide guidance for '25 at this stage. What we're laying out here is, these are the component parts. We're going to get some benefit from fixed rate asset pricing over time. We're going to get some benefit in the immediate term from the BSBY cessation and that leading back into the P&L. As that rolls off, we'll get benefit from cash flow hedges repricing. And then we use the forward curve same as you do for the rate cuts. We benefit a little bit from global markets liability sensitivity. And then that final piece is the piece that we're trying to drive in terms of organic growth. We're trying to drive this loan growth, we're trying to drive the deposit growth. And as Brian pointed out, it's been a pretty unusual period in history, where we've had an enormous change in the rate structure and in the fiscal stimulus and the effects now fading away to something more normal. But that last box will come down to your assumptions versus our assumptions. And we will update you as we go through the next couple quarters, and we'll give you a better sense towards the end of the year. Jim Mitchell Okay, that's all fair. And maybe just on the growth piece, maybe deposits seem to have bottomed for you guys in the second quarter of last year, you've had good growth, I think Brian pointed out, even with the tax headwind this quarter, you grew sequentially. So good performance, but still pretty modest. How are you thinking about the growth trajectory from here, I guess, as we think about, does it accelerate with rate cuts in your view? What are the dynamics are you thinking about that's returning to the historical kind of mid-single-digit deposit growth within BofA and the industry? Alastair Borthwick Well, I think Brian covered slide four, that top left chart gives a sense for what's going on with the growth, that's average growth over time there. We've had four quarters in a row, so we feel good about that part. Q2 does tend to be a slower quarter just with all the tax payments. So we think deposits will do better over time, particularly as we get past peak Fed funds. We feel like the pricing and rotation, you can sort of see it in our numbers, they're slowing. So we're getting towards the end there. We're getting towards the end of QT. So we're not quite finished on all of those things yet. I'd be careful about getting too excited about deposit growth, but we feel like we're doing okay so far, we just got to keep driving that. Jim Mitchell Okay, thanks for taking my questions. Operator We'll take our next question from Mike Mayo of Wells Fargo Securities. Mike Mayo Hi, I'll start with a simple question. You mentioned loan spreads have improved. Why is that? Where is that? Do you expect that to continue? Alastair Borthwick Loan spreads have improved for us, Mike, over the course of the past I think it's now eight or nine quarters. It's primarily in the commercial businesses. And it's largely because we have to price the balance sheet for the returns that our shareholders expect. And that's true, I think, for the industry. And we've been quite purposeful in that regard. So we've tried to balance price spread and growth over the course of time, but it's primarily a commercial phenomenon at this point. And I would expect that to continue for the foreseeable future, but it's a competitive environment, we've got to see. Mike Mayo Okay. You gave us slide 10, a lot of details there. You talked about September rate cuts, the fixed asset repricing, securities repricing, loans repricing, mortgage and auto, swaps maturing, November, we see fixed cash swaps and whole litany of stuff. But I think when you put it all together, what it's led to is a net interest margin of only 1.93%. In fact, I think your yield on your assets is below Fed funds right now. So would you agree that you're under-earning with that NIM of 1.93%? And I know I've asked this question before, but you always have to mark-to-market. What is a normal NIM? I mean, you were 2.5% in 2017, you were 3% in 2004. And I know the composition has changed and everything, but what's a normal NIM? And what do you think is a normal return on tangible common equity through the cycle? Thanks. Alastair Borthwick So I'd say right now in terms of the 1.93%, we feel like we are under earning. We feel like that number is going to go up over time. It'll go up as net interest income goes up. But additionally, I think the balance sheet is likely to stay kind of flattish here. So the numerator is going to grow, the denominator is going to stay pretty tight here. So we think we're under-earning there. We think through a cycle, we got to get back to a more normal number like 2.30-ish over time. That takes a while. It's a grind, Mike, quarter-after-quarter, so that's where we're headed. And in terms of return on allocated capital, right now we're right around that 14%. We want to be 15% or higher for our shareholder. A lot of it is because we've accrued an awful lot of capital over the time -- over the course of time in advance of any potential capital changes. And the other final thing I'll just remind you is, we're a little different than some of the regional banks in that we've got an enormous global markets business. And that obviously makes an impact on the headline NIM number. Mike Mayo Okay. And then just, I wasn't clear, you said net charge off in the second half should be less than the first half. And I wasn't sure if that related to cards or I wasn't sure what you meant by charge off. Brian Moynihan Mike, that was me. And basically what I'm saying is you plateaued in terms of the delinquencies, which means the second-half is pretty well determined, as you know, because it's just a march from [36 to 90] (ph) to 180. And it'll be -- the charge off rate will be flattish. We're kind of back to normal 3.80% or so. We underwrite to actually have a higher charge off rate, quite frankly, in that intolerance, but that 3.80% is kind of where we see it since 3.80%. Mike Mayo Okay, so credit card charge off should flatten or decline in the second-half relative to the first-half? Brian Moynihan Exactly. Yes, remember, if you think about all the charge offs, that's not -- that's the dominant part of it on the consumer side by a lot. And then the commercial, we spoke to the question of CRE office, which has been dropped quarter to quarter. We expect the second-half to be better also. Mike Mayo All right. Thank you. Brian Moynihan Yes. Operator We'll take our next question from Steven Chubak of Wolfe Research. Steven Chubak Hi, good morning. Alastair Borthwick Good morning, Steve. Steven Chubak Good morning, guys. So I wanted to ask just on -- just building on some of the NIM questions from earlier, a lot of that's been focused on asset repricing, both loans and securities. I was hoping you could speak to the opportunity to potentially optimize some of your higher cost funding. And just given multiple sources of NIM improvement, looking beyond '24, how should we think about the pace of NIM build as we -- I know it's a longer timeline to get to the 2.30 to 2.40, but just how to think about the expectations around the NIM trajectory beyond '24? Alastair Borthwick Well, your first point is a question of can we pay down some of the higher cost securities? The answer to that is yes. And that would be an expectation of ours as part of this. We've got some shorter dated CDs that can roll off. We can replace those or not. We have shorter dated debt. We've taken our long-term debt footprint down as we've continued to build the strength of the company. So there's a lot of different ways. It doesn't have to be securities reinvestment. It can be paying down higher cost liabilities as well. So we've got a lot of different ways that we can use, quote, the reinvestment, if you like, around the fixed rate. And then what was the second -- the second question was over what time period we expect to build? Steven Chubak It's really about the NIM trajectory beyond '24. Alastair Borthwick Yes. So, look, we're obviously on it right now. We feel like this is the trough. We're trying to build it from here. We'll make meaningful strides on that through 2025. That's where we're going. Steven Chubak Great. Thanks for taking my questions. Alastair Borthwick Welcome. Operator We'll take our next question from Betsy Graseck of Morgan Stanley. Betsy Graseck Hi. Good morning. Alastair Borthwick Good morning, Betsy. Brian Moynihan Good morning, Betsy. Betsy Graseck So, yes, another question on NII. Alastair, I did -- I think, hear you correctly when you said that as you go into the second-half of '25, there's going to be incremental benefits coming from swap roll-offs. Did I hear that right? Alastair Borthwick Yes, that's correct. Second-half '25. So as we get closer, we'll be able to give you some kind of bridge like this that allows you to see what that looks like. But it's just -- it's a year out right now. Betsy Graseck Yes, for sure. But I'm just wondering, is there anything that's -- like, I guess what I just would like to understand a little better is how the swap book is impacting slide 10. And then is it gradual into the second-half of '25 or is it a switch on in 3Q? Just understand how the swap book is playing into this thing. Alastair Borthwick Yes. The -- yes. So the part that's important for slide 10 around the second half of this year is just the BSBY piece. It's not from cash flow swaps. Any cash flow swaps we have that roll off in the course of the next 12 months really, they're all kind of current coupon-ish, because anything that we did there was to do with LIBOR cessation or whatever. And so, they all got re-coupons. So I wouldn't worry about that. In the second-half and onwards, some of the older, longer-dated things, they've got the lower coupons. So that's when you know the BSBY number over time will disappear, but in the second half of '25, the cash flow number will begin to appear. So -- and we'll give you a sense for what that looks like over time, Betsy. Betsy Graseck Okay, got it. And then on the far right-hand side of slide 10, you've got the yellow box, $50 million to $200 million. Could you just give us a sense as to what's the inputs to the $50 versus the $200, just so we can be able to track it as we go through the rest of the next two quarters? Alastair Borthwick Yes. We're essentially using four variables. We're thinking, what will the loan growth be. What will the deposit growth look like. What will be the rotation between non-interest bearing and interest-bearing, and what will be any pricing changes we need to make, right? Then rotation pricing are pretty closely interlinked, that you could even call them the same thing. If you use more conservative numbers, you get towards the lower end. If you use slightly more constructive numbers, you get towards the higher. I think the point we're trying to convey is this last part, this yellow box is always the unknowable at the beginning of the quarter, where we're projecting. The pieces in the green, we kind of feel like we know what those look like. That's pretty predictable at this point, but we've got a little more certainty around that. So, the teams, we got 213,000 people, who are working really hard to try and make that dotted yellow box at the higher end. But obviously, it depends on our assumptions and it depends on our actions. Betsy Graseck Super. Thank you so much for the color. Operator We'll take our next question from Erika Najarian of UBS. Erika Najarian Hi, good morning. Just my first question is trying to square, what you're telling us on the net interest income trajectory in the setup versus your disclosure. So, Alastair, you told us about, as a response to Glenn's question, the benefit from fixed asset repricing, cash flow hedges repricing in the second-half of '25. And when I look at table 40 from your queue, in both a parallel shift and a steepener scenario, down 100 is negative to net interest income? Is it because this is a 12-month look and like you pointed out, in the second-half of '25, you have underwater cash flow hedges that are rolling off. In other words, as we go through 2025, do you get less asset-sensitive? And additionally, what is the notional on those cash flow hedges that you're talking about? Alastair Borthwick Yes. So the asset sensitivity that we disclose is meant to give a sense for what happens if nothing changes, it's totally static. So that's one difference. Number two, it's off of the future curve. So it's a 100 above whatever or below whatever the future curve is. So, I think it's a really helpful thing for sort of short-term moves and rates. Like take, for example, that orange box on page 10, it's helpful for something like that, but it's less helpful in terms of a predictor of where 2025 NII would be, because there's so many other inputs, Erika, over time. Erika Najarian And just what's the notional of the cash flow hedges that you're referring to? Alastair Borthwick Over time? Let's say, about $150 billion -- about $150 million. Erika Najarian And how much of that starts rolling off in the second-half of 2025? Alastair Borthwick Well, I think about it like this, you can almost think about it like it's like $10 billion or so every quarter. It's just that the ones that roll off for the first -- next 12-months, they're all kind of current coupons, so they won't really have any impact. Once you get into the second-half of 2025, they're a little bit lower rated. So that's when you begin to get some benefit there. And then I think probably Lee can give you more of the details following. Erika Najarian Got it. And if I could just slide in one more question on the normalized NIM, Q3 and Q4 clearly is much higher than where you are now. Alastair, you mentioned we should assume a flattish balance sheet, but I think I had conversations with the company before in that half of that path between 19-ish to [2.3 to 2.4] (ph) has to do with balance sheet efficiency. And I'm wondering if you could carry out the balance sheet efficiency with and keep your balance sheet flattish? In other words, you know, obviously what the market is going to do is take your earning assets today and you know, apply two, three, five and say, okay, over time, whether it's '26 or '27, this is what BofA can earn under a normalized curve? I'm wondering if that's the right math to do, or should we expect some shrinkage of the balance sheet if you can -- that's part of the path for? Alastair Borthwick Yes. I think what will happen is the underlying growth of the company will still be there, but we have some things that we know, just like Steve asked that question, is there any higher rate, shorter-dated stuff you'd like to pay off? Yes, there will be overtime. So I think we've got some ability to almost like self-fund the first $100 billion, $150 billion of growth in terms of earning assets. So that's why we're saying that'll keep the denominator down while we're growing the numerator. Erika Najarian Okay, thank you. Operator We'll take our next question from Ken Usdin of Jefferies. Ken Usdin Hey, thanks. Good morning. Hey, Alastair, I just wanted to ask you a little bit more on the securities portfolio side, because you also have $180 billion or so of pay-fixed swaps on the AFS book. And so, we know about the HFS -- HTM maturity schedule, but how do you look at that AFS book and how much are those pay-fixed swaps currently in the money and kind of like how you're just thinking about that side of the portfolio as well? Thanks. Alastair Borthwick Yes. Just remember, those are received fixed. So remember that there -- remember that is when we put the AFS in our portfolio, it's so that we've got a group of securities that are sitting there. They're typically treasuries. We swap them to floating, so that they look like they're cash as far as we're concerned. We don't have to worry about -- in fact, then to regulatory capital flowing through. And they just to us, they just look like cash equivalents. So that's how we think about it, Ken. Ken Usdin Okay. And then just how do you manage that going forward with regards to, like the rate forecasts? Do those come off as the securities book matures or? Alastair Borthwick Well, I mean, it's less of an interest rate call for us. It's more of going back to this concept of we've got $1.9 trillion of deposits and we've got $1.05 trillion of loans. So we've got $850 billion of excess. So when the excess comes in, we can do a variety of different things. We'd love to put it in loans, but that's always our first -- that's our first love. But in the absence of that, we're going to put it in cash or we're going to put it in available for sale, probably swap to floating for the most part. And we can choose to put things in hold to maturity if we choose to. But obviously, right now, we feel like we want hold the maturity just continuing to pay down. That's what's been happening over the course of the past 11 quarters. We're just going to keep going with that. So no particular changes to our philosophy around available for sale. Ken Usdin Okay. And a quick one on expenses. I believe you said that costs are kind of hang in here at around the $16.3 that was reported. And so just kind of any color on puts and takes here, just is that better kind of revenue-related comp against your ongoing efficiencies? And just how do you think about longer-term expense growth again? Thank you. Brian Moynihan Sure, Ken. If it -- I think honestly, the second quarter is sort of emblematic if you think about last year's second quarter. And this year's second quarter, we went from -- we went up by $300 billion -- $300 million, excuse me. As Alastair said, $200 million was just wealth management incentive comp and other growth was really other incentive comp. So the idea, the pressures we face now are really more due to fee growth in the businesses, which typically have a tighter correlation between fees and expenses and incentive comp related to those fees. So that -- as Alastair said, that's not a -- that's a good expense growth is what you want. It does grow and it grows at a good rate. Headcount is basically been bounced around relatively flat. We're 212 million this quarter and even adding a bunch of summer teammates. We were 215 last year. This quarter, the same summer teammates included. So managing headcount, redeploying people. We have the huge -- the cleanup stuff going on. We have the new initiatives going on, or freeing up work and moving it over. So we feel good about managing the company and that's against inflation rate wages at 3% or 5% going on inflation in all the services we buy in the third-party markets, obviously, that the world experiences. So we feel good about how we're managing expenses. The key is pretty simple. As you -- all the revenue side equation that, yes, Alastair has been talking about their colleagues on NII and stuff is that lifts and expenses stay relatively flat, you start moving towards positive operating leverage. We were minus 1% or something like that this quarter, kind of hanging in there. And we'll expect that to go back to the five-year track we had all the way up until the pandemic hit and things got thrown in the sun. Q - Ken Usdin Thanks, Brian. Operator We'll take our next question from Gerard Cassidy of RBC. Q - Gerard Cassidy Hi, Brian. Hi, Alastair. Brian Moynihan Hi, Gerard. Alastair Borthwick Hi, there. Gerard Cassidy Brian, you talked -- and Alastair, both of you talked about the excess deposits. I think it was Slide 22 you pointed to. Can you share with us as you go forward and assuming the Federal Reserve does cut interest rates, I know you put, I think, free Fed fund rate cuts in your Slide 10. But as we go out into the end of '25, the forward curve is calling for obviously more rate cuts. Could you tell us how you expect to price your deposits as rates continue to follow with this excess deposit level? Can you be more aggressive in lowering your deposit costs? Brian Moynihan Yes. I think that's very business and more importantly, customer-specific views, Gerard. So we think of our deposit strategies in the context of how our customers utilize our services. And so, if you think about the parts that priced up in Global Banking or the investment-related cash in the Consumer business and Wealth Management, that will come back down as rates come, because the short-term equivalents come down, some is absolutely mechanical because it's actually priced to meet a money market fund equivalent that will happen. And so, yes, I think if you think about us being all in, if you look on that slide at 203 basis points, there'll be some pickup as rates come down in those higher things. The zero interest balance accounts are low-interest checking. You know, they don't really move because there's zero interest or low interest, so they'll be kind of static, but they're still extremely valuable in the current context. So when you think of all the consumer, I think 60 odd basis-points or something, that's driven by the fact that we have $40-odd million transactional primary checking accounts that is growing at $1 million a year, meant, multiple years in a row, $900,000 a million a year that are maturing from $3,000 up to $7,000 or $8,000 in balances as people mature the relationship with us, that's where the tremendous value in the deposit base this company goes. And so if you think about $1.91 trillion having grown $100 billion almost from the trough, you think about it growing linked-quarter, multiple quarters in a row, you think about even as we look now to buy the balances above that amount. Yes, that -- those are good dynamics. So we think about it, but it will move. But if you remember, part of our deposit pricing is never going to move to zero. Gerard Cassidy Right, right. No, no doubt. And those are the golden deposits. And one other question on slide 10 and also I think if I recall your first quarter queue, you guys indicated you were asset sensitive. I would assume that this slide 10 also shows that with the three rate cuts, Alastair, what would it take to move to a more neutral position on the balance sheet or even a liability-sensitive position should the Fed really get into a rate-cutting environment? Alastair Borthwick Yes. So this is -- this shows that we're asset sensitive. That's why the red box obviously is bigger than the green box. It's the market specifically that's liability sensitive. So we're still asset-sensitive, Gerard. What it would take for us is either we can have a lot more rotation into interest-bearing or we could buy some short-dated duration, fixed-rate. So those are the two alternatives. And if you look at the course of time, if you were to go back to our queues over time, you'd see that we've become less and less rate-sensitive overtime. We've really narrowed the corridor of whether rates go up by 100 or down by 100, what could that outcome look like? Narrowed that pretty substantially over time because we're trying to lock in rates here, recognizing that NII is up $4 billion or $5 billion over the course of the past several years per quarter. Brian Moynihan Yes. The last thing I'd say, Gerard, for a person who's been around this business as many years as you have, this has been a very abnormal rate environment for the last 15-years or so. And if you get to where you have a one Fed funds rate 3.5, which is what our experts predict, it sort of stops out at the ability to bring the asset sensitivity tighter and tighter is there because you actually have room to move down without hitting zero floors and stuff. So there's -- and so stability during time periods of which the rate environment doesn't flip around. And then secondly, a higher nominal rate environment allow you to manage to that outcome because part of the other outcome for us is just as rate -- the rate structure is nominally very low is the zero floors kick-in and that creates a amount of sensitivity that over time will go away if rate structure is higher. That makes sense to you? Gerard Cassidy Yes. No, it does. Thank you. And just Brian or Alastair, one last quick question. I noticed in slide 25, your home equity loan balance has actually increased. I think that's the first time in maybe over two years or three years. Was there a new program or what are you seeing that drives that? And that -- and should that or can that continue as we go forward into '25? Thank you. Brian Moynihan Yes, I think it just reflects that the people have locked in low-rate loans and now that they want to borrow. It's an expensive view because they've got a fixed-rate mortgage loan and they've got a home equity sitting on top of why wouldn't they use it. I like it for it was only two years. It's been four years or five years since that balance went from $30 billion started declining, so it's good to see. I'll note at the bottom of that page, if you look at year-over-year mortgage production $5.7 billion and $5.9 billion and you look at home equity line production, which is new originations in the boxes, solid. But it is nice to finally see that the actual balances have stabilized and we'll see -- they're kind of flattish, they're not really growing, but it's nice to see them not just keep coming down and hopefully, they'll start to be utilized. Our expectation would be, they will be as consumers over time want to take out part of the equity in their home at a rate that is reasonable, but doesn't require to refinance the whole first. Gerard Cassidy Great. Thank you, again, Brian. Operator We'll take our next question from Vivek Juneja of JPMorgan. Vivek Juneja Hi, thanks for the questions. Just a little color on non-interest-bearing deposits. When you look at an average basis, the decline has clearly slowed sharply. Period end was down at a faster rate. Is that just the noise around end of 1Q? Or what are you seeing as you look sort of month-by-month? Is that truly slowing or yes -- and talk to it a little bit by customer segment, if you can, please? Alastair Borthwick Yes. I think, Vivek, you're catching two things. First one is it is slowing, that rotation is slowing and we would expect that because at the end of the day, this is mostly cash in motion, it's transactional accounts, that's why it's non-interest bearing. And the answer why it's a little different this quarter is because of the seasonality of tax payments. For anyone who has a big tax payment due, they frequently just allow it to, they may pull it out of their brokerage account, put it into their -- they may put it into their non-interest-bearing and then they're wiring it out from there. So that's, again, an example of money in motion, but that's what's going on this quarter. Vivek Juneja A quick one, Visa B derivative gains, did the -- did you have anything in your equity derivatives trading revenue this quarter? Alastair Borthwick Nothing to highlight, nothing to note. That's a position we sold years ago and anything that's happened with Visa would just unwind on the balance sheet. We've recycled it, so it shouldn't have any impact to revenue. Vivek Juneja Thank you. Operator We'll take a question from Matt O'Connor of Deutsche Bank. Brian Moynihan Good morning, Matt. Matt O'Connor Good morning. How are you guys thinking about kind of targeted capital levels going forward? Obviously, we're still waiting for final rules. Maybe there's a little more volatility in your SCB than you would have thought, but you still got a nice buffer? And then I guess one last piece I was thinking is the remixing of the balance sheet that's been commented kind of throughout this call over time probably causes a little creep in RWAs, right, like loans higher than, say, securities. So lots of excess capital, but some puts and takes and how are you thinking about it between now and when we get final guidelines? Brian Moynihan The first thought, I think we always want to use the capital to grow the business. So if we need to use it to support RWA growth for loans or something, that's a good outcome and that's what we want to do first. Second, we maintain the 11.9% quarter-to-quarter with a little bit RWA increase, I think that would be emblematic. And we bought $3.5 billion, paid out $1.9 billion in dividends. So you'd expect that kind of to continue on in terms of that basic idea of we don't need a lot of capital to grow, because the RWA demands are met with a fairly straightforward amount. We're earning a nice amount of dollars and we'll deploy it back in the dividend and the buybacks. Well, our job is to maintain -- our view is we will maintain a 50 basis point type of management buffer to whatever the requirements are. The volatility, well, there's a whole different discussion on that in terms of the wisdom of that. But the reality is the volatility is absorbable, because you have time to plan into it and get done within a race we've seen. So whether we agree with the volatility or not, we've easily absorbed it and the new rule is coming out. We'll see what happens and we'll adjust. But just think of this as basically a requirement of 10.7 under the new SCB plus 50 is 11.2. Maybe you get a little tighter if you feel you got great insight to what happens next year. And then I think the finalization of all the three will come through and we'll see what that is and see how that all correlates to the various aspects. But we feel good about where we are and expect that all current earnings are basically available to support the growth we're talking about in the current economic environment. That's relatively modest need, but really the rest of it just goes plowing back to you. Matt O'Connor Okay. And then just to summarize that, I mean, do you think about bringing down the 11.9 to 11.2 kind of in the near term or to make it obvious, like, wait -- that's a little bit more theoretical and wait for the capital rules to play out? Brian Moynihan I think we just -- we need to see how the next 60, 90, 120 days play out. We heard a lot of discussion about the timing of a re-proposal or not, et cetera. So we had a lot of flexibility and -- but we continue to focus on shareholder value creation and all of that. But I think we're in a critical spot for the industry in terms of learning the outcome of a lot of these things over the next short period of time here. Matt O'Connor Okay. Thank you. Operator That concludes our question-and-answer session for today. I'd be happy to return the call to Brian Moynihan for closing comments. Brian Moynihan Thank you, operator. Thank all of you for joining us today. Obviously, a lot of focus on NII, and we gave you the Slide 10 to give you the bridge. Alistair answered a lot of the questions, Lee's here to answer it. The key is to understand what's driving that, which is deposit performance, which is stabilized and starting to grow for like six quarters in a row now, loan growth very low, but just staying positive. Those are going to drive the value of this franchise, and that's going to grow with buyer customers. That's coupled with strong fee performance this quarter in terms of wealth management fees, investment banking fees, consumer fees, even growing global payment services fees and of course, the great work done by our markets team. So that leveled with flattish expenses, gives us a chance to start driving operating leverage again in the company. And that generates a lot of earnings, a lot of excess capital, and we put that back in your hands. So thank you for your time and attention. We look forward to talking next quarter. Operator This does conclude today's Bank of America earnings announcement. You may now disconnect your lines. And everyone, have a great day.

Morgan Stanley (MS) Q2 2024 Earnings Call Transcript

Glenn Schorr - Evercore Ebrahim Poonawala - Bank of America Mike Mayo - Wells Fargo Securities Dan Fannon - Jefferies Brennan Hawken - UBS Devin Ryan - JMP Securities Steven Chubak - Wolfe Research Gerard Cassidy - RBC Saul Martinez - HSBC Good morning. Welcome to Morgan Stanley's Second Quarter 2024 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chief Executive Officer, Ted Pick. Ted Pick Good morning and thank you for joining us. The firm generated $15 billion in revenue, $1.82 in EPS, and a 17.5% return on tangible in the second quarter. [Solid earnings] (ph) and demonstration of operating leverage completes a strong first half of 2024. $30 billion in revenue, $6 billion in earnings, and an 18.6% return on capital. In institutional securities, we're beginning to see the benefits from our continued focus on our world-class investment banking franchise, with revenues up 50% year-over-year, including a 70% increase year-over-year in fixed income underwriting. In institutional equities, we are back with a $3 billion quarter. In wealth, we posted margins of 27%, and across wealth and investment management, we've now grown total client assets to $7.2 trillion on our road to $10 trillion plus. Together, we delivered strong operating leverage. Further, on the back of the annual stress test results, we announced that we will increase the dividend by $0.075 for the third year in a row to [$0.925] (ph), reflecting the growth of our durable earnings over time. During the quarter, we built $1.5 billion of capital, and at quarter end, our CET1 ratio is 15.2%, 170 basis points above the forward requirement. Our capital position provides us the flexibility to continue to support dividend growth, support our clients, and buy the stock back opportunistically. The quarter also showed continued balance in both top-line and profitability across the major segments. Wealth and institutional securities produced $6.8 billion and $7 billion in revenue respectively, with earnings also roughly split between our institutional businesses and wealth and investment management. Our businesses are working closely together to maximize adjacent opportunities across the integrated firm. Across the investment bank, navigating changes in the cycle means being deliberate around risk management and, given geopolitical uncertainty, where we spend our time to deliver clients, solutions, and to capture share. In wealth management, we continue to focus on aggregating assets and delivering strong advice. In investment management, we are investing in secular growth areas, including customization and real assets. Year-to-date, annualized growth in net new assets and wealth management is over 5%, with another strong quarter of over $25 billion in fee-based flows. Strong fee-based flows support daily revenue, which on average continues to be about $100 million each day this year throughout and show the stability and continued growth of the wealth franchise. We are well navigating the continued uncertainty around forward rate path, geopolitics, and now the US Political cycle and expect those to be the themes for the balance of the year. We remain focused on our best-in-class talent and building out best-in-class infrastructure to support ongoing growth across wealth and investment management and institutional securities. I wanted to reiterate our strategy, which is clear to advise individuals and institutions around the world in raising, managing, and allocating capital. World-class execution demands that we deliver strong earnings and returns through the cycle, that we do so while maintaining robust capital levels, and that we deliver on a durable growth narrative across the segments. And then Morgan Stanley executes on this strategy in a first-class way [Blue] (ph). That's it in a nutshell. And finally, in reflecting on this weekend's assassination attempt, we share in the hope that in the months to come, we will as Americans, find ways to unify and preserve our better selves. With that, Sharon will now take us through the quarter in greater detail. Thank you. Sharon Yeshaya Thank you and good morning. In the second quarter, the firm produced revenues of $15 billion. Our EPS was $1.82 and our ROTCE was 17.5%. Results highlight the power and scale of our integrated firm. The resilience of the US economy and a more stable near-term outlook on rates supported conviction amongst clients. Institutional securities drove performance, led by strength and equity and a pickup in investment banking. Wealth management also delivered on our established strategy, reporting record durable asset management fees and strong fee-based flows. Together, improved confidence and higher client engagement along with our focus on prioritizing investments, yielded operating leverage, and profitability. The firm's year-to-date efficiency ratio was 72% benefiting from scale and reductions in our expense base. Year-to-date expenses benefited from lower litigation expenses, the absence of back office integration related costs and severance, as well as our dedicated effort to prioritize our current spend. On prioritization, we remain committed to client and asset growth, technology, and targeted investments to ensure robust infrastructure that supports growth and addresses ongoing regulatory expectations. Now to the businesses. Institutional securities revenues of $7 billion increased 23% versus last year, capturing the strengths of the integrated investment bank across US, and international markets. Higher activity in Asia contributed to results. Strong performance in institutional equity, as well as debt underwriting, demonstrate the breadth of our client franchise. In our markets business, opportunities unfolded on the back of global political events and macroeconomic data. Investment banking revenues were $1.6 billion. The 51% increase from the prior year was broad-based. We continue to invest in investment banking across talent and lending, broadening and deepening our global coverage footprint in key sectors, including financials, healthcare, technology, and industrials. These investments are beginning to have an impact as capital markets improve and activity picks up. Advisory revenues were $592 million, reflecting an increase in our completed M&A activity versus the prior year. The pre-announced M&A backlog continues to build and suggests diversification across sectors. Equity underwriting revenues of $352 million improved versus the prior year, driven by increases across most products, but remain below historical averages. From a geographical perspective, we brought a number of transactions to market in Europe and Asia, demonstrating the importance of having a strong global market footprint. Fixed income underwriting revenues were $675 million, well above five-year historical averages. Results reflect a meaningful pickup in non-investment grade loan and bond issuance, as tighter spreads and strong CLO issuance provided opportunities for refinancing. The investment banking backdrop continues to improve, led by the US, the advisory and underwriting pipelines are healthy across regions and sectors. Inflation data has continued to moderate, which has helped stabilize front-end rates and support boardroom confidence and sponsor reengagement. As buyers and sellers make progress to close the valuation gap, we expect that we are still in the early innings of an investment banking rebound. Subject to changes in [rate past] (ph) expectations and geopolitical developments, our integrated investment bank is well-positioned to service our clients. Turning to equity, we continue to be a global leader in this business. Equity revenues of over $3 billion, up 18% compared to last year, reflect strong results across business and regions. Higher client engagement, dynamic risk management, and strength in Asia all contributed to performance. Prime brokerage revenues were strong and increased from the prior year as client balances reached new peaks. Regionally, we witnessed higher client activity in Asia and seasonal patterns in Europe. Cash results increased versus last year, reflecting higher volumes across regions. Derivative results were up versus last year's second quarter as client activity was higher and the business navigated the market environment well. Further, the business benefited from corporate activity on the back of convertible issuances, additional evidence of the integrated firm at work. Fixed income revenues of $2 billion increased year-over-year. Macro performance was up versus the prior year. Despite lower realized volatility, clients were engaged around elections and political events in the quarter. Micro results improved year-over-year, driven by the growth of our more durable revenues as we continue to support our clients with financing solutions. Solid results in commodities were in-line with the prior year. Turning to ISG lending and provisions. In the quarter, ISG provisions were $54 million, driven by certain individual commercial real estate loans. Net charge-offs were $48 million, primarily related to two commercial real estate loans for which we had previously already taken provisions. Turning to Wealth Management. Wealth Management generated strong results generating revenues of $6.8 billion with record asset management fees. Our PBT margin continued to make progress towards our goal, demonstrating our ability to grow and generate operating leverage through the cycle. We are delivering on our differentiated, scaled multichannel asset gathering strategy. Wealth Management client assets reached $5.7 trillion. Moving to our business metrics in the second quarter. Pretax profit was $1.8 billion up year-over-year with a reported margin of 26.8%. DCP negatively impacted our margin by approximately 100 basis points. The margin demonstrates the inherent operating leverage of our asset gathering strategy. We are improving the efficiency with which we run the business. Asset management revenues of $4 billion were up 16%. That is more than $500 million in fees versus the prior year. It's driven by higher average asset levels and the impact of cumulative positive fee-based flows. In the quarter, fee-based flows of $26 billion were strong, marking the seventh consecutive quarter of over $20 billion, bringing the year-to-date fee-based flows to $52 billion. We are seeing a steady migration of assets from adviser-led brokerage accounts to fee-based accounts, evidence that investments in our client acquisition funnel are paying-off. Fee-based assets now stand at $2 trillion. Net new assets were $36 billion reflecting headwinds from seasonal tax payments. Year-to-date, net new assets are $131 billion representing 5% annualized growth of beginning period assets. Net flows will be lumpy in any given period of time and impacted by both the macroeconomic environment and business specific factors. We believe both tax-related outflows and increased spending, particularly among high net worth clients, impacted flows this quarter. Still our first half NNA growth remains solid. Transactional revenues were $782 million. Excluding the impact of DCP revenues were up 5% versus last year. The increase was primarily driven by higher equity-related transactions. Bank lending balances grew by $4 billion to $151 billion evidence that as the macroeconomic backdrop stabilizes, our lending capabilities can be met and can meet our diversified client needs. Total deposits of $343 billion remains stable, with sweep deposits down approximately $10 billion sequentially mostly offset by growth in CDs. Net interest income was down modestly to $1.8 billion reflecting the decline in sweeps, which was largely attributable to the seasonality of tax payments. The Wealth Management business continued to perform well, aggregating assets, generating fees and benefiting from scale and our differentiated offering, consistently earning approximately $100 million a day. In the third quarter, we intend to make changes to our advisory sweep rates against the backdrop of changing competitive dynamics. The impact of these intended changes will be largely offset with the expected gains from the repricing of our investment portfolio. Therefore third quarter NII will be primarily driven by the path of sweeps, and NII could decline modestly in the third quarter. Importantly inclusive of these pricing changes, the rate path and our expectations around client behavior, we believe that NII should inflect higher as you look out into next year. Our Wealth Management strategy is predicated on gathering assets, meeting our clients' lending needs and offering advice. Asset management fees, the core of our Wealth Management strategy, continues to produce strong results reaching a record this quarter. Taken together, we delivered a strong margin, and we continue to work towards 30% margins over time. This quarter, we reached approximately $19 million in relationships across our three channels, and we continue to invest in order to deepen engagement. AI tools are helping advisers grow, and Wealth Management's partnership with institutional securities is increasing connectivity around our workplace offering. These investments have supported flows to our adviser-led channel, where average client duration is nearly 15 years and growing. The steady progress supports our journey towards $10 trillion-plus in total client assets. Turning to Investment Management. Revenues of $1.4 billion increased 8% from the prior second quarter, supported by higher asset management revenue. Asset management and related fees were $1.3 billion up 6% year-over-year, reflecting higher average AUM. Total AUM ended the quarter at $1.5 trillion. Performance-based income and other revenues were $44 million as gains were driven primarily by our infrastructure, US private credit and US private equity funds, reflecting our investments in secular growth areas. We recorded long-term net outflows of approximately $1 billion. We continue to see strong momentum across areas of strategic focus, namely Parametric. Consistent with current industry trends, we saw outflows in our active equity strategies. Our business is well-positioned given strength in areas of secular growth, such as customization, direct indexing and private alternatives. Our continued focus on global distribution combined with our deep structuring and product creation capabilities, should support incremental growth. Turning to the balance sheet. Total spot assets decreased $16 billion from the prior quarter to $1.2 trillion. Our standardized CET1 ratio was 15.2%. Client activity was strong and markets were open. We actively supported clients with a focus on velocity of resources. We also grew our CET1 capital by $1.5 [billion] (ph), reflecting strong earnings and continued capital distribution. The most recent stress test results reaffirm our durable business model and strong capital position. For the third year in a row, we announced a quarterly dividend increase of $0.075. Having generated over $3.85 of earnings per share and an 18.6% ROTCE year-to-date, we enter the back half of the year from a position of strength, with a robust capital base to support clients. Investment Banking pipelines are healthy and diverse, dialogues are active and markets are open. In Wealth Management, strong fee-based flows and the realization of operating leverage continue to demonstrate that our strategy is working. As capital markets become more active, we see opportunities for retail clients to engage and over time deploy their cash and cash equivalent balances into fee-based products. With that, we will now open the line up to questions. We are now ready to take any questions. [Operator Instructions] We'll take our first question from Glenn Schorr with Evercore. Your line is now open. Please go ahead. Good morning. Sharon, I appreciate all the upfront commentary on NII and Wealth. I wanted to drill down a little bit on what you said. So if you have $2 trillion in client assets in advisory and they keep a handful of percent of money in cash, that change you are making in rate paid on advisory -- on deposit in advisory accounts, can add up to like a good amount of money. So I wanted to get a little more sharper focus on what you said about 2025 NII? And then what exactly did you say the offset is on the NII? Thanks. Sharon Yeshaya Sure. Thanks, Glenn for the question. Actually, the portion that -- of the sweep balances that are impacted are as you mentioned, the sweep on the adviser-led channel, which is actually a small portion of the overall BDP that we disclose. So it's a small portion of that overall stack. And the increase in pricing is being offset largely by the repricing of the investment portfolio, right? So as things mature and that investment portfolio reprices, it's that change in the quarter amount that will offset it when we look ahead. Glenn Schorr And is there a particular reason why you only have to focus on repricing in this smaller portion than of the adviser-led channel, meaning not --. Sharon Yeshaya Certainly. Yes, what I would note there is that what we think about -- when we think about sweeps, broadly is mainly in transactional accounts. And in those transactional accounts, we have a wide range of choices and products for our clients. And so therefore, they have a lot of options as you think about their transactional accounts and brokerage. We'll move to our next question from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead. Good morning Ted. Just maybe sticking with NII and more importantly, on pretax margin, right? You had an extremely strong quarter. The stock's weaker this morning, and it has to do with the NII drag on wealth revenues and margin. So one I think, Sharon, your level of visibility into NII, lots of moving pieces around client behavior, maybe we get interest rate cuts. Just give us a sense of, if history is any guide on, what rate cuts would imply for client behavior? Or is there cash to assets that you are looking at that gives you comfort around NII potentially stabilizing post 3Q? And then maybe a question -- go ahead, yes. Sharon Yeshaya Yes. So why don't I take that, and then you can ask your second question. So you are pointing at a great point Ebrahim, as we look ahead through time, which was the second point of my guidance, is that when we look over the next year, we're seeing and we expect that we should see an inflection in NII. And that is predicated on the points that you mentioned, which is that as you see rate cuts, we would expect those balances to stabilize. Remember, outside of the tax quarter this particular quarter, we had been seeing a stabilization in those sweep deposits. So it's important to recognize that, that has been happening, reaching that frictional level of transactional cash. So that would likely continue. And then over time, you would also begin to see a benefit as rates to be cut, that BDP could actually see inflows, which you've seen from a historical perspective. But in addition to that, you have two other factors. One is the repricing of the portfolio, which I've also already mentioned. And the second piece has to do with lending. We look to continue to support our clients with lending products, and you are beginning to also see that potentially reach an inflection. This is the first quarter that we've seen this type of lending growth since the interest rate hikes began. We've seen now use of SBL products rather than just it being offset by paydowns. So those are all encouraging signs when we look ahead over the course of the next year for NII. Ebrahim Poonawala That's helpful. And I guess my second question was, just talking to investors, when we look at the 30% pretax margin target, the question is whether this is aspirational, whether the bar is set too high given how competitive the business is. So remind us in terms of your comfort level on the 30% pretax margin, to the extent you can, the time-line of when we get there? And when we get there, should that be a sustainable pace for the business? Thanks. Ted Pick Thanks, Ebrahim. Confidence level, high. If you take a step back, there are three pieces to the Wealth Management line; asset management, transactional, net interest income, as you know. In the asset management context, those are fees that are going to fee-based accounts, advisory-led. Those figures are up 4% sequentially and 16% year-over-year. That is fee-paying advice. Last quarter, the net new assets into that category was $26 billion. So fee-based flows -- that continues to be a growth piece of the Wealth Management store. The second cylinder is transactional. Transactional has been relatively weak, which is a link to general weakness in overall capital markets activity. And as you hear from our bullish commentary with respect to overall corporate finance activity in the investment bank, that will bleed through over time to the transactional line. And then third, the net interest income line. And as Sharon said, that will inflect and should inflect over the next year. You put those together, the scale of the business, the funnel, and the processing of $100 million of revenues a day that continue to grow, we are going to continue to achieve operating leverage. It's that simple. We're investing in E*TRADE. We're investing in the traditional advisor, and we're spending a lot of time top of house focused on workplace, which we think is an enormous opportunity across our corporate and sponsor base. In January, I had said 30% was the goal. We were in the mid-20s. We just printed 27% GAAP, 28% [Ex-CPE] (ph). It's a core stated objective. It will take some quarters to get there, but we intend on achieving it over time as we continue to grow assets and scale in the business. We'll move to our next question from Mike Mayo with Wells Fargo. Please go ahead. Hi, Ted, you've said this and Sharon repeated this that the industry is only in the early innings of an investment banking rebound. I have to say we've heard that for a couple of years and there now is this time, why is this time real? Do you expect the rebound to continue through the normally slow summer period before the election? How many years? What gives you confidence that this is for real? And how much is your backlog up quarter-over-quarter? Ted Pick It's an excellent question because you're exactly right that a number of folks have been calling for this and it has been sort of a delayed shoots if you will. But I think now we are seeing some tempering of the inflation prints and some normalization rates. We are also beginning along with that to see the market broaden-out. You of course have seen that over the last number of weeks. And I think, we can now expect broader corporate finance activity to quicken, whether that is across the corporate community or sponsors or other institutions. And the early sign of this kind of activity can be seen in the convertibles product. Global convertibles activity is up significantly. And as you know, on the margin ladder, it typically goes converts, IPO, and then M&A. In the context of bake-offs and the like, in some spaces we are seeing bake-offs running at triple plus the year-over-year rate that they were at for sectors and for some of our client groups. We've been seeing now the launch of traditional IPOs and we are seeing M&A pipeline kicking in. So corporate community, sponsor community, cross-border community, I think we are in the early stages of a multi-year investment banking-led cycle. If you believe the economy is going to hold up led by the US, you should expect then to see that if there is some regulatory normalization too across a whole bunch of the sectors that are typically most active. So we are quite convicted on this call. Mike Mayo And just one pushback, I mean with interest rates, you know, so much higher than they've been in the past. Don't you think that could get in the way when people are looking to borrow money for deals and the like? Is this a matter of simply waiting for rates to go lower? Or that's not going to get in the way? Ted Pick I mean it's a fair question. You've written about this in the context of what was the normal before financial repression, right? And I would take the view that in the context of the last 15 years, even some normalization, because I don't know that we are going to go into a full-blown rate cycle to your point, some normalizations of rates will still have you at 3% or 4% on the front-end and even some steepening potentially. So now we are just back to the old weighted average cost of capital of mid-90s in most normal economic periods. And the game will have to go on because there is just been some activity that has been suppressed by any kind of measure percentage of asset stock percentage of market cap. And the stickiness that we are seeing in the sponsor community, too needs to unglue. There is an enormous, as you know multitrillion-dollar stockpile between the two sides of sitting on inventory that needs to be released and then dry powder that's been raised. That will act as a competitive weapon against the competitive bid from the corporate community that has to contend with the reality of a smaller world with real sovereign risk and real cost of capital differences from one jurisdiction to another. So in short, unless you were to tell me we are going to go into a full-blown recession, which none of us can call, and that even if we saw rates normalize to something that is along the lines of the historic 4% on the front end, I think you will see over the next number of quarters and really over the next number of years, a resumption of more normalized M&A activity, with the key difference being that the financial sponsor community is now institutionally come of age. They have global reach. They can work the entire capital structure. They will work in concert with corporate partners, as you know. They don't actually have to act as a lone wolves, and they can work with us to finance the package. So it is not just the straight M&A advise or the straight IPO, it would also be bespoke offerings in the private public space, interest rate and foreign exchange hedging and the other ornaments on the investment banking tree that a couple of the leading global investment banks can bring. And this is really why, over the last couple of years, the extent we've done a so-called front-office hiring, it really has been to target several very high-quality investment bankers who typically have spent their entire careers at one firm and have decided to come to the Morgan Stanley platform. And we are seeing the fruits of that across industries. So I am quite bullish on it. Certainly take your point that has been a number of quarters on sort of on the promise. But I think as we get into 2025 and the election coming and then the election behind us, we should see that activity continue on a sustainable pace. Our next question is from Dan Fannon with Jefferies. Please go ahead. Thanks good morning. I was hoping to get a little bit more color on the flows in the quarter within Wealth, maybe the breakdown from the channels and contribution. Last quarter, I think we saw a Family Office be an outsized contributor. But hoping to get a little bit more color on where the flows were sourced in 2Q. Sharon Yeshaya Sure. I'll take that. It's -- we continue to see broad-based sourcing in terms of where those assets are coming from. In this particular quarter, as I mentioned the biggest offset and drag though, is really from taxes. So it's -- you still have a workplace accounts. You still have the advice-based account directly. You still have self-directed. All those places remain contributors. What continues in my mind to be most interesting though, isn't just the contribution that you are getting from the three various channels, but the fact that you have in the advice-based channel, it's not just coming from existing clients, but it's split with existing and net new clients. And some of those net new clients are also relationships that are being sourced from workplace. So I would not just directly focus on what channel is it coming from, but how are you seeing those channel in that interplay work, because that's actually the power of the differentiated platform. Once you have somebody who wants more differentiated advice for self-directed speaks to an advisor, that advisor sees net new clients, bring in assets, and then that's new acquisitions into the funnel and eventually into fee-based. So it's really the whole ecosystem that I would call your attention to, rather than just one isolated leg. Ted Pick Which is part of the reason that workplace is so important, because at workplace, I can continue to experience success amongst the corporate and sponsor community that has an affinity effect on the top of the house at those institutions in terms of their own wealth, and then potentially other products around it. So it can be an indirect sale where you aren't necessarily going directly to the prospective client via the FA, but you could actually work potential clients through the institutionalized effect of workplace where we do a great job educating on wellness -- financial wellness and then effectively institutionalizing ourselves by overseeing incentive comp through the Morgan Stanley Solium product and having succeeded on an MS at work mandate, which, as you know is a durable, sticky asset that effectively is seen by the entire employee base, you can start working your way up the funnel to the senior executives of that front. We'll move to our next question from Brennan Hawken with UBS. Your line is now open. Please go ahead. Good morning Ted. Thanks for taking my question. I'd like to just drill down a little more to give the second follow-up here on the repricing change that you mentioned in your prepared comments, Sharon. So the repricing that we've seen in the securities book has been slow. So I'm just kind of curious as to why you think that will help offset the repricing actions that you are taking on the deposit side. Is that because it will be a phased repricing, and therefore there is an ability to have the phased benefit in the asset side offset? And then just a nitty-gritty question on it, is the switch going to be to money fund sweep rather than higher yielding deposits, and then that way you can just slowly replace that funding as you see [fit] (ph)? Sharon Yeshaya So thanks, Brennan, I'll take that question. No, all the changes that we'll make will happen, are expected to happen in the third quarter. And so those different changes will be made, and they'll be based on various competitive dynamics. Brennan Hawken Okay. Got it. And then is the -- is this going to be focused on the advisory relationship similar to what we've seen from some other wirehouse competitors? And could you just -- is it the changes that have been announced by Wells and BofAs, is that what you mean by competitive dynamics? Or is there something else that I'm not aware of? Sharon Yeshaya That's exactly as I stated it, and it will just be limited as you said, to the sweeps that are dealt within the advisor-led channel. Our next question comes from Devin Ryan with JMP Securities. Your line is now open. Great. Good morning Sharon and hi. The first question, just on -- another one on the GWM flows. Sharon, you mentioned tax season is a factor, which you completely get. But then you also mentioned increased client spending. And I just wanted to drill into that, just whether that's something that could continue, whether it was seasonal or influenced by inflation? Just trying to understand that component of the impact on flows. Sharon Yeshaya Yes. I think that's a really interesting question. I did call it out. We've seen increased spending by higher net worth, and so higher income bands are certainly spending. We see that in the data alongside actual spending. We see that in purchases of homes. We see that in various tailored investments. So they are -- that cohort, so to speak, is using its cash in different ways and its various investment in different ways. So I do think that -- that's an interesting dynamic that's playing out. I know that others have mentioned it within their portfolios as well. It's only something we are seeing in our data. Devin Ryan Okay. Got it. Thank you. And then a follow-up just on the interplay between Investment Banking and Trading, and I appreciate the commentary on kind of the improving capital markets backdrop, which is great to hear and kind of the expectation from our end that there's going to be a lot more primary issuance in equities, maybe in debt as well as M&A picks up. So just trying to think about what that means for the trading businesses, equities and fixed income and whether you guys feel like we could maybe sustain around these really high levels or even maybe -- even the wallet could move higher just as you get a stronger primary issuance market? Ted Pick Well, I know that competitive set will naturally speak to areas where integration can be an asset. Here, we have -- we believe, something really special inside of our Institutional Securities business, our so-called integrated investment bank, which has been ongoing for -- now we are getting on seven or eight years. Now under Dan Simkowitz's direction. And this is a sort of critical facet of business strategy at our place because you have now the appropriate and important relationships that have been built across fixed income, equities and banking through our capital markets new issue business. You have those now having been compounded and advanced by the mobilization of some folks from one division to another. So there is real familiarity now with the work product. A lot of the work product, as you know, is not traditional vanilla IPOs. Yes. There are some on the horizon that are quite substantial, and we'd expect that to be an important part of the calendar. But there is also a more bespoke product, whether it be convertibles or products in the private area or products that effectively necessitate high-quality structuring and advice, and that can only be brought to the boardroom if you have world-class investment bankers who can lean on the expertise of their colleagues, not just in the new issue business but as appropriate, in institutional equities and in fixed income. And if you look at our fixed income business, for example and fixed income underwriting, you'll see that the share gains have been quite extraordinary. And that the year-over-year revenue number, I believe is up 71%. That speaks to the fine work that's been done by folks, not just in the debt capital markets business which is housed inside of our new issue business linked to banking, but also working closely with fixed income professionals, whether they are in the securitized products group and our commodities area broader credit or in our macro space, i.e., interest rate and foreign exchange. So when you get into the knitting of ISG, our Integrated Investment Bank, you see that part of the reason that we are bullish, not just to Mike's earlier question on the denominator, but also on our ability to increase the numerator, is not so much because we think there is a need to deploy a lot more capital. We will do so as appropriate when the markets demand it. But that we are able to get the kind of bespoke advice for clients that comes from the familiarity of our people, the quality of the advice that is differentiated and importantly, that it's global, so that we can bring it to the client base. So that is part of, I think, the secret sauce that we've been working hard on to generate above cost of capital returns, inside the investment bank on a stand-alone basis. And that obviously doesn't include even the synergies that we'd see across the Firm into Wealth and Investment Management. But your question is on the investment bank specifically. And I feel really good about the way it's structured, the leadership that we have within it, the experience set, and then our ability now to tap into this next cycle which will be different than the last one. Rates will be well higher than that of financial repression. We'll be toggling between some bouts of inflation and potential recession. We'll be dealing with the unpredictability going to not only our own cycle, US election cycle, but the world around us. But also the coming of age and the institutionalization of the financial sponsor community, where we have very strong relationships with that leadership group from top to bottom across the Investment Bank, Wealth and Investment Management. For our next question, we'll move to Steven Chubak with Wolfe Research. Your line is now open. So maybe just starting off with a question just on operating leverage within ISG. Year-to-date, the incremental margins are quite strong, just north of 80%. You spoke constructively on IB and Trading and inflecting positively. Just want to better understand what you believe is a sustainable incremental margin as activity steadily builds especially given some of the growth, at least from here, may skew a bit more heavily towards Investment Banking, which tends to be more compensable. Sharon Yeshaya So when you look at it, I would really focus Steve, on the efficiency ratio targets that we put for the whole firm, right? We think that the firm can run at or below the 70% over time through a durable cycle. The issue with your specific question, as you yourself highlighted is, it depends on where those different revenues are coming from. So there might be periods of time where it's higher BC&E related, there might be periods of time where you have different jurisdictions associated with it. But broadly speaking, the enterprise we've given 30% margins as it relates to Wealth and the sort of Wealth and Investment Management space, and then you have the ISG space. So by definition, if you're running at 70% efficiency ratio more broadly, you look for an entire enterprise to run at somewhere of a 30% margin. Ted Pick Yeah. The only thing I would add to that is, of course as you know, there is real seasonality in the business. Fixed income tends to have its strongest quarter, street-wide in the first quarter, Investment Banking typically in the fourth quarter. That's not every year, but that's typically out shakes out. Third quarter tends to be weaker in the summer months, and then it's sort of all about September. And obviously, this September will be one that will be driven in part by sentiment around the upcoming elections. So that's kind of the seasonality piece. The other is just the scale within the businesses, I'd be remiss again, not to sort of underscore the importance of having reached $3 billion in the equities business. This has been a leading business where we have been Number 1 and Number 2 for the last dozen years. And we see the clients are much in demand of our services across cash, derivatives and prime brokerage. And then connecting to Investment Banking, I think that business has too hit an inflection point again where they can continue to prosecute high-margin business through the cycle. All of this, of course is dependent on the economy holding up and general asset price levels. But given where we are right now, we are feeling good about that, too. Steven Chubak Thanks for that perspective. And just a follow-up on the deposit discussion. Both you and your wirehouse peers announced similar actions on deposits, which you noted, Sharon. You mentioned it was informed by competitive dynamics. But I wanted to better understand if there's any feedback you or your peers had received from regulators that prompted the decision? Because from our vantage point, the timing of these pricing actions at this stage of the rate cycle is simply difficult to reconcile? Sharon Yeshaya I'm sorry, Steve, we don't comment, as you know on regular matters. Steven Chubak Okay, fair enough. [I had to try] (ph) thanks for taking my questions. We'll move to our next question from Gerard Cassidy with RBC. Your line is now open. Please go ahead. Good. Thank you. You gave us good insights into your thinking about what the capital markets could bring, especially Investment Banking. And I think you touched on it in your comments with Ted, or maybe you Sharon, that the transactional numbers could benefit from a stronger ECM business. Can you then take the next second derivative and share with us from your experience of Solium, should we -- that business pick up the workplace channel, if more of these maybe private equity sponsor companies go public. Should the workplace channel see stronger revenues potentially in a stronger Investment Banking market over the next 12 months to 18 months? Sharon Yeshaya I think that's a great question. I know, Gerard a few years ago, you also asked me about different values of those assets associated with what the underlying is. I completely agree with you. As you have workplace assets rise, the value of those client assets rise. New corporations issue their employees more stock. They also grow their employee base. It should absolutely add participants. It should add new corporates. It will add new net flows. And now that we have all of that -- when you just have Solium, now you also have E*TRADE and workplace, and the platforms are integrated. So as those flows -- flow into an E*TRADE account, people can transact on that. And then, as Ted said, we can also offer financial wellness. So absolutely, it helps that ecosystem begin to work. Gerard Cassidy Very good. And just as a follow-up, Ted, if I take a step back, obviously you guys have done a very good job in the last 10 years of growing organically, but then complementing that growth with acquisitions. Once we get the Basel III end game final proposal, maybe some G-SIB relief, can you share with us, as you look out over the next two, three years -- is there any parts of the picture today that you'd like to enhance possibly with acquisitions? Or -- are you good where you are today? Ted Pick I will take the opportunity to sort of give a brief view on capital, if I could, Gerard, and link that to potential external opportunities. We anticipated or we believe it was possible that we could have a tougher annual CCAR test, and indeed it was. And what we've prioritized in potential uses of capital, above all things has been dividend policy. And as you know, we are increasing the dividend again to [$0.925] (ph), which at spot offers a 3.5% dividend yield. So that is the continued highest priority on use of capital. If you include of course, use of capital to inorganic opportunity. Second our clients. We have continued to lean in for clients, across the business segments as appropriate, and you see the operating leverage across the businesses, particularly across the investment bank. But we've also thought about the buyback opportunistically and have been buying stock back and returning capital. This past quarter, more than $2 billion between the dividend and the buyback, in a way that has been reflective of offering us that optionality. As we sit here today, we are 170 basis points above the buffer. And importantly, we continue to be in the 3.0 G-SIB buffer, which in one context would normally get much attention, but does get attention in the context of your question, which is sort of forward-looking strategic opportunity. It is worth noting if we can manage to stay at 3.0, assuming the framework holds through whatever Basel brings, that will be our buffer in 2026. So we are [170 basis points] (ph) over and we accreted $1.5 billion this quarter. External, i.e., inorganic, therefore, is something we can think about. It's just not something we're going to think about in the short term. The reality is we've got our forced hierarchy, the forced hierarchy is dividend first, investing in clients as appropriate, achieving operating returns against that second. And then third, the buyback opportunistically. Down the road, two, three, four years out, if opportunities come across the horizon, importantly after we have some definition around Basel and continued potential refinement of what we understand to be inside CCAR formulation, so just general regulatory uncertainty, sure, we might look at stuff. But I would tell you in the short-term, we're very happy with the acquisitions that we've made over the last 10 years, 12 years. And we are determined to generate operating leverage in each of the two major segments; Wealth and Investment Management and the Integrated Investment Bank, and then to obviously hit our efficiency ratios of 70% and the margins and returns that we've talked about. We'll move to our next question from Saul Martinez with HSBC. Please go ahead. Good morning. I wanted to follow-up on an earlier question on the outlook for your sales and trading businesses. You've kind of consistently done about into $18 billion to $20 billion of annual revenue in the post-pandemic period, in [fixed and equities] (ph). And right now, we have a backdrop where we're going to see rate cuts, markets are strong, issuance activity may pick up. At the same time, you have perhaps more competition from foreign banks who have lost share. So how do you see -- do you have a view on how you see the wallet evolving for these businesses, your ability to maintain or gain share in this backdrop? And then I guess, ultimately, do you think you can grow revenues here from a base that is materially higher than what it was pre-pandemic? Ted Pick I think the answer to that is that we would like to grow share that is durable. We want to grow share in businesses that are connected to the core client base, whether it be global asset managers, the leading alternative asset managers, private equity and private credit players that have come to the floor, and then our lead corporate and sovereign clients. There are products that can be offered. There are very few firms that can do that globally. We continue to have a world-class market space, for example in Asia, where I believe we have the largest equities business. We've been growing the business quite assiduously on the continent in the UK, where our senior management has been putting in a lot of time and attention. And as you know, we have a differentiated joint venture with our friends and partners at MUFG in Tokyo. So if you consider the global footprint of the firm -- in a world that continues to be equities-based. It continues to be an equities world. You see it in the asset price momentum in the US. You see now the potential for that to broaden to more names and more sectors. And that obviously gives opportunity for folks in the stock picking business for example, where we've been very strong traditionally in equities, to do the [cash rise] (ph) and prime brokerage suite that we offer. You could see continued uncertainty based on how the next administration handles the significant macro challenges facing the US, whether you'll see a steeper yield curve, where you'll see activity on the front and to the belly of the curve. That of course, offers all kinds of opportunities for the rates business. And connected to corporate catalyst activity, where, on an M&A acquisition, the acquirer may wish to inoculate themselves from rate or foreign exchange risk, and that's the service that we offer. Again, I like the idea of growing durably inside the integrated investment bank. I like the idea that we are working in sandboxes with the appropriate capital controls around that. But that we are allowing enough breathing space so that when our lead clients are looking to engage in a -- once in every few years catalyst event, that we can fully offer the entirety of the advice and financing spectrum to them on demand. So the answer would be to grow and grow responsibly. I'd like to think we can inch up the numerator along with the denominator, and then you would see that almost imperceptibly over the course of quarters and years. Saul Martinez That's helpful. Thank you. Just I guess a quick follow-up, related follow-up. The ROE, 14% in ISG in the first half of the year early on, as you highlighted, in Investment Banking cycle. Do you have a view on where the ISG -- Institutional Securities ROE can get to as the Investment Banking cycle kind of plays out? Is there a view on sort of what a normalized ROE would be here. Ted Pick We're still early. We're still early in the cycle. We're watching it of course. To the earlier question on when the green [shoes] (ph) come through on the high-margin M&A product, the reality of seasonality, the uncertainty of rate path, geopolitics, US elections, it's hard to put a pin on what the returns will be in a given forward quarter until we kind of see some normalization in those uncertainties, not to mention some of the regulatory stuff that we are dealing with as we speak, Basel namely. But yes, you're right to point out that we are seeing some real operating leverage in the Investment Bank. And over the course of a number of years, as we think about not just the integrated firm, but the returns generated inside of Wealth and Investment Management. And then we look at the returns inside the Investment Bank, we are measuring that. And we are looking to have that contribute to the overall sustainable 70% efficiency of the firm. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect and have a great day.

Earnings call: Morgan Stanley reports solid Q2 2024 earnings By Investing.com

Morgan Stanley (NYSE:MS) has announced robust second-quarter results for 2024, with significant growth in key areas of its business. The firm reported $15 billion in revenue and earnings per share (EPS) of $1.82, marking a 17.5% return on tangible equity for the quarter. Institutional securities experienced a 50% increase in revenue year-over-year, bolstered by a 70% rise in fixed income underwriting. Wealth management also performed strongly, with margins at 27% and client assets growing to $7.2 trillion. Moreover, Morgan Stanley declared an increase in its quarterly dividend, continuing a three-year trend of dividend growth. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Morgan Stanley remains focused on strengthening its business across all major segments. The firm's investments in talent, infrastructure, and AI tools are aimed at supporting its ongoing growth, while it continues to prioritize dividends and shareholder returns. Despite certain market uncertainties, Morgan Stanley is poised to leverage opportunities in investment banking, equities, and rates, aiming for sustainable efficiency and responsible growth. The company concluded the earnings call with a strong sense of confidence in its strategic direction and financial health. InvestingPro Insights Morgan Stanley (MS) has demonstrated a strong financial performance in the second quarter of 2024, as evidenced by the robust growth in revenue and earnings. This success is further underscored by key metrics and insights from InvestingPro. InvestingPro Tips highlight that Morgan Stanley has maintained a notable track record of dividend payments, having raised its dividend for 10 consecutive years, and has continued this for 32 consecutive years. This consistency reinforces the company's commitment to shareholder returns and financial stability. Moreover, Morgan Stanley's solid footing in the Capital Markets industry is reflected in its performance, with analysts predicting profitability for this year, a testament to its effective business strategies and market position. InvestingPro Data offers a deeper look into the company's financial health. With a Market Cap of $171.97 billion and a P/E Ratio of 19.29, the firm is valued favorably in the market. Moreover, the company's revenue growth of 2.92% over the last twelve months as of Q1 2024 indicates a steady upward trajectory. The Gross Profit Margin of 86.5% highlights the company's efficiency in generating income from its revenues, which is crucial for sustaining its growth and profitability. For readers interested in further insights, there are 11 additional InvestingPro Tips available, which can be accessed at: https://www.investing.com/pro/MS. These tips could provide investors with a more nuanced understanding of the company's financial outlook and investment potential. To explore these insights, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, enhancing your investment research with comprehensive data and analysis. Morgan Stanley's continued focus on dividends, coupled with its strategic investments and market leadership, positions the company well for ongoing success and aligns with the positive outlook presented in the earnings call. The InvestingPro data and tips serve to further substantiate the firm's robust financial health and promising future. Full transcript - Morgan Stanley (MS) Q2 2024: Operator: Good morning. Welcome to Morgan Stanley's Second Quarter 2024 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chief Executive Officer, Ted Pick. Ted Pick: Good morning and thank you for joining us. The firm generated $15 billion in revenue, $1.82 in EPS, and a 17.5% return on tangible in the second quarter. [Solid earnings] (ph) and demonstration of operating leverage completes a strong first half of 2024. $30 billion in revenue, $6 billion in earnings, and an 18.6% return on capital. In institutional securities, we're beginning to see the benefits from our continued focus on our world-class investment banking franchise, with revenues up 50% year-over-year, including a 70% increase year-over-year in fixed income underwriting. In institutional equities, we are back with a $3 billion quarter. In wealth, we posted margins of 27%, and across wealth and investment management, we've now grown total client assets to $7.2 trillion on our road to $10 trillion plus. Together, we delivered strong operating leverage. Further, on the back of the annual stress test results, we announced that we will increase the dividend by $0.075 for the third year in a row to [$0.925] (ph), reflecting the growth of our durable earnings over time. During the quarter, we built $1.5 billion of capital, and at quarter end, our CET1 ratio is 15.2%, 170 basis points above the forward requirement. Our capital position provides us the flexibility to continue to support dividend growth, support our clients, and buy the stock back opportunistically. The quarter also showed continued balance in both top-line and profitability across the major segments. Wealth and institutional securities produced $6.8 billion and $7 billion in revenue respectively, with earnings also roughly split between our institutional businesses and wealth and investment management. Our businesses are working closely together to maximize adjacent opportunities across the integrated firm. Across the investment bank, navigating changes in the cycle means being deliberate around risk management and, given geopolitical uncertainty, where we spend our time to deliver clients, solutions, and to capture share. In wealth management, we continue to focus on aggregating assets and delivering strong advice. In investment management, we are investing in secular growth areas, including customization and real assets. Year-to-date, annualized growth in net new assets and wealth management is over 5%, with another strong quarter of over $25 billion in fee-based flows. Strong fee-based flows support daily revenue, which on average continues to be about $100 million each day this year throughout and show the stability and continued growth of the wealth franchise. We are well navigating the continued uncertainty around forward rate path, geopolitics, and now the US Political cycle and expect those to be the themes for the balance of the year. We remain focused on our best-in-class talent and building out best-in-class infrastructure to support ongoing growth across wealth and investment management and institutional securities. I wanted to reiterate our strategy, which is clear to advise individuals and institutions around the world in raising, managing, and allocating capital. World-class execution demands that we deliver strong earnings and returns through the cycle, that we do so while maintaining robust capital levels, and that we deliver on a durable growth narrative across the segments. And then Morgan Stanley executes on this strategy in a first-class way [Blue] (ph). That's it in a nutshell. And finally, in reflecting on this weekend's assassination attempt, we share in the hope that in the months to come, we will as Americans, find ways to unify and preserve our better selves. With that, Sharon will now take us through the quarter in greater detail. Thank you. Sharon Yeshaya: Thank you and good morning. In the second quarter, the firm produced revenues of $15 billion. Our EPS was $1.82 and our ROTCE was 17.5%. Results highlight the power and scale of our integrated firm. The resilience of the US economy and a more stable near-term outlook on rates supported conviction amongst clients. Institutional securities drove performance, led by strength and equity and a pickup in investment banking. Wealth management also delivered on our established strategy, reporting record durable asset management fees and strong fee-based flows. Together, improved confidence and higher client engagement along with our focus on prioritizing investments, yielded operating leverage, and profitability. The firm's year-to-date efficiency ratio was 72% benefiting from scale and reductions in our expense base. Year-to-date expenses benefited from lower litigation expenses, the absence of back office integration related costs and severance, as well as our dedicated effort to prioritize our current spend. On prioritization, we remain committed to client and asset growth, technology, and targeted investments to ensure robust infrastructure that supports growth and addresses ongoing regulatory expectations. Now to the businesses. Institutional securities revenues of $7 billion increased 23% versus last year, capturing the strengths of the integrated investment bank across US, and international markets. Higher activity in Asia contributed to results. Strong performance in institutional equity, as well as debt underwriting, demonstrate the breadth of our client franchise. In our markets business, opportunities unfolded on the back of global political events and macroeconomic data. Investment banking revenues were $1.6 billion. The 51% increase from the prior year was broad-based. We continue to invest in investment banking across talent and lending, broadening and deepening our global coverage footprint in key sectors, including financials, healthcare, technology, and industrials. These investments are beginning to have an impact as capital markets improve and activity picks up. Advisory revenues were $592 million, reflecting an increase in our completed M&A activity versus the prior year. The pre-announced M&A backlog continues to build and suggests diversification across sectors. Equity underwriting revenues of $352 million improved versus the prior year, driven by increases across most products, but remain below historical averages. From a geographical perspective, we brought a number of transactions to market in Europe and Asia, demonstrating the importance of having a strong global market footprint. Fixed income underwriting revenues were $675 million, well above five-year historical averages. Results reflect a meaningful pickup in non-investment grade loan and bond issuance, as tighter spreads and strong CLO issuance provided opportunities for refinancing. The investment banking backdrop continues to improve, led by the US, the advisory and underwriting pipelines are healthy across regions and sectors. Inflation data has continued to moderate, which has helped stabilize front-end rates and support boardroom confidence and sponsor reengagement. As buyers and sellers make progress to close the valuation gap, we expect that we are still in the early innings of an investment banking rebound. Subject to changes in [rate past] (ph) expectations and geopolitical developments, our integrated investment bank is well-positioned to service our clients. Turning to equity, we continue to be a global leader in this business. Equity revenues of over $3 billion, up 18% compared to last year, reflect strong results across business and regions. Higher client engagement, dynamic risk management, and strength in Asia all contributed to performance. Prime brokerage revenues were strong and increased from the prior year as client balances reached new peaks. Regionally, we witnessed higher client activity in Asia and seasonal patterns in Europe. Cash results increased versus last year, reflecting higher volumes across regions. Derivative results were up versus last year's second quarter as client activity was higher and the business navigated the market environment well. Further, the business benefited from corporate activity on the back of convertible issuances, additional evidence of the integrated firm at work. Fixed income revenues of $2 billion increased year-over-year. Macro performance was up versus the prior year. Despite lower realized volatility, clients were engaged around elections and political events in the quarter. Micro results improved year-over-year, driven by the growth of our more durable revenues as we continue to support our clients with financing solutions. Solid results in commodities were in-line with the prior year. Turning to ISG lending and provisions. In the quarter, ISG provisions were $54 million, driven by certain individual commercial real estate loans. Net charge-offs were $48 million, primarily related to two commercial real estate loans for which we had previously already taken provisions. Turning to Wealth Management. Wealth Management generated strong results generating revenues of $6.8 billion with record asset management fees. Our PBT margin continued to make progress towards our goal, demonstrating our ability to grow and generate operating leverage through the cycle. We are delivering on our differentiated, scaled multichannel asset gathering strategy. Wealth Management client assets reached $5.7 trillion. Moving to our business metrics in the second quarter. Pretax profit was $1.8 billion up year-over-year with a reported margin of 26.8%. DCP negatively impacted our margin by approximately 100 basis points. The margin demonstrates the inherent operating leverage of our asset gathering strategy. We are improving the efficiency with which we run the business. Asset management revenues of $4 billion were up 16%. That is more than $500 million in fees versus the prior year. It's driven by higher average asset levels and the impact of cumulative positive fee-based flows. In the quarter, fee-based flows of $26 billion were strong, marking the seventh consecutive quarter of over $20 billion, bringing the year-to-date fee-based flows to $52 billion. We are seeing a steady migration of assets from adviser-led brokerage accounts to fee-based accounts, evidence that investments in our client acquisition funnel are paying-off. Fee-based assets now stand at $2 trillion. Net new assets were $36 billion reflecting headwinds from seasonal tax payments. Year-to-date, net new assets are $131 billion representing 5% annualized growth of beginning period assets. Net flows will be lumpy in any given period of time and impacted by both the macroeconomic environment and business specific factors. We believe both tax-related outflows and increased spending, particularly among high net worth clients, impacted flows this quarter. Still our first half NNA growth remains solid. Transactional revenues were $782 million. Excluding the impact of DCP revenues were up 5% versus last year. The increase was primarily driven by higher equity-related transactions. Bank lending balances grew by $4 billion to $151 billion evidence that as the macroeconomic backdrop stabilizes, our lending capabilities can be met and can meet our diversified client needs. Total deposits of $343 billion remains stable, with sweep deposits down approximately $10 billion sequentially mostly offset by growth in CDs. Net interest income was down modestly to $1.8 billion reflecting the decline in sweeps, which was largely attributable to the seasonality of tax payments. The Wealth Management business continued to perform well, aggregating assets, generating fees and benefiting from scale and our differentiated offering, consistently earning approximately $100 million a day. In the third quarter, we intend to make changes to our advisory sweep rates against the backdrop of changing competitive dynamics. The impact of these intended changes will be largely offset with the expected gains from the repricing of our investment portfolio. Therefore third quarter NII will be primarily driven by the path of sweeps, and NII could decline modestly in the third quarter. Importantly inclusive of these pricing changes, the rate path and our expectations around client behavior, we believe that NII should inflect higher as you look out into next year. Our Wealth Management strategy is predicated on gathering assets, meeting our clients' lending needs and offering advice. Asset management fees, the core of our Wealth Management strategy, continues to produce strong results reaching a record this quarter. Taken together, we delivered a strong margin, and we continue to work towards 30% margins over time. This quarter, we reached approximately $19 million in relationships across our three channels, and we continue to invest in order to deepen engagement. AI tools are helping advisers grow, and Wealth Management's partnership with institutional securities is increasing connectivity around our workplace offering. These investments have supported flows to our adviser-led channel, where average client duration is nearly 15 years and growing. The steady progress supports our journey towards $10 trillion-plus in total client assets. Turning to Investment Management. Revenues of $1.4 billion increased 8% from the prior second quarter, supported by higher asset management revenue. Asset management and related fees were $1.3 billion up 6% year-over-year, reflecting higher average AUM. Total AUM ended the quarter at $1.5 trillion. Performance-based income and other revenues were $44 million as gains were driven primarily by our infrastructure, US private credit and US private equity funds, reflecting our investments in secular growth areas. We recorded long-term net outflows of approximately $1 billion. We continue to see strong momentum across areas of strategic focus, namely Parametric. Consistent with current industry trends, we saw outflows in our active equity strategies. Our business is well-positioned given strength in areas of secular growth, such as customization, direct indexing and private alternatives. Our continued focus on global distribution combined with our deep structuring and product creation capabilities, should support incremental growth. Turning to the balance sheet. Total spot assets decreased $16 billion from the prior quarter to $1.2 trillion. Our standardized CET1 ratio was 15.2%. Client activity was strong and markets were open. We actively supported clients with a focus on velocity of resources. We also grew our CET1 capital by $1.5 [billion] (ph), reflecting strong earnings and continued capital distribution. The most recent stress test results reaffirm our durable business model and strong capital position. For the third year in a row, we announced a quarterly dividend increase of $0.075. Having generated over $3.85 of earnings per share and an 18.6% ROTCE year-to-date, we enter the back half of the year from a position of strength, with a robust capital base to support clients. Investment Banking pipelines are healthy and diverse, dialogues are active and markets are open. In Wealth Management, strong fee-based flows and the realization of operating leverage continue to demonstrate that our strategy is working. As capital markets become more active, we see opportunities for retail clients to engage and over time deploy their cash and cash equivalent balances into fee-based products. With that, we will now open the line up to questions. Operator: We are now ready to take any questions. [Operator Instructions] We'll take our first question from Glenn Schorr with Evercore. Your line is now open. Please go ahead. Glenn Schorr: Good morning. Sharon, I appreciate all the upfront commentary on NII and Wealth. I wanted to drill down a little bit on what you said. So if you have $2 trillion in client assets in advisory and they keep a handful of percent of money in cash, that change you are making in rate paid on advisory -- on deposit in advisory accounts, can add up to like a good amount of money. So I wanted to get a little more sharper focus on what you said about 2025 NII? And then what exactly did you say the offset is on the NII? Thanks. Sharon Yeshaya: Sure. Thanks, Glenn for the question. Actually, the portion that -- of the sweep balances that are impacted are as you mentioned, the sweep on the adviser-led channel, which is actually a small portion of the overall BDP that we disclose. So it's a small portion of that overall stack. And the increase in pricing is being offset largely by the repricing of the investment portfolio, right? So as things mature and that investment portfolio reprices, it's that change in the quarter amount that will offset it when we look ahead. Glenn Schorr: And is there a particular reason why you only have to focus on repricing in this smaller portion than of the adviser-led channel, meaning not --. Sharon Yeshaya: Certainly. Yes, what I would note there is that what we think about -- when we think about sweeps, broadly is mainly in transactional accounts. And in those transactional accounts, we have a wide range of choices and products for our clients. And so therefore, they have a lot of options as you think about their transactional accounts and brokerage. Operator: We'll move to our next question from Ebrahim Poonawala with Bank of America (NYSE:BAC). Your line is now open. Please go ahead. Ebrahim Poonawala: Good morning Ted. Just maybe sticking with NII and more importantly, on pretax margin, right? You had an extremely strong quarter. The stock's weaker this morning, and it has to do with the NII drag on wealth revenues and margin. So one I think, Sharon, your level of visibility into NII, lots of moving pieces around client behavior, maybe we get interest rate cuts. Just give us a sense of, if history is any guide on, what rate cuts would imply for client behavior? Or is there cash to assets that you are looking at that gives you comfort around NII potentially stabilizing post 3Q? And then maybe a question -- go ahead, yes. Sharon Yeshaya: Yes. So why don't I take that, and then you can ask your second question. So you are pointing at a great point Ebrahim, as we look ahead through time, which was the second point of my guidance, is that when we look over the next year, we're seeing and we expect that we should see an inflection in NII. And that is predicated on the points that you mentioned, which is that as you see rate cuts, we would expect those balances to stabilize. Remember, outside of the tax quarter this particular quarter, we had been seeing a stabilization in those sweep deposits. So it's important to recognize that, that has been happening, reaching that frictional level of transactional cash. So that would likely continue. And then over time, you would also begin to see a benefit as rates to be cut, that BDP could actually see inflows, which you've seen from a historical perspective. But in addition to that, you have two other factors. One is the repricing of the portfolio, which I've also already mentioned. And the second piece has to do with lending. We look to continue to support our clients with lending products, and you are beginning to also see that potentially reach an inflection. This is the first quarter that we've seen this type of lending growth since the interest rate hikes began. We've seen now use of SBL products rather than just it being offset by paydowns. So those are all encouraging signs when we look ahead over the course of the next year for NII. Ebrahim Poonawala: That's helpful. And I guess my second question was, just talking to investors, when we look at the 30% pretax margin target, the question is whether this is aspirational, whether the bar is set too high given how competitive the business is. So remind us in terms of your comfort level on the 30% pretax margin, to the extent you can, the time-line of when we get there? And when we get there, should that be a sustainable pace for the business? Thanks. Ted Pick: Thanks, Ebrahim. Confidence level, high. If you take a step back, there are three pieces to the Wealth Management line; asset management, transactional, net interest income, as you know. In the asset management context, those are fees that are going to fee-based accounts, advisory-led. Those figures are up 4% sequentially and 16% year-over-year. That is fee-paying advice. Last quarter, the net new assets into that category was $26 billion. So fee-based flows -- that continues to be a growth piece of the Wealth Management store. The second cylinder is transactional. Transactional has been relatively weak, which is a link to general weakness in overall capital markets activity. And as you hear from our bullish commentary with respect to overall corporate finance activity in the investment bank, that will bleed through over time to the transactional line. And then third, the net interest income line. And as Sharon said, that will inflect and should inflect over the next year. You put those together, the scale of the business, the funnel, and the processing of $100 million of revenues a day that continue to grow, we are going to continue to achieve operating leverage. It's that simple. We're investing in ETRADE. We're investing in the traditional advisor, and we're spending a lot of time top of house focused on workplace, which we think is an enormous opportunity across our corporate and sponsor base. In January, I had said 30% was the goal. We were in the mid-20s. We just printed 27% GAAP, 28% [Ex-CPE] (ph). It's a core stated objective. It will take some quarters to get there, but we intend on achieving it over time as we continue to grow assets and scale in the business. Mike Mayo: Hi, Ted, you've said this and Sharon repeated this that the industry is only in the early innings of an investment banking rebound. I have to say we've heard that for a couple of years and there now is this time, why is this time real? Do you expect the rebound to continue through the normally slow summer period before the election? How many years? What gives you confidence that this is for real? And how much is your backlog up quarter-over-quarter? Ted Pick: It's an excellent question because you're exactly right that a number of folks have been calling for this and it has been sort of a delayed shoots if you will. But I think now we are seeing some tempering of the inflation prints and some normalization rates. We are also beginning along with that to see the market broaden-out. You of course have seen that over the last number of weeks. And I think, we can now expect broader corporate finance activity to quicken, whether that is across the corporate community or sponsors or other institutions. And the early sign of this kind of activity can be seen in the convertibles product. Global convertibles activity is up significantly. And as you know, on the margin ladder, it typically goes converts, IPO, and then M&A. In the context of bake-offs and the like, in some spaces we are seeing bake-offs running at triple plus the year-over-year rate that they were at for sectors and for some of our client groups. We've been seeing now the launch of traditional IPOs and we are seeing M&A pipeline kicking in. So corporate community, sponsor community, cross-border community, I think we are in the early stages of a multi-year investment banking-led cycle. If you believe the economy is going to hold up led by the US, you should expect then to see that if there is some regulatory normalization too across a whole bunch of the sectors that are typically most active. So we are quite convicted on this call. Mike Mayo: And just one pushback, I mean with interest rates, you know, so much higher than they've been in the past. Don't you think that could get in the way when people are looking to borrow money for deals and the like? Is this a matter of simply waiting for rates to go lower? Or that's not going to get in the way? Ted Pick: I mean it's a fair question. You've written about this in the context of what was the normal before financial repression, right? And I would take the view that in the context of the last 15 years, even some normalization, because I don't know that we are going to go into a full-blown rate cycle to your point, some normalizations of rates will still have you at 3% or 4% on the front-end and even some steepening potentially. So now we are just back to the old weighted average cost of capital of mid-90s in most normal economic periods. And the game will have to go on because there is just been some activity that has been suppressed by any kind of measure percentage of asset stock percentage of market cap. And the stickiness that we are seeing in the sponsor community, too needs to unglue. There is an enormous, as you know multitrillion-dollar stockpile between the two sides of sitting on inventory that needs to be released and then dry powder that's been raised. That will act as a competitive weapon against the competitive bid from the corporate community that has to contend with the reality of a smaller world with real sovereign risk and real cost of capital differences from one jurisdiction to another. So in short, unless you were to tell me we are going to go into a full-blown recession, which none of us can call, and that even if we saw rates normalize to something that is along the lines of the historic 4% on the front end, I think you will see over the next number of quarters and really over the next number of years, a resumption of more normalized M&A activity, with the key difference being that the financial sponsor community is now institutionally come of age. They have global reach. They can work the entire capital structure. They will work in concert with corporate partners, as you know. They don't actually have to act as a lone wolves, and they can work with us to finance the package. So it is not just the straight M&A advise or the straight IPO, it would also be bespoke offerings in the private public space, interest rate and foreign exchange hedging and the other ornaments on the investment banking tree that a couple of the leading global investment banks can bring. And this is really why, over the last couple of years, the extent we've done a so-called front-office hiring, it really has been to target several very high-quality investment bankers who typically have spent their entire careers at one firm and have decided to come to the Morgan Stanley platform. And we are seeing the fruits of that across industries. So I am quite bullish on it. Certainly take your point that has been a number of quarters on sort of on the promise. But I think as we get into 2025 and the election coming and then the election behind us, we should see that activity continue on a sustainable pace. Operator: Our next question is from Dan Fannon with Jefferies. Please go ahead. Ted Pick: Good morning Dan. Dan Fannon: Thanks good morning. I was hoping to get a little bit more color on the flows in the quarter within Wealth, maybe the breakdown from the channels and contribution. Last quarter, I think we saw a Family Office be an outsized contributor. But hoping to get a little bit more color on where the flows were sourced in 2Q. Sharon Yeshaya: Sure. I'll take that. It's -- we continue to see broad-based sourcing in terms of where those assets are coming from. In this particular quarter, as I mentioned the biggest offset and drag though, is really from taxes. So it's -- you still have a workplace accounts. You still have the advice-based account directly. You still have self-directed. All those places remain contributors. What continues in my mind to be most interesting though, isn't just the contribution that you are getting from the three various channels, but the fact that you have in the advice-based channel, it's not just coming from existing clients, but it's split with existing and net new clients. And some of those net new clients are also relationships that are being sourced from workplace. So I would not just directly focus on what channel is it coming from, but how are you seeing those channel in that interplay work, because that's actually the power of the differentiated platform. Once you have somebody who wants more differentiated advice for self-directed speaks to an advisor, that advisor sees net new clients, bring in assets, and then that's new acquisitions into the funnel and eventually into fee-based. So it's really the whole ecosystem that I would call your attention to, rather than just one isolated leg. Ted Pick: Which is part of the reason that workplace is so important, because at workplace, I can continue to experience success amongst the corporate and sponsor community that has an affinity effect on the top of the house at those institutions in terms of their own wealth, and then potentially other products around it. So it can be an indirect sale where you aren't necessarily going directly to the prospective client via the FA, but you could actually work potential clients through the institutionalized effect of workplace where we do a great job educating on wellness -- financial wellness and then effectively institutionalizing ourselves by overseeing incentive comp through the Morgan Stanley Solium product and having succeeded on an MS at work mandate, which, as you know is a durable, sticky asset that effectively is seen by the entire employee base, you can start working your way up the funnel to the senior executives of that front. Dan Fannon: Great. Thank you. Operator: We'll move to our next question from Brennan Hawken with UBS. Your line is now open. Please go ahead. Ted Pick: Good morning Brennan. Brennan Hawken: Good morning Ted. Thanks for taking my question. I'd like to just drill down a little more to give the second follow-up here on the repricing change that you mentioned in your prepared comments, Sharon. So the repricing that we've seen in the securities book has been slow. So I'm just kind of curious as to why you think that will help offset the repricing actions that you are taking on the deposit side. Is that because it will be a phased repricing, and therefore there is an ability to have the phased benefit in the asset side offset? And then just a nitty-gritty question on it, is the switch going to be to money fund sweep rather than higher yielding deposits, and then that way you can just slowly replace that funding as you see [fit] (ph)? Sharon Yeshaya: So thanks, Brennan, I'll take that question. No, all the changes that we'll make will happen, are expected to happen in the third quarter. And so those different changes will be made, and they'll be based on various competitive dynamics. Brennan Hawken: Okay. Got it. And then is the -- is this going to be focused on the advisory relationship similar to what we've seen from some other wirehouse competitors? And could you just -- is it the changes that have been announced by Wells and BofAs, is that what you mean by competitive dynamics? Or is there something else that I'm not aware of? Sharon Yeshaya: That's exactly as I stated it, and it will just be limited as you said, to the sweeps that are dealt within the advisor-led channel. Operator: Our next question comes from Devin Ryan with JMP Securities. Your line is now open. Ted Pick: Good morning Devin. Devin Ryan: Great. Good morning Sharon and hi. The first question, just on -- another one on the GWM flows. Sharon, you mentioned tax season is a factor, which you completely get. But then you also mentioned increased client spending. And I just wanted to drill into that, just whether that's something that could continue, whether it was seasonal or influenced by inflation? Just trying to understand that component of the impact on flows. Sharon Yeshaya: Yes. I think that's a really interesting question. I did call it out. We've seen increased spending by higher net worth, and so higher income bands are certainly spending. We see that in the data alongside actual spending. We see that in purchases of homes. We see that in various tailored investments. So they are -- that cohort, so to speak, is using its cash in different ways and its various investment in different ways. So I do think that -- that's an interesting dynamic that's playing out. I know that others have mentioned it within their portfolios as well. It's only something we are seeing in our data. Devin Ryan: Okay. Got it. Thank you. And then a follow-up just on the interplay between Investment Banking and Trading, and I appreciate the commentary on kind of the improving capital markets backdrop, which is great to hear and kind of the expectation from our end that there's going to be a lot more primary issuance in equities, maybe in debt as well as M&A picks up. So just trying to think about what that means for the trading businesses, equities and fixed income and whether you guys feel like we could maybe sustain around these really high levels or even maybe -- even the wallet could move higher just as you get a stronger primary issuance market? Ted Pick: Well, I know that competitive set will naturally speak to areas where integration can be an asset. Here, we have -- we believe, something really special inside of our Institutional Securities business, our so-called integrated investment bank, which has been ongoing for -- now we are getting on seven or eight years. Now under Dan Simkowitz's direction. And this is a sort of critical facet of business strategy at our place because you have now the appropriate and important relationships that have been built across fixed income, equities and banking through our capital markets new issue business. You have those now having been compounded and advanced by the mobilization of some folks from one division to another. So there is real familiarity now with the work product. A lot of the work product, as you know, is not traditional vanilla IPOs. Yes. There are some on the horizon that are quite substantial, and we'd expect that to be an important part of the calendar. But there is also a more bespoke product, whether it be convertibles or products in the private area or products that effectively necessitate high-quality structuring and advice, and that can only be brought to the boardroom if you have world-class investment bankers who can lean on the expertise of their colleagues, not just in the new issue business but as appropriate, in institutional equities and in fixed income. And if you look at our fixed income business, for example and fixed income underwriting, you'll see that the share gains have been quite extraordinary. And that the year-over-year revenue number, I believe is up 71%. That speaks to the fine work that's been done by folks, not just in the debt capital markets business which is housed inside of our new issue business linked to banking, but also working closely with fixed income professionals, whether they are in the securitized products group and our commodities area broader credit or in our macro space, i.e., interest rate and foreign exchange. So when you get into the knitting of ISG, our Integrated Investment Bank, you see that part of the reason that we are bullish, not just to Mike's earlier question on the denominator, but also on our ability to increase the numerator, is not so much because we think there is a need to deploy a lot more capital. We will do so as appropriate when the markets demand it. But that we are able to get the kind of bespoke advice for clients that comes from the familiarity of our people, the quality of the advice that is differentiated and importantly, that it's global, so that we can bring it to the client base. So that is part of, I think, the secret sauce that we've been working hard on to generate above cost of capital returns, inside the investment bank on a stand-alone basis. And that obviously doesn't include even the synergies that we'd see across the Firm into Wealth and Investment Management. But your question is on the investment bank specifically. And I feel really good about the way it's structured, the leadership that we have within it, the experience set, and then our ability now to tap into this next cycle which will be different than the last one. Rates will be well higher than that of financial repression. We'll be toggling between some bouts of inflation and potential recession. We'll be dealing with the unpredictability going to not only our own cycle, US election cycle, but the world around us. But also the coming of age and the institutionalization of the financial sponsor community, where we have very strong relationships with that leadership group from top to bottom across the Investment Bank, Wealth and Investment Management. Operator: For our next question, we'll move to Steven Chubak with Wolfe Research. Your line is now open. Steven Chubak: So maybe just starting off with a question just on operating leverage within ISG. Year-to-date, the incremental margins are quite strong, just north of 80%. You spoke constructively on IB and Trading and inflecting positively. Just want to better understand what you believe is a sustainable incremental margin as activity steadily builds especially given some of the growth, at least from here, may skew a bit more heavily towards Investment Banking, which tends to be more compensable. Sharon Yeshaya: So when you look at it, I would really focus Steve, on the efficiency ratio targets that we put for the whole firm, right? We think that the firm can run at or below the 70% over time through a durable cycle. The issue with your specific question, as you yourself highlighted is, it depends on where those different revenues are coming from. So there might be periods of time where it's higher BC&E related, there might be periods of time where you have different jurisdictions associated with it. But broadly speaking, the enterprise we've given 30% margins as it relates to Wealth and the sort of Wealth and Investment Management space, and then you have the ISG space. So by definition, if you're running at 70% efficiency ratio more broadly, you look for an entire enterprise to run at somewhere of a 30% margin. Ted Pick: Yeah. The only thing I would add to that is, of course as you know, there is real seasonality in the business. Fixed income tends to have its strongest quarter, street-wide in the first quarter, Investment Banking typically in the fourth quarter. That's not every year, but that's typically out shakes out. Third quarter tends to be weaker in the summer months, and then it's sort of all about September. And obviously, this September will be one that will be driven in part by sentiment around the upcoming elections. So that's kind of the seasonality piece. The other is just the scale within the businesses, I'd be remiss again, not to sort of underscore the importance of having reached $3 billion in the equities business. This has been a leading business where we have been Number 1 and Number 2 for the last dozen years. And we see the clients are much in demand of our services across cash, derivatives and prime brokerage. And then connecting to Investment Banking, I think that business has too hit an inflection point again where they can continue to prosecute high-margin business through the cycle. All of this, of course is dependent on the economy holding up and general asset price levels. But given where we are right now, we are feeling good about that, too. Steven Chubak: Thanks for that perspective. And just a follow-up on the deposit discussion. Both you and your wirehouse peers announced similar actions on deposits, which you noted, Sharon. You mentioned it was informed by competitive dynamics. But I wanted to better understand if there's any feedback you or your peers had received from regulators that prompted the decision? Because from our vantage point, the timing of these pricing actions at this stage of the rate cycle is simply difficult to reconcile? Sharon Yeshaya: I'm sorry, Steve, we don't comment, as you know on regular matters. Steven Chubak: Okay, fair enough. [I had to try] (ph) thanks for taking my questions. Operator: We'll move to our next question from Gerard Cassidy with RBC. Your line is now open. Please go ahead. Gerard Cassidy: Good. Thank you. You gave us good insights into your thinking about what the capital markets could bring, especially Investment Banking. And I think you touched on it in your comments with Ted, or maybe you Sharon, that the transactional numbers could benefit from a stronger ECM business. Can you then take the next second derivative and share with us from your experience of Solium, should we -- that business pick up the workplace channel, if more of these maybe private equity sponsor companies go public. Should the workplace channel see stronger revenues potentially in a stronger Investment Banking market over the next 12 months to 18 months? Sharon Yeshaya: I think that's a great question. I know, Gerard a few years ago, you also asked me about different values of those assets associated with what the underlying is. I completely agree with you. As you have workplace assets rise, the value of those client assets rise. New corporations issue their employees more stock. They also grow their employee base. It should absolutely add participants. It should add new corporates. It will add new net flows. And now that we have all of that -- when you just have Solium, now you also have E*TRADE and workplace, and the platforms are integrated. So as those flows -- flow into an ETRADE account, people can transact on that. And then, as Ted said, we can also offer financial wellness. So absolutely, it helps that ecosystem begin to work. Gerard Cassidy: Very good. And just as a follow-up, Ted, if I take a step back, obviously you guys have done a very good job in the last 10 years of growing organically, but then complementing that growth with acquisitions. Once we get the Basel III end game final proposal, maybe some G-SIB relief, can you share with us, as you look out over the next two, three years -- is there any parts of the picture today that you'd like to enhance possibly with acquisitions? Or -- are you good where you are today? Ted Pick: I will take the opportunity to sort of give a brief view on capital, if I could, Gerard, and link that to potential external opportunities. We anticipated or we believe it was possible that we could have a tougher annual CCAR test, and indeed it was. And what we've prioritized in potential uses of capital, above all things has been dividend policy. And as you know, we are increasing the dividend again to [$0.925] (ph), which at spot offers a 3.5% dividend yield. So that is the continued highest priority on use of capital. If you include of course, use of capital to inorganic opportunity. Second our clients. We have continued to lean in for clients, across the business segments as appropriate, and you see the operating leverage across the businesses, particularly across the investment bank. But we've also thought about the buyback opportunistically and have been buying stock back and returning capital. This past quarter, more than $2 billion between the dividend and the buyback, in a way that has been reflective of offering us that optionality. As we sit here today, we are 170 basis points above the buffer. And importantly, we continue to be in the 3.0 G-SIB buffer, which in one context would normally get much attention, but does get attention in the context of your question, which is sort of forward-looking strategic opportunity. It is worth noting if we can manage to stay at 3.0, assuming the framework holds through whatever Basel brings, that will be our buffer in 2026. So we are [170 basis points] (ph) over and we accreted $1.5 billion this quarter. External, i.e., inorganic, therefore, is something we can think about. It's just not something we're going to think about in the short term. The reality is we've got our forced hierarchy, the forced hierarchy is dividend first, investing in clients as appropriate, achieving operating returns against that second. And then third, the buyback opportunistically. Down the road, two, three, four years out, if opportunities come across the horizon, importantly after we have some definition around Basel and continued potential refinement of what we understand to be inside CCAR formulation, so just general regulatory uncertainty, sure, we might look at stuff. But I would tell you in the short-term, we're very happy with the acquisitions that we've made over the last 10 years, 12 years. And we are determined to generate operating leverage in each of the two major segments; Wealth and Investment Management and the Integrated Investment Bank, and then to obviously hit our efficiency ratios of 70% and the margins and returns that we've talked about. Saul Martinez: Good morning. I wanted to follow-up on an earlier question on the outlook for your sales and trading businesses. You've kind of consistently done about into $18 billion to $20 billion of annual revenue in the post-pandemic period, in [fixed and equities] (ph). And right now, we have a backdrop where we're going to see rate cuts, markets are strong, issuance activity may pick up. At the same time, you have perhaps more competition from foreign banks who have lost share. So how do you see -- do you have a view on how you see the wallet evolving for these businesses, your ability to maintain or gain share in this backdrop? And then I guess, ultimately, do you think you can grow revenues here from a base that is materially higher than what it was pre-pandemic? Ted Pick: I think the answer to that is that we would like to grow share that is durable. We want to grow share in businesses that are connected to the core client base, whether it be global asset managers, the leading alternative asset managers, private equity and private credit players that have come to the floor, and then our lead corporate and sovereign clients. There are products that can be offered. There are very few firms that can do that globally. We continue to have a world-class market space, for example in Asia, where I believe we have the largest equities business. We've been growing the business quite assiduously on the continent in the UK, where our senior management has been putting in a lot of time and attention. And as you know, we have a differentiated joint venture with our friends and partners at MUFG in Tokyo. So if you consider the global footprint of the firm -- in a world that continues to be equities-based. It continues to be an equities world. You see it in the asset price momentum in the US. You see now the potential for that to broaden to more names and more sectors. And that obviously gives opportunity for folks in the stock picking business for example, where we've been very strong traditionally in equities, to do the [cash rise] (ph) and prime brokerage suite that we offer. You could see continued uncertainty based on how the next administration handles the significant macro challenges facing the US, whether you'll see a steeper yield curve, where you'll see activity on the front and to the belly of the curve. That of course, offers all kinds of opportunities for the rates business. And connected to corporate catalyst activity, where, on an M&A acquisition, the acquirer may wish to inoculate themselves from rate or foreign exchange risk, and that's the service that we offer. Again, I like the idea of growing durably inside the integrated investment bank. I like the idea that we are working in sandboxes with the appropriate capital controls around that. But that we are allowing enough breathing space so that when our lead clients are looking to engage in a -- once in every few years catalyst event, that we can fully offer the entirety of the advice and financing spectrum to them on demand. So the answer would be to grow and grow responsibly. I'd like to think we can inch up the numerator along with the denominator, and then you would see that almost imperceptibly over the course of quarters and years. Saul Martinez: That's helpful. Thank you. Just I guess a quick follow-up, related follow-up. The ROE, 14% in ISG in the first half of the year early on, as you highlighted, in Investment Banking cycle. Do you have a view on where the ISG -- Institutional Securities ROE can get to as the Investment Banking cycle kind of plays out? Is there a view on sort of what a normalized ROE would be here. Ted Pick: We're still early. We're still early in the cycle. We're watching it of course. To the earlier question on when the green [shoes] (ph) come through on the high-margin M&A product, the reality of seasonality, the uncertainty of rate path, geopolitics, US elections, it's hard to put a pin on what the returns will be in a given forward quarter until we kind of see some normalization in those uncertainties, not to mention some of the regulatory stuff that we are dealing with as we speak, Basel namely. But yes, you're right to point out that we are seeing some real operating leverage in the Investment Bank. And over the course of a number of years, as we think about not just the integrated firm, but the returns generated inside of Wealth and Investment Management. And then we look at the returns inside the Investment Bank, we are measuring that. And we are looking to have that contribute to the overall sustainable 70% efficiency of the firm. Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect and have a great day.

Earnings call: Schwab reports robust growth and optimistic outlook By Investing.com

Charles Schwab Corporation (NYSE:SCHW) has reported significant growth and a positive outlook in its recent earnings call. CEO Walt Bettinger highlighted the successful integration of Ameritrade clients and the company's strong financial performance, including over $150 billion in net new assets year-to-date and nearly 1 million new brokerage accounts. Schwab's wealth business also saw a 56% increase in managed investing net flows compared to the previous year. The company's executives discussed plans to improve lending capabilities and client experience, as well as strategies to manage net interest margin and capital levels. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In conclusion, Charles Schwab Corporation is navigating a year of transition with a strong focus on growth and client satisfaction. The firm's strategic moves and financial discipline, alongside the integration of Ameritrade, position it well for future profitability and expansion in its wealth management and lending services. InvestingPro Insights Charles Schwab Corporation (SCHW) has demonstrated resilience and strategic foresight in its financial operations, as evidenced by the company's recent earnings call. To provide additional context to Schwab's financial health and future prospects, we turn to InvestingPro data and tips. InvestingPro Data highlights a Market Cap of $123.46B USD, reflecting the company's substantial market presence. Despite a challenging environment, SCHW has maintained a Gross Profit Margin of 96.62% over the last twelve months as of Q1 2024, showcasing its ability to retain a high level of earnings relative to its revenue. Moreover, the company's Operating Income Margin stands at 37.22%, indicating strong operational efficiency. In terms of InvestingPro Tips, it's important to note that 15 analysts have revised their earnings downwards for the upcoming period, signaling potential headwinds or a conservative outlook on future earnings. Additionally, SCHW has managed to maintain dividend payments for 36 consecutive years, which could be an attractive point for income-focused investors, especially in the context of the company's long-term profitability. For readers looking to delve deeper into Charles Schwab Corporation's financial metrics and gain access to exclusive insights, InvestingPro offers additional tips that can further inform investment decisions. With the use of the coupon code PRONEWS24, readers can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, providing a more comprehensive understanding of SCHW's investment profile. In summary, Charles Schwab Corporation continues to navigate the financial landscape with a clear strategic direction, backed by a strong operational foundation and a longstanding commitment to shareholder returns. The additional insights from InvestingPro underscore the importance of considering both the challenges and opportunities that lie ahead for the company. Full transcript - Charles Schwab (SCHW) Q2 2024: Jeff Edwards: Good morning, everyone, and welcome to the Schwab 2024 Summer Business Update. This is Jeff Edwards, Head of Investor Relations; and I'm joined today by our Co-Chairman and CEO, Walt Bettinger; President, Rick Wurster; and CFO, Peter Crawford. We got a bit of an early start today to beat the Texas heat, so let's run through our housekeeping items and get in today's remarks. The slides for today's business update will be posted to their usual spot on the IR website at the beginning of Peter's section. Q&A remains structured as one question, no follow-ups, please, but you can certainly reenter the queue to ask another question if time permits. And as always, please don't hesitate to reach out with any follow-up questions for the IR team. And lastly, the wall of words, which showcases our forward-looking statements, reminding us that the future is uncertain, so please stay in touch with our disclosures. And with that, I'll turn it over to Walt. Walt Bettinger: Thank you, Jeff, and good morning, everyone. Thanks for joining us for our July business update. Earlier this year, we spoke about 2024 being a transition year for the firm. We define this year as transitional for a series of reasons. We were anticipating completing the last transition groups from the Ameritrade acquisition. And we anticipated that former Ameritrade clients would move from negative asset flows to positive levels of net new assets. We further anticipated that former Ameritrade retail clients would begin to utilize Schwab capabilities in the areas of investment advisory, financial planning and banking. We anticipated the investment advisers, who formerly used Ameritrade for custodial services, would also begin to bring net new assets to Schwab, and their evaluation of our service levels would improve rather dramatically. We anticipated that Schwab users of StreetSmart would begin to take advantage of the powerful trading capabilities in the Thinkorswim platforms. From a capital standpoint, we anticipated that we would organically build capital throughout the year toward our long-term objectives. And from a financial standpoint, we anticipated improving, albeit somewhat uneven, earnings results during the year with Q4 2024 delivering somewhere between $0.80 and $0.90, and then with strong growth continuing into 2025 and beyond. Halfway through the year, this definition of a transition year is being realized, again, as we anticipated. And all of these issues position us for a strong period of growth in client metrics and financial results in the coming years. So, with these critical indicators of success unfolding in such a positive manner, let's take a quick look tactically at how the second quarter of this year looked. Inflation showed some encouraging signs of moderating, closer to the Fed target of 2%, which continued pushing a select number of primarily technology stocks ever higher during the quarter. Investor sentiment remained solidly positive at quarter-end with investors purchasing stocks throughout the quarter and overall trading activity was a bit higher than in the prior year. Now as I stated earlier, as we anticipated, we completed the last client transition group during the second quarter. That's almost $2 trillion in assets, 17 million client accounts, and over 3.5 million daily average trades, all done with the attrition levels that are well below other integrations in our industry, as well as our estimates at the time of the acquisition, which were 5% to 6% asset attrition and 4% revenue attrition. And while it's still somewhat early, the client response to the combined platform has been even stronger than we anticipated. Promoter Scores for former Ameritrade retail clients are now increasing about 50 points nine months post conversion date. While the Promoter Scores for advisory services, including the former Ameritrade adviser clients, have returned to pre-conversion levels. Impressively, former Ameritrade retail clients who converted in 2023 are already bringing in assets on a net basis. However, their level of net new assets still remains below our target range. Clearly, this illustrates that we're reaching an inflection point as attrition continues to abate and we rebuild back to firm-wide net new asset levels in our targeted 5% to 7% range. And lastly, former Ameritrade retail clients are already making up about one-third of our overall enrollments in advisory solutions, an early illustration of the power of combining the two firms and their interest in Schwab's broader offering of wealth management solutions. The overall client engagement was solid in the second quarter with the equity buy-sell ratio at about 1.1, while daily average trades remained at relatively high levels for a second quarter and above the same period from last year. Meanwhile, we've seen a large increase in interest among our clients in our Managed Investing solutions. So overall, key client metrics continue to be solid. Net new assets year-to-date were over $150 billion, including Q2 asset gathering of about $60 billion, up 17% from the same period last year, again, still somewhat below our long-term goal of 5% to 7% to an economic cycle but growing closer to that figure as the impact from former Ameritrade client attrition begins to wane. New brokerage accounts were again almost $1 million -- I'm sorry, 1 million accounts during the quarter. Looking deeper at the types of clients we're attracting. These new-to-firm households continue to set us up well for the long term with almost six out of 10 new clients under the age of 40. And investment adviser clients of all sizes continue to entrust their client assets to our custodial services. For years, we've emphasized that Schwab Advisor Services is the premier offering for RIAs of all sizes, and we are equally committed to each segment of advisers. And these net new asset results are particularly encouraging as they reflect our success serving again every size adviser. Let me take a brief step back to take a more big-picture look at Schwab and the growth trajectory we've been on for over 50 years. From our origins as a discount broker, we have continually listened to client needs, as well as anticipated client needs, and added services and capabilities along the way. What is key is that we have always done so in a Schwab Way, through clients' eyes, at a great value and without the client having to accept trade-offs. We call that modern wealth management. And when we look to the future, we believe this formula will only serve to build our market share larger and larger. Of course, one of the key capabilities we have added along the way has been banking services to meet the needs of our clients on both sides of their personal balance sheets. Now some have asked us after the regional banking crisis of 2023 whether we remain committed to serving our clients' banking needs. And the answer is a definite yes. That said, we have studied our approach to offering banking services in recent quarters and wanted to share a few additional perspectives on how we see banking unfolding in the future at Schwab. Offering lending services to our retail clients and the clients of the investment advisers we serve is important. Arguably, it's critical as it meets client needs and deepens relationships in a meaningful way. Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs. We believe firms that do not offer lending services are at a strategic disadvantage that will show itself more and more over time. So, we are committed to offering quality lending services in a manner consistent with how we lend today, exclusively for our clients, residential mortgages, HELOCs for clients who have their first mortgage with us, and pledged asset lines. And to support lending for our clients, we continue to invest in both technology to make the application and approval process streamlined and efficient, as well as experienced bankers who can help shepherd the more complex loans through. From the standpoint of the investments we make at the bank for deposits in excess of those needed for lending to our clients, over time, and by that, I mean, years, not months or quarters, we would envision some shortening of our overall balance sheet investment portfolio duration. That could lead to some modestly higher earnings volatility through an interest rate cycle but should help reduce volatility of our capital levels and the need to access supplemental borrowing when interest rates potentially rise rapidly. One of our objectives is to increase our emphasis on attracting transactional bank deposits like checking balances with our award-winning checking product. This would serve as a means of increasing liquidity and further stabilizing our overall deposit base. And we envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals, deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from the third-party banks that make sense for us. Net, these various actions should lead, again, over time to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients' banking needs, lower our capital intensity and, importantly, protect the economics we are able to generate from owning a bank. So, while we see some modest changes in the way we manage and operate our bank, one thing you can count on, we will continue to operate our business in the Schwab Way, making decisions through clients' eyes, offering clients great value, and delivering service and advice to our valued clients without asking for any trade-offs. So Rick, let me turn it over to you for some more discussion on our efforts as well as results during the second quarter. Rick Wurster: Thanks, Walt, and good morning, everyone. With the successful completion of the Ameritrade conversion behind us, we are looking ahead to an exciting new chapter as we continue to advance our four strategic focus areas. And we will do so from a position of strength, having fully combined the best of Schwab and Ameritrade to offer our clients a no trade-offs experience. Our ability to increase our scale while also continuously driving efficiency in our operations remains one of our key competitive advantages. The Ameritrade integration is a clear example of how we have vastly increased our scale while cutting costs. And by the end of this year, we'll realize the remaining 10% of run rate expense synergies from the acquisition. Over time, our growing client base, our cost discipline and our ongoing investments in technology will continue to help us reduce our cost to serve our clients, in the same way it has over the past decade as we've decreased our cost per client account by 25% and by around 50% when you consider inflation. We plan to build on this competitive advantage. We will invest in technology, including artificial intelligence, that will ultimately help us lower our costs. We will implement operational enhancements and process transformation so we can serve our clients even more efficiently than we do today. And as we continue to increase our scale and enhance our efficiency, we'll reinvest in our clients over time and support our growth for the long term, just as we've done historically. Win-win monetization is about meeting more of our clients' total financial needs. By offering the ease and convenience of having more of their financial life in one place, we're also able to bolster our revenue growth and our wealth business is growing quickly. And this is a win for clients as Client Promoter Scores for our advice solutions are among the highest at the firm. So, these are our happiest clients. And it is a win for us. Year-to-date, we've attracted nearly $25 billion in Managed Investing net flows, a 56% increase over last year. And we see strong net flows across our spectrum of solutions. And you can see the growth on this page: 40% in Schwab Wealth Advisory, 53% in Wasmer Schroeder, and 127% and in Schwab Personalized Indexing. By offering our clients a broad spectrum of the wealth solutions they need, we're also supporting growth in our fee-based revenue streams, as you can see with the growth in our revenue on the right-hand side of this page. Looking within our Wealth Solutions, I wanted to do a bit of a deeper dive into our Wasmer strategies. These fixed income strategies provide clients with a wide range of tax-exempt and taxable solutions. Clients also have access to a dedicated team of portfolio managers and portfolio personalization capabilities, all at a lower cost than competitive offerings. With total assets under management of $25 billion, we've seen assets in these strategies grow at a compound annual growth rate of 23% since our acquisition in July of 2020 and have grown by nearly 80% in the last two years where we've had a higher interest rate environment. This year-to-date alone, we've seen net flows of $4 billion, demonstrating that these solutions are indeed meeting client needs. Turning now to client segmentation. At Schwab, we will always meet the needs of a wide spectrum of investors and RIA firms, but we also need to serve our distinct client segments. And strong relationships are the foundation of our ability to do this. When we build relationships by meeting client needs and meeting clients where they are and with the service models, the tailored education and the specialized capabilities they need, we will retain our existing clients and attract new ones. RIAs, which are one of our key client segments, we strengthened our relationships with RIAs of all sizes through an unparalleled offer that helps each of them grow, compete and succeed. For example, we offer advisers turnkey asset management solutions, flexible technology, and highly specialized business consultant teams, all at an incredible value with zero custody fees and no intention of changing that. Turning to our retail business, high net worth retail clients are another important segment where the power of strong relationships is clear. Our high net worth retail investors who have a financial consultant, bringing more than 3x the average household net new assets, 2.8x the Managed Investing net flows, and have better TOA ratios, and notably higher Client Promoter Scores compared to retail high net worth clients who do not have an FC. Continuing to invest so we can build and expand on these valuable client relationships will help support our growth over the long term. Our fourth strategic focus area is the Brilliant Basics. We know that we can make it even easier for our clients to do business with us, and if we can deliver on the basics for our clients in every interaction they have at Schwab, we'll build loyalty and our delighted clients will grow their wealth with us and refer their friends and family members to us. One example of how we're delivering on this for clients is the enhancements we continue to make to the best-in-class Schwab mobile app. We know clients and third parties like it today. Our mobile app has a 4.8-star rating on the App Store. And for the second year in a row, Corporate Insight has ranked us the number one mobile app experience among brokerage firms. And we continue to invest in and enhance that experience. We're introducing features our former Ameritrade clients love, like the recently launched customizable dashboard. Other recent and planned enhancements will simplify the client experience by reducing clicks and expanding on our customization capabilities. Guided by our consistent through client-size strategy, we remain well positioned for continued growth. While there are several factors that can influence asset gathering in the near term, things like the macroeconomic environment, seasonality and some behavioral differences we see in the former Ameritrade client base, we believe our through-the-cycle growth recipe remains intact. Over the longer term, we expect we'll continue to see 5% to 7% annualized NNA growth from existing and new clients, bolstered by delivering on our four strategic focus areas. As we've shared, 2024 is a transition year, with strong client engagement, a successful integration, continued progress on our strategic focus areas, and opportunities to introduce our client base to the best of Schwab and Ameritrade, we remain well positioned to continue serving our growing client base and delivering profitable long-term growth to stockholders. With that, I'll turn it over to Peter. Peter Crawford: Well, thank you very much, Rick. So, Walt and Rick talked about the exciting results we've already seen from the Ameritrade integration and the opportunities it enables, our strong momentum in the market and the success we have enjoyed in attracting a diverse mix of clients, the progress we have made in continuing to enhance our leading value proposition at the same time that we continue to drive greater efficiency throughout our business. And finally, our commitment to continuing that journey, combining ever greater efficiency with sustained investments in improving the client experience. For my time today, I'll review our solid financial performance in the second quarter and over the first half of the year. I'll provide some high-level perspective on what we're seeing with regard to our clients' transactional cash, and I'll share an updated scenario for 2024. The important point is that we are proceeding through what we've described previously, and what Walt talked about at the outset, as a transitional year. But frankly, at a slightly faster pace than we had anticipated just six months ago, with our organic growth rebounding towards historical levels, a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, sequential growth in our net interest margin, continued expense discipline with adjusted expenses basically flat year-over-year excluding some unusual items, and finally, a steady increase in our capital levels, both our regulatory levels and those inclusive of AOCI. And all of that sets the stage for what we expect will be more of a return to normal, the unlocking of our core earnings power and, frankly, a much simpler financial story in the quarters and years ahead, but one featuring strong growth in revenue and earnings in the back half of 2024 and over the next several years. As Walt mentioned, the first half of the year has been characterized by strong equity markets, increased client engagement and solid organic growth. We saw that reflected in external benchmarks such as the S&P 500 and NASDAQ, as well as key drivers of our business performance, including margin balances up 15% from the end of 2023, trading activity up slightly from the first six months of last year, and as Rick mentioned, a real surge in interest among clients for our advisory solutions. Our clients' transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024. But even so, we continue to see a moderation of the rate-driven client cash realignment activity. Now that backdrop helped support solid financial performance in the second quarter, with revenue up 1% year-over-year to $4.7 billion. Adjusted expenses in Q2 were up just under 2% year-over-year, but that included several onetime and/or unusual items without which our adjusted expenses would have been down more than 1%. We produced an adjusted pretax margin of roughly 41% and adjusted EPS of $0.73. Turning our attention to the balance sheet. Total assets dropped by 4%, driven primarily by tax-related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. And the overall level of realignment within Bank Sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023. Now as I mentioned earlier, we have seen strong growth in margin utilization to start the year. And to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter. What I want to emphasize again, that this is a good thing. We are more than happy to absorb a bit more borrowing on which we're paying just over 5% to support margin loans on which we're earning just under 8%. And finally, despite rates that increased slightly during the quarter, our capital position continued to get even stronger. With our adjusted Tier 1 leverage ratio, again, reminding you that's the one that's inclusive of AOCI and, therefore, what our binding constraint would be if we lose the AOCI opt-out, at Schwab Bank now well over 6% and just under 6% for the Company overall. Meaning, we are marching steadily towards our new operating objective for capital. Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year. And all indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from Bank Sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing. Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked, meaning, in the absence of this catalyst, we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time, we believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again. Now that solid start to the year lays the foundation for what we expect will be an even stronger end of the year, propelling us into growth through 2025 and beyond. We now expect our full year revenue to range between flat to up 2% versus 2023 or roughly in the middle of the mathematical illustrations you may recall we shared back in January. And as I shared back in May at our Investor Day, we now expect our adjusted expenses to be approximately 2% higher than 2023. And as a reminder, about half that change from the previous guidance is due to unanticipated onetime items such as the FDIC surcharge and the regulatory accrual, with the remainder coming from the increase in the SEC 31 fee, which is, again, is a pass-through expense and, therefore, P&L neutral. But to use the transitional word again, that annualized view masks the progression in earnings power by the end of the year. We're expecting flattish earnings from Q2 to Q3, but assuming the Fed cuts rates in September as is widely expected, we could see our NIM reach the mid-2.20s in Q4 on its way to approaching 3% by the end of 2025, which we believe will support adjusted earnings per share in the middle of the $0.80 to $0.90 range we outlined at the beginning of the year, with our earnings power building in 2025 and beyond. Despite long-term rates moving a little bit higher during the quarter, our capital levels are climbing steadily, and we continue to expect our consolidated adjusted Tier 1 leverage ratio to approach our slightly updated operating objective of 6.75% to 7% on a consolidated basis by the end of 2024, at which point it becomes more of a live conversation regarding whether and how we want to do further capital return, our number one priority for capital is always to support business growth. Now to the extent that we have capital in excess of what is needed to do that, we have, throughout our history, taking steps to return that to stockholders. That can be through increasing our dividend, which generally rises alongside earnings. That can be by redeeming outstanding preferreds to create additional dry powder for the future, especially preferreds that might be or might become relatively expensive, and that can also be, of course, through stock buybacks, which we do opportunistically. There is one additional consideration right now, which is to the extent that we have outstanding supplemental borrowing, we may choose to utilize some of the liquidity we'd otherwise use for buybacks to reduce some of that bank-level debt. Now doing that reduces our reliance on nonbusiness-as-usual funding sources, and given the relatively higher cost of the supplemental borrowing, it's likely more accretive to earnings in the near term, while preserving the capacity, the ability to implement stock repurchases at a later date. So by doing that, we can kind of have our cake and eat it too. Now those of you who have followed the Company for a while know that we don't tend to communicate bold, long-term financial targets. Rather, we continue to talk about our long-term financial formula, a relatively simple and straightforward formula that is based on our clear and straightforward business strategy, which we articulated, as you know, is through clients' eyes. And what makes that financial formula simple and straightforward is that it's based on a set of a pretty reasonable assumptions, for Schwab at least, around organic growth, revenue growth, expense containment and capital return, assumptions that we have delivered through the cycle over multiple decades. Over the last two-plus years, that formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances. But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we're nearing the point where that simple and straightforward formula, that simple and straightforward financial story should become more clear, one that without making some big leap of faith combined strong organic growth, strong profitability and substantial capital return. With that, I'll turn it over to Jeff to facilitate our Q&A. Jeff? Jeff Edwards: Thank you very much, Peter. Operator, can you please remind everyone how they may ask a question? Operator: [Operator Instructions] Our first question comes from Brian Bedell from Deutsche Bank (ETR:DBKGn). Please go ahead. Brian Bedell: Great. Thanks very much for the presentation. Maybe just, Peter, could you talk about your view on how you make deposit rates as the Fed cuts -- and I guess, first and foremost is your assumption in your targets based on, I guess, how many Fed cuts are based on that? And then just maybe just talk about how you might reduce direct deposit rates in sweep and the banking deposits as the Fed cuts -- essentially the deposit beta to that? Peter Crawford: Sure. So, thanks, Brian. So, the scenario that I outlined is based off the Fed cutting rates a single time in the rest of this year in September. In terms of deposit betas, I wouldn't necessarily assume that deposit betas are symmetrical. If you look historically, deposit betas tend to be a bit higher on the -- in the easing cycle than they are in a tightening cycle. And so, while we certainly haven't made any decisions exactly about what we'll do with deposit rates, I think that's a reasonable expectation. And we also would expect that as rates come down, the cost of any replacement supplemental funding that we have to access comes down as well. And we'd also expect that, on the margin, that rate cuts would, over time, bring about higher levels of clients' transactional cash as the incentive for them to utilize alternative solutions like purchase money funds and CDs become somewhat less. Operator: Next, we'll go to the line of Ken Worthington from JPMorgan (NYSE:JPM). Please go ahead. Ken Worthington: In terms of the use of third-party banks like TD, how much of your bank assets might migrate to third-party banks over time at sort of steady state? And how would you expect the economics to compare to the fees that you currently earn on a money market fund or in the Schwab Bank spread over rate cycle? And I guess lastly, given the Wells comments on Friday, is there a risk that using third-party banks might risk regulators having an opinion on the yields passed on to certain end-customers in the advisory or other segments of your business? Walt Bettinger: Yes. So, I think it's I think it's early to have definitive answers on the first set of questions that you asked. Although if you research our IDA agreement with TD Bank, it probably gives you a good direction with respect to the economics. The economics can be very attractive for us in terms of not needing to have capital relative to those deposits. And that's where I would probably direct you to look in terms of the economics of that. In terms of the level, we want to make sure that we maintain sufficient deposits at our bank to, again, fund the loans that our clients want, and then have appropriate levels of liquidity over and above that. With respect to the Wells Fargo (NYSE:WFC) issue, we have provided money market fund sweep cash and -- or money market yields on bank cash for all of our fiduciary-driven investment advisory solutions already. So, I don't really see the Wells Fargo report having any kind of meaningful implications for us. We've been doing this for an extended period of time already. Operator: Next, we'll go to the line of Kyle Voigt from KBW. Please go ahead. Kyle Voigt: Good morning. Just maybe on the Ameritrade attrition abating and net new assets getting back to that 5% to 7% level as they have grown historically. I guess with the knowledge of doing prior brokerage integrations, albeit at a smaller scale than the Ameritrade integration, so do you have any expectation of when you could get back into that range? And typically, when do you see attrition effectively fully abate after the last migration, which we've obviously just went through? Walt Bettinger: Let me start by saying first -- thanks for the question, Kyle. Let me start by saying when we look at our Schwab client base, we continue to grow within that 5% to 7% organic growth rate that we target over the long term. When you look at the Company level metrics, what's keeping us from the 5% to 7% overall is, in fact, behavior of the Ameritrade clients. And the great thing that we're seeing is we are seeing a change in their behavior. And it's in line with what we would expect, which is, first, we need to stop clients from leaving the firm and from Ameritrade flows being negative. And I think we're in the process of that happening. Walt referenced the significant improvement in Client Promoter Scores. That's true both on the retail side and the adviser side. So, Client Promoter Scores are getting higher. As those Client Promoter Scores are getting higher, we're moving from outflows from our Ameritrade clients to inflows. What we then need to do is to move a client base that hasn't had client flows quite in line with where Schwab organic growth rate has been historically. We need to move them from being positive contributors to net new assets to contributing at the same level as Schwab -- as our Schwab organic growth rate. And the way we'll do that is by introducing our Schwab model to Ameritrade clients, the financial consultant, the relationship model, the service, the advice, the consultants that we bring on the advisory side. All of that, we believe, will help accelerate the Ameritrade net new asset formation. So, we're confident we can grow in the 5% to 7% range. We continue to do so on the Schwab side today. And we're right where we'd expect to be in terms of the process of moving Ameritrade clients from being net detractors in net new assets to now being slightly positive. And then, we anticipate by introducing our model to them to be able to grow them to the same level as Schwab clients over time. Operator: Next, we'll go to the line of Dan Fannon from Jefferies. Please go ahead. Dan Fannon: Peter, I was hoping you could elaborate on your assumptions on what's going to drive the sequential growth really after being flat in Q3 to Q4, and specifically things like margin balances, which are growing, but as you said, are drawing more short-term funding. So curious about short-term funding levels plus some of the other assumptions in that Q3 to Q4 ramp. Peter Crawford: Yes. So, we can -- certainly, we can follow up with -- we have a number of assumptions on the page there, and you're welcome to follow up with the IR team in terms of some of the details. But broadly speaking, as I mentioned previously, the assumptions are as a single Fed cut in September, client cash realignment activity that continues to moderate. We expect it will flatten and then, again, ultimately resume growth. And then more of a continuation of the general -- relatively conventional assumptions on equity market depreciation, margin balance growth that goes along with that and so forth. In terms of supplemental borrowing, our priority, of course, is to pay that down as quickly as we can. But the pace at which we pay that down, it is dependent on the level of margin balance growth. And if we see -- continue to see more margin balance growth, we will, as we always do, want to make sure we support that growth. And at times, that means moving some cash out of the -- some client cash out of the bank over to the broker-dealer. But again, that is a -- we welcome the margin balance growth. It's good for clients. It means we're -- our clients are engaged, that we are supporting our active trader community, which is a very important segment for us. It's a very profitable interest-earning assets. So, we're more than happy to support that even if it means that it delays, to a certain extent, the pay-down of supplemental borrowing. It's accretive from a NIM standpoint, accretive from a net interest revenue standpoint, and so forth. So, it's why it's really, I think, I'd caution everyone not to focus on supplemental borrowing just in isolation in a vacuum, because it's influenced by other factors as well. Operator: Next, we'll go to the line of Steven Chubak from Wolfe Research. Please go ahead. Steven Chubak: Hi, good morning. So, Peter, you had outlined a couple of different self-help levers. I mean, the first is the potential to migrate additional cash off balance sheet in the future. I actually wanted to focus on the potential opportunity to accelerate pay-downs of the high-cost liabilities by repositioning the securities portfolio. And I was hoping you could just unpack what are some of the constraints that we should be mindful of when thinking through the potential opportunity. And is it fair to assume that you would likely wait until you're at your capital target at which point you would maybe consider pursuing that path? Peter Crawford: Yes. So, thanks for the question, Steven. So, I would say, I know we've gotten this question -- we've gotten this question a fair amount. And our thinking on repositioning trade hasn't really changed. We certainly understand the benefit of that on accelerating the paydown of supplemental borrowing, accelerating the net interest margin accretion, earnings accretion that we expect to happen over time. At the same time, we're very cognizant of, and very mindful, of doing anything that would jeopardize the trust our clients place in us, especially for the sake of, moving forward, something that we expect will happen on its own. And so that's why we haven't done that. So, I would say it's not something we, by any means, rule out altogether, but it's also not something we're looking to do in the near term. Operator: Next, we'll go to the line of Brennan Hawken from UBS. Please go ahead. Brennan Hawken: I'd like to follow up on the question around the shift to third-party banks as a place for deposits. So just at a high level, I'm curious if you could explain to us the strategic shift here because we spoke about it a year ago at the last what used to be the winter business update, now is the Investor Day, although I guess -- well, in 2023, it was at a different timing. And there was a defense of using the bank subsidiary. So, what led you to shift there? And then maybe just like timing-wise, when should we expect this to happen? And how do you strike the -- you referenced that you want liquidity above the need to fund the loans. How should we be thinking about what the bank will actually look like once things settle out and you take this journey? Peter Crawford: Yes. Thanks, Brennan. And so as I indicated, we're talking about years, not months and quarters. And we just want to foreshadow that, over those period of years, we think that there may be approaches that are more efficient in terms of rewarding our clients as well as rewarding our stockholders than maintaining 100% of the deposits at our bank. We want deposits, as I indicated, to be sufficient to cover the loans that we intend to do for our clients, that provide quality yields, deepen relationships and we're able to do at exceptionally low credit risk, as well as having liquidity beyond that. But we all recognize that deposit flows can be very volatile depending on rate environments. And we have in place one agreement already today that provides us substantial flexibility for client deposits with exceptional economics for us without the need for capital. And we think that there are other opportunities to consider expanding that. Again, I want to emphasize, the prepared remarks I made, that this is all subject to the economics of doing so. But we do think there are meaningful opportunities to lighten some of the capital load over time, again, measured in years, not months and quarters, that will provide us additional flexibility and also let us extend FDIC insurance to higher levels for our clients. Operator: Next, we'll go to the line of Benjamin Budish from Barclays (LON:BARC). Please go ahead. Benjamin Budish: Just thinking about the sort of cash inflows over the next maybe six to eight quarters, can you maybe provide an update on your expected pace of securities maturing off of the balance sheet? I think you've talked before about the back half of '24. But is there any update you could perhaps provide on what to expect in 2025? Peter Crawford: Yes. So, I mean I think I would think about that in terms of the pace of cash flows off the investment portfolio as sort of in the $10 billion to $11 billion a quarter, somewhere in that range, as the portfolio -- the size of the portfolio goes down, that it's reasonable to expect that that level of cash flow goes down as well, sort of commensurate with that. But sort of -- and that's a general rule of thumb over the next several quarters, I think, is a reasonable expectation. Operator: Next, we'll go to the line of Alex Blostein from Goldman Sachs (NYSE:GS). Please go ahead. Alex Blostein: Well, so a lot of these things we're talking about for the last several quarters are related to kind of self-help levers and improvement in the Company's earnings power ultimately start with improvement in the deposit trajectory of the business that will help supplement the borrowings, capital returns, et cetera. So maybe help us sort of refresh, now that you've had the business with Ameritrade for some time, how are you thinking about the normalized framework for growth in Schwab's deposits, sweep deposits, whether it's a percentage of net new assets or some other metric, but I guess also considering that, even if we do get rate cuts, the Fed funds rate and the market rate is still going to be probably meaningfully higher versus kind of the available deposit yield that you and the industry are offering. Peter Crawford: Yes. Thanks, Alex, for the question. So, I know there's a lot of focus on kind of month-to-month, even at times week-to-week changes in deposit flows. I think it's important to maybe set a little bit of context. So, first is deposit flows over a short period of time are influenced by net new assets, of course, the cash is brought in from new accounts, and then what clients do with that cash. And that can be rate-driven allocations that they make to purchase money funds, CDs and so forth. It can also be into engagement in the markets, equities, mutual funds and so forth. And so that can create some variability. We have seen strong engagement in the markets. And when we look at the rate-driven activity among our clients, that continues to go down. The second point of context I would make, which is that you do see variability in those flows from, frankly, from day to day or month to month. And we can see $2 billion or $3 billion of net inflows or outflows on a particular day. And so, when you just look at a month's numbers, depending on what day of the week the month ends on, it can influence the level of transactional cash that we report on that monthly basis. And I'd say June was sort of -- was comparable to May. July has started off stronger. It's still early, it's about halfway through the month, so we'll see how the month ends. But it is -- it started off definitely stronger than in terms of deposit flows than May. In terms of the long term, to your question long term, we would expect in a stable environment that client transactional cash grows with the growth in accounts and the growth in total assets. We actually recently did a study to look at clients who opened their accounts roughly 20 years ago. And what we see over time is, as those clients increase the net worth in their accounts, increase assets in their accounts, their cash balances go up and they actually stay at a relatively constant percent of the assets in the account. And so, I think as you are modeling our transactional cash over a long period of time, over years, I think it's reasonable to expect that that transactional cash grows with the growth in assets and the growth in accounts. When rates are rising, it will -- growth will be a little bit lower, and rates are falling, that growth will be a little bit faster. But I think over time in a stable environment, that's a reasonable expectation over, again, over multiple years. Operator: Next, we'll go to the line of Bill Katz from TD Cowen. Please go ahead. Bill Katz: Maybe a two-parter. The first one is just in terms of the Ameritrade metrics you had mentioned in terms of not up to the 5% to 7% growth rate that you're experiencing with legacy platform, can you scale and size the two relative asset pools that we're speaking to? And then the broader question I have is just as you're thinking now about migrating the growth of the bank, how should we be thinking about the end state of the size of the bank? And does this change your capital return methodology? Walt Bettinger: Let me start with the Ameritrade part of the question. We brought over about $2 trillion of Ameritrade client assets. We're at $9.4 trillion overall. So, Ameritrade is clearly an important part of our business. Looking at the longer term, important to remember the enthusiasm we have for the combination of the strength of Ameritrade and Schwab. We were talking a lot about short-term dynamics around cash and net interest margin and things like that. We have an incredible franchise that we've just spent four years putting together the best of everything Ameritrade had to offer with the best of everything Schwab has to offer. And the behavior we're seeing from our clients is exactly what we would expect. We went from clients who experienced a lot of change and might have had dual relationships at Ameritrade and somewhere else, making the decision that this wasn't where they wanted to be. And so we did see some attrition. That attrition was well below what our expectations were. And now we're seeing what we'd expect to see in the next phase, which is client satisfaction from those clients that were moved, who had their experience change, improving dramatically. We're up 35 points in our advisory services business in terms of our overall client promoter scores following the conversion. And on the retail side, nine months after a client moves, their satisfaction is up 50 points. So, we have built a platform that both sets of clients love. And now what we get to do for the long term and for the foreseeable future is deliver our mission of making a difference in our clients' lives through a platform that's never been stronger on the retail side and the adviser side than it is right now today. And so, we're confident in our long-term organic growth rate. We think the behavior we're seeing is exactly in line with what we would have expected, and are very optimistic for our future growth. Operator: Next, we'll go to the line of Michael Cyprys from Morgan Stanley (NYSE:MS). Please go ahead. Michael Cyprys: Maybe just circling back to the Wells Fargo announcement. Maybe you could just help clarify for us the magnitude of cash that you have in fiduciary accounts, the types of accounts these represent where you offer the money funding equivalent yields, is this just retirement only? And then just more broadly, how do you think about the risk over the long term that industry practices evolve with more account types over time that capture these money fund equivalent yields? Walt Bettinger: So, I just want to clarify, in our fiduciary relationships where we -- in our Managed Investing programs, our wealth programs, cash assets are invested in a sweep government money fund. So, we don't have this exposure that Wells Fargo has. Operator: Next, we'll go to the line of Chris Allen from Citi. Please go ahead. Chris Allen: I wanted to ask about the 3% NIM outlook for 2025. Just wondering what are the parameters that you're baking in to get there? Does this entail any of the changes that you talked about around the balance sheet strategy in terms of shortening duration as well? Peter Crawford: Yes. Thanks, Chris. So, the 3% -- approaching -- NIM approaching 3% by the end of 2025, the primary driver of that is, again, the moderation of the client transactional cash realignment activity and the paydown of the supplemental borrowing. That is very, very accretive to our net interest margin. In terms of whether the comments that Walt provided have any influence over that, I'd just reiterate what he said, which is that is something that's evolutionary, not revolutionary. It's going to play out over multiple years. And so, it doesn't influence at all really the -- that more near-term outlook that we have for the end of -- towards the end of 2025. Thanks for the question. Jeff Edwards: Operator, I think that time for one short question, and then we're going to close. Operator: Absolutely. Our final question comes from the line of Devin Ryan from Citizens JMP. Please go ahead. Devin Ryan: Just had a question about lending. And obviously, it's been an area you guys have been talking about both at the Investor Day and then today as well. Just thinking about kind of where Schwab is, your 40 basis point decline assets. I think you highlighted that the industry [Technical Difficulty] [00:57:24] percent. So just would love to get some color around where -- how much of that gap do you think you could actually close just with your, I guess, suite of products, number one. And number two, what you're comfortable going to in terms of the mix of the balance sheet, especially just given some of the evolution of the balance sheet we're talking about today as well. Walt Bettinger: Thanks for the question, Devin. We certainly think we can expand our lending capabilities. And the way we're focused on doing that is by creating the easiest, most straightforward, client-friendly process in the industry. We've seen that within our pledged asset line program where it's now 1.7 days average cycle time to get a pledged asset line. It's actually less than a day for individual and joint accounts, but our more complex ones drive up the average time. 85% of those originations are now done digitally. These are major enhancements. And we're making other enhancements to our mortgage process, to the way we lend to our higher net worth clients and the experience they have. So, we're trying to build an experience that makes it such that our Schwab clients never want to borrow somewhere else, they want to borrow from us. So, we do think there is lots of runway to close that gap, and we're quite bullish on our -- on the opportunity here. Now, we are in an interest rate environment where there's not as much borrowing as we've seen historically, not as much rolling over of loans and things. But we are confident that we've built the process, the experience and the offer that we should be for our clients an exceptional place to borrow. And that includes our industry-leading rates for clients that have assets with us. Final comment I'd make is it's also a terrific way to add to the service that we provide to our adviser clients. Our advisers for years have been asking us to do more lending because they don't want to have to introduce another party into the relationship. And increasingly, we're able to meet their needs, which delights them, and we think we'll be able to do more of that over time. Peter Crawford: All right. Well, I think it's my opportunity or my time to close. I want to thank all of you for joining us this morning and hearing our thoughts on the business and the opportunity in front of us. I think it's very easy to focus on very near-term practical measures. And as client cash realignment activity, plus or minus $1 billion, or supplement our borrowing or net interest margin in terms of -- which we measure in terms of basis points. And those of you who follow the Company for a long time know that we manage for the long term. We have a very long-term orientation. Our faith in our clients, our faith in our strategy, our confidence in that strategy really helps us remain focused on long term. And Walt described this year at the outset as a transitional year. And I think as we sit here halfway through the year, we feel really good about how that transition is going in terms of our strategic positioning, in terms of the completion of the Ameritrade integration and the satisfaction of those clients, in terms of the organic growth, the capital levels, and even the financial performance. And we certainly recognize the journey is not over by any means. We're feeling very confident about where we are and where we're going. Thanks, everyone, again, and we look forward to speaking with you again in October.

Bank of America (BAC) Q2 2024 Earnings Call Transcript | The Motley Fool

Good day, everyone, and welcome to the Bank of America earnings announcement. At this time, all participants are any listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator instructions] Please note, this call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Lee McEntire of Bank of America. Lee McEntire -- Senior Vice President, Investor Relations Good morning. Welcome. Thank you for joining the call to review our second-quarter results. Our earnings release documents are available on the Investor Relations section of the bankofamerica.com website, and they include the earnings presentation that we will make reference to during the call. I hope everyone has had a chance to review those documents. Our CEO, Brian Moynihan, will make some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Let me just remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on our website. So, with that, let me turn the call over to Brian. Thank you, Lee, and good morning and thank all of you for joining us today. Before I begin today, I just want to reflect for a second on the horrible events this weekend. We at Bank of America are clear that there's no place for political violence in our great country, and we continue to wish the former President Trump a speedy recovery. And our thoughts, of course, go out to the victims and their families and others impacted by this terrible event. With that, let's turn our results -- let's turn our attention to the results for the second quarter of 2024 Bank of America Corporation. This quarter, we achieved success in a number of areas, underscoring the benefits of our diversity and the dedication of our team to deliver responsible growth. Our organic growth engine continues to add customers and activity in all our businesses even as we see the drop in net interest income this quarter. I'm starting on Slide 2. Our net income for the quarter was $6.9 billion after tax or $0.83 in diluted EPS. Attesting to the balance in our franchise, the earnings were split evenly, half in our consumer GWIM businesses, which serve people, and the other half in our institutional-focused business, global banking and markets. We grew revenue from the second-quarter 2023 as improvement in noninterest income overcame the decline in net interest income. Fees grew 6% year over year and represented 46% of total revenue in the quarter. Our strong fee performance was led by a 14% improvement in asset management fees in our wealth management businesses. We grew investment banking fees 29% year over year and saw sales and trading revenue increase 7%. Global markets had its ninth consecutive quarter of year-over-year growth in sales and trading revenue, a good job by Jimmy DeMare and his team. Card and service charge revenue also grew by 6% year over year in our consumer business. Much of this fee growth is a result of our intensity around organic growth and is a testimony to the -- a testament to the diversity of our operating model. Now, on to Slide 3. Organic growth has been driven by several key factors. First, we focus on our customers. We continue to place them at the center of everything we do. Consumer led the way in delivering solid organic growth with high-quality accounts and engaged clients. For the 22nd consecutive quarter, we had significant net new consumer checking accounts. We expanded our customer base and our market share. Specifically, we added 278,000 net new checking accounts this quarter, which brings our first six months of 2024 to more than 500,000. In wealth management, we added another 6,100 new relationships this quarter. In our commercial businesses, we added thousands of small businesses and hundreds of commercial banking relationships. This has led to now managing $5.7 trillion in client balances, loans, deposits, and investments across the consumer and wealth management client segments. In those areas, we saw flows of $58 billion in the past four quarters. Our emphasis on personalized financial solutions and superior customer service has strengthened customer loyalty, attracting new clients across all our businesses. Our focus on providing liquidity and risk management solutions to our institutional clients positions us to continue to gain more share of their wallets as well. Second, we continue to deliver innovative digital solutions. One of the primary contributors of both attracting and maintaining customers to our platforms is our digital banking capabilities for our clients across all the businesses. Our fully integrated consumer banking investment app drives the utility for our customers across their investment and consumer accounts. Our user stats are strong proof points. Our second-language capabilities in our consumer businesses further enhance our customers' capabilities. You can see the continued digital growth in the slides on Pages 26, 28, and 30 in the appendix. A couple of highlights. Our consumer mobile banking app now serves more than 47 million active users. They logged in 3.5 billion times this quarter. We also committed -- continued to see more sales through the use of our digital properties. Digital sales represented 53% of our total sales in the past quarter in our consumer businesses. 23 million consumers are now using Zelle. They send money on Zelle at nearly two and a half times the rate they write checks. And in fact, more Zelle transactions -- send transactions take place in the combination of customer ATM transaction, cash withdrawals, and teller. Simply put, Zelle is becoming a dominant way to move money. In our Wealth Management business, we are seeing more banking accounts being open to complement the investment business those clients do with us. Importantly, these clients are also recognizing the ease of our digital banking capability. Seventy-five percent of our new accounts in our Merrill teammates were opened digitally. Eighty-seven percent of our global banking clients also are digitally active. We have innovated and significantly streamlined service requests by enabling clients to directly initiate and track transaction inquiries within our awarded CashPro platform using AI to accomplish that. Third, we continued to make core strategic investments in our businesses. We're not complacent with the success you see on this page. We continue to strategically invest in our core businesses. A few examples. While we had a leading retail deposit share in America, we continued to invest and have opened 11 new financial centers this quarter in the first half of the year and renovated another 243. This is investment in both our expansion markets and our growth markets. In wealth management, we continue to invest in our Advisor Development Program. It's grown to 2,300 teammates, allowing us to continuously add more than -- teammates to our 18,000 strong best-in-class financial advisory force across all our wealth management businesses. We're also adding teams of experienced advisors strategically in areas across the country. In our banking teams, we continued to add to our regional investment banking team. We now have more than 200 regional bankers across the country to better serve our commercial clients, and they complement our industry coverage to our corporate clients. In our global markets business, we continued to extend balance sheet to our clients and adding expertise and talent to continue to lead our market share improvement seen over the last several years. We also have increased our technology initiatives and expect to spend nearly $4 billion on technology initiatives this year. We have focused projects around our artificial intelligence enhancements with both clients and our teammates. A recent example of our use of AI is our Advisor and Client Insights tools. We've delivered more than 6 million insights year to date to our financial advisors, providing them proactive reason to engage with clients. AI has moved from cost-savings ideas to enhancing the quality of our customer interactions. Fourth, our organic growth is driving integrated flows across our business. We invest heavily in each line of business that compete in the markets based on their particular customer segment. But importantly, we also invest across our lines of business to knit them together and gain market share in the local markets. It's a differentiated advantage for us, our banking leadership position across our businesses and our nationwide franchise. For example, we leverage our franchise by connecting business customers to our wealth management teams. Our teams across all our businesses have made 4 million referrals to other businesses in the first six months of this year. Next, we drive efficiency and effectiveness, and that's through our operational excellence platform. We continue to invest heavily in the future of our franchise and growth while we also have to manage expenses day to day. Our focus on operational excellence has enabled us to hold our expense growth up to 2% year over year, well below the inflation rates. We continue to work to achieve operating leverage as NII stabilizes and begins to grow again. As you look at it and Alastair will explain later, a fair portion in the year-over-year increase in expense is due to the formulaic incentives of wealth management due to the fee growth in that business. And last, our capital strength allows us to deliver for all stakeholders. Our capital remained strong as we held our CET1 ratio at 11.9% this quarter. We grew loans, increased our share repurchases to $3.5 billion and paid $1.9 billion in dividends. Average diluted shares dropped below 8 billion shares outstanding. In addition, we also announced our intent to increase our quarterly dividend 8% upon board approval. Note that 11.9% CET1 ratio remained a solid excess capital position above -- both above the current regulatory requirements and the increased requirement to 10.7% beginning October as a result of the recent CCAR [Inaudible]. Let's turn to Slide 4. A couple of things to note here. First, we've noted for several quarters that the second-quarter NII would be the trough for this rate cycle. We expect NII to grow in the third quarter and fourth quarter this year. Alastair is going to provide you some points in detail about the path forward. One important contributor to that change is the positive behaviors of our customers. On Slide 4, you'll note that average deposits grew 2% year over year and increased modestly linked quarter. The second quarter in reality is typically a heavy outflow quarter. We have a lot of customers who pay a lot of taxes in that quarter. Quarter-over-quarter increases in rates paid continued to slow again this quarter across all businesses except for wealth management. And we show you that on this page, Slide 4, by line of business. While wealth business deposit rates have moved higher with continued rotation, we expect those rates to begin to stabilize and the rate of quarterly change to decrease going forward. Turning to Slide 5. In previous calls, many of you have asked questions or comment upon the question about consumer net charge-offs and when would they stabilize in the second half of 2024. That expectation we have remains unchanged as well. This quarter's net charge-offs were 59 basis points. And for context, this is a stabilization of the rate. I would just remind you that prior to this quarter, I have to go all the way back to 2014 to see a charge-off rate that high, and that's near when we were still emerging from the financial crisis. On Slide 4, we highlight the 30- and 90-day-plus credit card delinquency trends, which show delinquencies have plateaued for the second consecutive quarter. This should lead to stabilized net credit losses in credit card in the second half of the year. At the bottom of the page, note a couple of facts. First, on the payment rates. This is the rate of paydown of balances in a given month. It remained 20% above index to the pre-pandemic levels even while our card customers have plenty of capacity to borrow. And importantly, because of our relationship-based businesses, look at the right-hand side at the bottom of Page 5. There, you can see our deposit and investment balances of our customers who also have a card with us remained 25% above their pre-pandemic levels, illustrating continued health of these customers. So, as you think about consumer credit, the card charge-offs drive it and they flattened out in terms of delinquencies, and we expect them to improve in the second half. With regard to commercial real estate, our usual CRE credit exposure slide is included in our appendix. We continue to aggressively work through our loans in our modest CRE office portfolio. We saw a decrease in all the categories, a decrease in reservable criticized loans, a decrease in NPLs, and a decrease in net charge-offs. This supports our previous expectation that net charge-offs in the second half of 2024 will be lower than the first half of 2024. Our second-quarter performance highlights Bank of America's ability to generate strong, sustainable growth through a combination of customer-centric strategies, innovation, strategic investments and a commitment to a strong balance of risk and reward. We call that responsible growth. We're confident that focused approach will continue to drive long-term success and create value for you, our shareholders. Now, I will turn it to Alastair for additional thoughts. Alastair M. Borthwick -- Chief Financial Officer Thank you, Brian. And I'm going to start on Slide 6 of the earnings presentation. I'll touch on more highlights noted on Slide 6 as we work through the material. I just wanted to say upfront that we delivered strong returns with return on average assets of 85 basis points and a return on tangible common equity of nearly 14%. So, let's move to the balance sheet on Slide 7, where you can see we ended the quarter at 3.26 trillion of total assets, relatively unchanged from the first quarter. And not much to note here apart from a mix shift of lower securities balances, mostly offset by an increase in reverse repo and modest loan growth as well as global markets client activity. On the funding side, deposits declined 36 billion on an ending basis, reflecting typical seasonal customer payments of income taxes. And as Brian noted, average deposits were still modestly higher. Liquidity remained strong with 909 billion of global liquidity sources. That was flat compared to the first quarter. Shareholders' equity was also flat compared to Q1 as earnings were offset by 5.4 billion in capital distributed to shareholders and a 1.9 billion redemption of preferred stock in the quarter. The 5.4 billion of capital contributions included 1.9 billion in common dividends and the repurchase of 3.5 billion in shares. AOCI improved modestly in the quarter, and tangible book value per share of $25.37 rose 9% from the second quarter of last year. In terms of regulatory capital, our CET1 level improved to 198 billion, and the CET1 ratio was stable at 11.9%. This 11.9% ratio remained well above our current 10% requirement as well as our new 10.7% requirement as of October 1st, 2024. Risk-weighted assets increased modestly and that was driven by lending activity. Our supplemental leverage ratio was 6% versus our minimum requirement of 5%, and that leaves plenty of capacity for balance sheet growth. And our 468 billion of TLAC means our total loss-absorbing capital ratio remains comfortably above our requirements. Brian already covered deposit trends, so let's turn the balance sheet focus to loans, and we'll look at average balances on Slide 8. You can see average loans in Q2 of 1.051 trillion. They improved 1% year over year, driven by 5% credit card growth and modest commercial growth. The modest improvement in overall commercial loans included a 2% increase in our domestic commercial loans and leases, partially offset by a 4% decline in commercial real estate. Middle market lending saw an uptick in the quarter, and we saw good demand in our wealth businesses from custom lending. These areas of growth were largely offset by continued paydowns from our larger corporate clients on interest rate sentiment. Consumer growth was driven by credit card borrowing. And while home lending balances were flattish, originations picked up a bit this quarter. Lastly, and on a positive note, loan spreads continued to widen. As we turn our focus then to NII performance and Slide 9, note that we moved the slide we typically use to talk about excess deposits to the appendix on Slide 22. So, you can see that there. Our excess deposit levels above loans remained high at 850 billion and continued to be a good source of value for shareholders. Fifty-two percent of our excess liquidity is now in short-dated cash and available for sale securities. The longer-dated lower-yielding hold-to-maturity book continues to roll off, and we reinvested again this quarter in higher-yielding assets. The blended yield of cash and securities continued to improve in the quarter and is now 160 basis points above our deposit rate paid. Regarding NII, on a GAAP [Technical difficulty] Operator To all locations on hold, please remain online. We're experiencing a technical difficulty. Please remain online. You'll hear music for just a moment. Alastair M. Borthwick -- Chief Financial Officer Will materialize. And this now includes three interest rate cuts starting in September, another in November, and one more in December. And the waterfall shows an estimated impact of those rate cuts to our quarterly NII. The next couple of categories are a result of natural management of interest rate risk in a balance sheet mixed with fixed rate assets and variable rate assets. And our balance sheet is split roughly half and half. So, we take in liquidity from customers that we use to fund our assets, and then we store excess liquidity in cash and securities. We have fixed assets that mature and pay down, and those supply cash that then gets put back to work on the balance sheet and reprices over time. And we have two basic categories of fixed assets, the mature and pay off, and those are securities and loans. On securities, you can see we've got about 10 billion a quarter of cash coming off of our securities portfolio. And we gained roughly 300 basis points of improvement on those assets when we put that money back from the balance sheet. On loans between resi mortgage and auto, we've got another roughly 10 billion, which reprices with a little less yield improvement on securities. And between the securities and loans, we expect the fixed rate asset repricing adds about 300 million through our quarterly rate of NII as we get to the fourth quarter. On the variable rate asset side and to protect from down moves in rates, we hedge some of that with cash flow swaps. And those typically roll off in any given quarter and get replaced over time. So, included in the cash flow hedges is an impact of cessation of BSBY as an alternative rate. If you recall, we took a charge in the fourth quarter of '23. It was 1.6 billion, and we said that would come back to us through time. And beginning in November, we started to see the benefit coming back into NII. And in Q4, that's about 200 million. That Q4 partial quarter benefit will grow by a slightly smaller sequential NII benefit in Q1 '25 and then it begins to taper off heading into 2026. In addition, we've got about 150 billion of received fixed cash flow hedges protecting us from short rate moves moving lower. Most are hedging floating rate commercial loans, and the cost of those hedges is reported as contra revenue in commercial loan interest income. These hedges have a weighted average life of just over two years, and they've got an average fixed rate of approximately 250 basis points. So, starting in the second half of 2025, we begin to get some additional NII tailwind because the cash flow hedges with lower fixed rate likes where we receive. Those will begin to roll off and will likely replace those at higher current market rates at the time. The actual size of the tailwind we'll get from the expiration of those swaps will obviously be highly dependent on the level and the shape of the yield curve at the time of those maturities, and that stretches out over the course of the next four years. OK. A couple of other points to make. You'll note we don't expect much movement around our modestly liability-sensitive global markets NII activity. And lastly, our forward view has an expectation of low single-digit growth in loans, low single-digit growth in deposits with continued slowing of rate paid movement through the back half of 2024. And you can see our expectation of the combined impact here as well. This last element is the one that has the most potential variability. And obviously, it will depend upon actual deposit and loan growth and pricing and rotation. OK. Let's turn to expense, and we'll use Slide 11 for the discussion. We reported 16.3 billion of expense this quarter, and that's more than 900 million lower than Q1, which included 700 million for the FDIC special assessment. Not including the FDIC assessment, expenses were lower than Q1 by 229 million, driven by seasonally lower payroll tax expense. Compared to Q2 '23, we're up less than 2%, and that increase is equal to the incentives paid for improved fee revenue. Incentives for our GWIM business alone are up 200 million year over year. And that's obviously an expense we're happy to pay when we have a 14% improvement in fees for assets under management. Our second-quarter head count number included welcoming a diverse class of nearly 2,000 summer interns, who we hope will join us over the course of the next year or two upon their graduation. And absent those interns, our head count fell by nearly 2,000. In the third quarter, we expect to add approximately 2,500 college graduates for full-time more than -- and that's from more than 120,000 applications received, showing that we remain an employer of choice for talented young people. Expense levels for the rest of 2024 are expected to bounce around the second-quarter level, given the higher fee revenue and investments made for growth. So, let's now move to credit, and we'll turn to Slide 12. There was little change in our asset quality metrics this quarter. Provision expense was 1.5 billion. That was 189 million higher than Q1, driven by a smaller reserve release in Q2. Net charge-offs of 1.5 billion were little changed with a small increase in credit card mostly offset by lower commercial real estate office charge-offs. On a weighted basis, we remain reserved for an unemployment rate of nearly 5% by the end of 2025 compared to the most recent 4.1% rate reported. The net charge-off ratio was 59 basis points, largely unchanged from Q1. On Slide 13, we highlight more credit quality metrics for both our consumer and commercial portfolios. Consumer net charge-offs increased by a modest 31 million versus the first quarter from the flow-through of higher late-stage credit card delinquencies from Q1. Highlighting the change in direction of delinquencies, consumer 90-day-plus delinquencies declined in 2Q by 57 million. Commercial net charge-offs were relatively flat as lower commercial real estate losses were mostly offset by a small increase in other commercial loans. Our office losses went from 304 million in Q1 to 226 million in Q2. Other commercial real estate loan losses were simply one hotel. OK. Let's move to the various lines of business and some brief comments on their results. And I'll start on Slide 14 with consumer banking. For the quarter, consumer earned 2.6 billion on continued strong organic growth. And reported earnings declined 9% year over year as revenue declined from lower deposit balances compared to the second quarter of last year. Customer activity showed another strong quarter, net new checking growth, another strong period of card openings, and investment balances for consumer clients, which climbed 23% year over year to a new record 476 billion. That included 12 months of strong flows at 38 billion in addition to market appreciation over the time. As noted earlier, loans grew nicely year over year from credit card, as well as small business where we remain the industry leader. The team held expense flat year over year, reflecting good work with continued business investments for growth, offset by the operational excellence work to improve processes and move more of our transactions to digital. And as you can see in the appendix, Page 26, digital adoption and engagement continued to improve. And customer satisfaction scores remained near record levels, illustrating customer appreciation of our enhanced capabilities due to our continuous investment. Moving to wealth management on Slide 15. We produced good results and those included good organic client activity, market favorability and strong AUM flows. And this quarter also saw good lending results. Our comprehensive suite of investment in advisory services, coupled with our commitment to personalized wealth management planning solutions, has enabled us to meet the diverse needs and aspirations of our clients. Net income rose 5% from the second quarter of last year to a little more than a billion. In Q2, we reported revenue of 5.6 billion, growing 6% over the prior year. As Brian noted, strong 14% growth in fee revenue from investment and brokerage services overcame the NII headwind. Expense growth reflects the fee growth and other investments for the future. The business had a 25% margin, and it generated a strong return on capital of more than 22%. Average loans were up 2% year over year, driven by strong growth we're seeing in custom lending and a pickup in mortgage lending. Both Merrill and the Private Bank continued to see good organic growth. And they produced strong assets under management flows of 58 billion since last year's second quarter, which reflects a mix of new client money as well as existing clients putting more of their money to work. I also want to highlight the continued digital momentum in this business, and you can find that on Slide 28. On Slide 16, we turn to global banking results. And here, the business produced earnings of 2.1 billion, down 20% year over year, as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 6%, driven by the impact of interest rates and deposit rotation. The diversified revenue across products and regions reflects the strength of our global banking franchise. In our GTS business, fees for managing the cash of clients offsets a lot of the NII pressure from higher rates. And clients are accessing the capital markets for their capital needs instead of borrowing. Investment banking had a strong quarter, growing fees 29% year over year to nearly 1.6 billion led by debt capital markets fees, mostly in leveraged finance and investment grade. And we finished the quarter strong, maintaining our No. 3 investment banking fee position globally. A solid start to 2024 has left us in a good position with top three rankings now in North America, Latin America and EMEA and number six in APAC. And we're seeing strong performance in important industry groups as well. An increase in provision expense from last year was driven by the commercial real estate net charge-offs I discussed earlier. And expense increased 3% year over year, including continued investment in the business. Switching to global markets on Slide 17. I'll focus my comments on results excluding DVA, as I normally do. The team had another terrific quarter as we generated good revenue growth and achieved operating leverage and continued to deliver a solid return on capital. Earnings of 1.4 billion grew 19% year over year, and return on average allocated capital was 13%. Revenue, and again, this is ex DVA, improved 10% from the second quarter of '23. Focusing on sales and trading ex DVA, revenue improved 7% year over year to 4.7 billion, and that's the highest second quarter in over a decade. FICC was down 1% while equities increased 20% compared to Q2 '23. FICC revenues remained strong and versus Q2 '23. They were modestly lower driven by a weaker macro trading quarter in FX and rates. And that was largely offset by better commodities and mortgage trading. Equities was driven by strong trading results in derivatives and cash equities. Year-over-year expenses were up 4% on revenue improvement and continued investment in the business. Finally, on Slide 18. All Other shows a loss of 0.3 billion, and that was little changed year over year as lower expense was offset by lower provision costs as a result of reserve changes. Our effective tax rate for the quarter was 9%. And excluding discrete items and the tax credits related to investments in renewable energy and affordable housing, the effective tax rate would have been 25%. And with that, I think we'll stop there, and we'll jump into questions. Lee McEntire -- Senior Vice President, Investor Relations All right. Alastair and Brian, I just wanted to -- I did hear some feedback that maybe the audio from the call got interrupted for a moment. So, at the point at which it got interrupted, I just want to reiterate a couple of points that Alastair was making. If you go back to Slide 9, where I think we lost the audio, was where we started beginning a discussion about the performance from Q1 to Q2 of net interest income. That was driven by higher funding costs and the rotation of deposits seeking higher yield alternatives. And while higher again in Q2, both the rotation and the rate paid increases did continue to slow down. On the Slide 10, I think the only points that I would make that Alastair began to discuss there was we are just reiterating our expectation that Quarter 2 would be the bottom for the NII in the rate cycle that we have been in. And our trajectory remains the same, the belief that our NII will begin to rise in Q3 compared to Q2 and then rise again in Q4. We provided the range of expectations that Alastair covered. And we expect Q4 NII to be around the 14.5 billion level, plus or minus. That would be approximately 4% to 5% higher than this quarter's NII. And he began that discussion by making sure that you know that we pick up an extra day of net interest income in the Q3, providing about 125 million of additional NII that also carries through into Q4. You see that on the slide. It also assumes that the current forward curve will materialize. Those -- that said, that interest rate cuts will start in September. We will expect another one in November and December in the curve. And the waterfall includes an estimated impact of those rates to quarterly net interest income. And so, then we started the discussion -- he began the discussion on the fixed asset repricing, which then I think is where the audio picked back up again. And so, we're happy to answer some questions on that. I know you'll have questions, but just wanted to recover that point -- those points for you. Operator [Operator instructions] We'll take our first question from Glenn Schorr of Evercore. Glenn Schorr -- Analyst Hi. Thanks very much. Hello there. And definitely appreciate Slide 10 a lot. I know you would have given us a 2025 NII guide if you wanted to give us one. So, feel free to give that if you want, but that's not my question. My question is, given all the pieces of the puzzle that you gave us, expectations for modest loan and deposit growth and slowing deposit-seeking behavior, if you get that 4% pickup from 2Q to 4Q this year that you're expecting, right now or at least recently, consensus had NII looking flattish with that fourth-quarter number. And that doesn't make a lot of sense, given all the pieces. So, maybe if you can just comment directionally, if you don't want to give the number, of does it make sense to you that we'd collectively be expecting flat NII with your higher fourth-quarter number? Alastair M. Borthwick -- Chief Financial Officer So, Glenn, you're right. We're probably not going to give guidance around 2025 for all the reasons that you would expect. What we're trying to do here is reinforce for everyone what we've been saying from the beginning of the year, and that is we think Q2 is the trough. And we believe, from this point, we're in a good position to grow. Now, when you look at some of the elements of this bridge, you'll draw your own conclusions with respect to fixed rate asset pricing is going to persist for some period of time. And you'll be able to draw your own conclusions. But I just want to point out, we've been pretty clear on our guidance for Q1 and Q2. We've always felt like this would be the trough. We feel like Q3 and Q4 are likely to be better. You can see our work here; we've laid it all out. Nothing's really changed in terms of that. And the most important thing, I think, for everybody here is we feel like 2024 is a really foundational year. It's this twist period where we just got to get through the last of the deposit rotation, and we're establishing a foundation for growth from here. So, that's what we're trying to convey. Glenn Schorr -- Analyst Maybe I could just ask a follow-up on deposits within the wealth business. You have 4 trillion of client assets. I'm curious if you break out the split between brokerage and advisory accounts? Can you hear me OK? I'm hearing tons of feedback, sorry. OK, sorry. So, 4 trillion in client assets -- great. Four trillion of client assets in wealth. I'm curious if you could give us the split between brokerage and advisory. And the reason I'm asking is I'm curious how you've been handling rate paid on cash and advisory accounts, and whether we should expect any behavioral changes following the recent Wells news. Look, Glenn, I'm not sure these things should be the distinction I'd look to. We price -- we've gone through a massive change in cash infused in the economy and withdrawn now under monetary policy. And so, as we stabilize, our instructions to our team are to grow our deposit base a little bit faster than economy. That means you have to price across the board to achieve that. And what -- if you look at the Slide 4 or 5, where I showed you sort of the change, what you see is the wealth management business takes a little bit longer because those clients have more investment cash with us, not what you're thinking, investment counts, because in their money, how they think about cash is they don't need the daily cash flow and they move that around. That largely is over. And if we look in the last four, six weeks, we're seeing those deposits, that business bounce around the $280-odd billion level, not a lot of movement. And it will keep moving in and out depending on customers paying down, paying their income taxes, taking more risk in the market and all those things. But the deposit pricing changes that we made to ensure that they were on a platform that could grow, having been as high as 350 billion down to 280 billion were made in the quarter and all through the P&L. We'll take our next question from Jim Mitchell of Seaport Global. Jim Mitchell -- Seaport Global Securities -- Analyst Hey, good morning. Maybe just a quick follow-up, and I don't mean to beat a dead horse on NII, but can we just -- can you just help us think through the puts and takes on you have rate cuts at the end of the year, forward curve implies more next year. As that cumulative impact starts to hit next year, I guess what gives you confidence that this is sort of the trough? What are all the puts and takes that we should think about in how we model the NII for next year when we think about the forward curve and that impact? Alastair M. Borthwick -- Chief Financial Officer Jim, I think this bridge probably is all the right inputs for any given year. I mean, we've chosen to do it for 2024. We've always resisted going out too far for the very simple reason that there are so many variables, and they start to multiply with one another. If you think about even the rate cut one here, we're using the three cuts, September, November, December. If I did this as of Wednesday of last week, there would have been two. Earlier in the year, there were six. So, since we don't know what that path looks like, it's very challenging then to provide guidance for '25 at this stage. But what we're laying out here is these are the component parts. We're going to get some benefit from fixed rate asset pricing over time. We're going to get some benefit in the immediate term from the BSBY cessation, and that's leading back into the P&L. As that rolls off, we'll get benefit from cash flow hedges repricing. And then we use the forward curves, same as you do, for the rate cuts. We benefit a little bit from global markets' liability sensitivity. And then the final piece is the piece that we're trying to drive in terms of organic growth. We're trying to drive this loan growth, trying to drive the deposit growth. And as Brian pointed out, it's been a pretty unusual period in history where we've had an enormous change in the rate structure and in the fiscal stimulus and the effects now fading away to something more normal. But that last box will come down to your assumptions versus our assumptions. And we will update you as we go through the next couple of quarters, and we'll give you a better sense toward the end of the year. Jim Mitchell -- Seaport Global Securities -- Analyst OK. That's all fair. And maybe just on the growth piece, maybe deposits seem to have bottomed for you guys in the second quarter of last year. You've had good growth. I think Brian pointed out, even with the tax headwind this quarter, you grew sequentially. So, good performance, but still pretty modest. How are you thinking about the growth trajectory from here, I guess, as we think about -- is it -- does it accelerate with rate cuts in your view? What are the dynamics are you thinking about as sort of returning to that historical kind of mid-single-digit deposit growth within BofA and the industry? Alastair M. Borthwick -- Chief Financial Officer Well, I think Brian covered Slide 4. That top-left chart gives a sense for what's going on with the growth that's average growth over time there. We've had four quarters in a row. So, we feel good about that part. Q2 does tend to be a slower quarter just with all the tax payments. So, we think deposits will do better over time, particularly as we get past peak Fed funds. We feel like the pricing in rotation is -- you can sort of see in our numbers, they're slowing. So, we're getting toward the end there. We're getting toward the end of Q3. So, we're not quite finished on all of those things yet. I'd be careful about getting too excited about deposit growth, but we feel like we're doing OK so far, and we've just got to keep driving that. We'll take our next question from Mike Mayo of Wells Fargo Securities. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. I'll start with a simple question. You mentioned loan spreads have improved. Why is that? Where is that? Do you expect that to continue? Alastair M. Borthwick -- Chief Financial Officer Loan spreads have improved for us, Mike, over the course of the past, I think, it's now eight or nine quarters. It's primarily in the commercial businesses. And it's largely because we have to price the balance sheet for the returns that our shareholders expect. And that's true, I think, for the industry, and we've been quite purposeful in that regard. So, we've tried to balance price spread and growth over the course of time, but it's primarily a commercial phenomenon at this point. And I would expect that to continue for the foreseeable future, but it's a competitive environment. We've got to see. Mike Mayo -- Wells Fargo Securities -- Analyst OK. You gave us Slide 10, a lot of details there. You talked about the September rate cuts, the fixed asset repricing, securities repricing, loans repricing, mortgage and auto, lots maturing November, received fixed cash swaps, and a whole litany of stuff. But I think when you put it all together, what it's led to is the net interest margin of only 1.93%. In fact, I think your yield on your assets is below Fed funds right now. So, would you agree that you're under earning with that NIM of 1.93%? And I know I've asked this question before, but you always have to mark to market. What is a normal NIM? I mean, you were 2.5% in 2017. You were 3% in 2004. And I know the composition has changed and everything. But what's normal NIM? And what do you think is a normal return on tangible common equity through the cycle? Thanks. Alastair M. Borthwick -- Chief Financial Officer So, I'd say right now, in terms of the 1.93, we feel like we are under earning. We feel like that number is going to go up over time. It will go up as net interest income goes up. But additionally, I think the balance sheet is likely to stay kind of flattish here. So, the numerator is going to grow. The denominator is going to stay pretty tight here. So, we think we're under-earning there. We think through a cycle, we've got to get back to a more normal number like 2.30-ish over time. That takes a while. It's a grind, Mike, quarter after quarter. So, that's where we're headed. And in terms of return on allocated capital, right now, we're right around that 14%. We want to be 15% or higher for our shareholder. A lot of it is because we've accrued an awful lot of capital over the time or over the course of time in advance of any potential capital changes. And the other final thing I'll just remind you is we're a little different than some of the regional banks in that we've got an enormous global markets business and that obviously makes an impact on the headline NIM number. Mike Mayo -- Wells Fargo Securities -- Analyst OK. And then just I wasn't clear, you said net charge-offs in the second half should be less than the first half. And I wasn't sure if that related to cards or I wasn't sure what you meant by net charge-offs. Brian T. Moynihan -- Chairman and Chief Executive Officer Mike, that was me. And basically, what I'm saying is we plateaued in terms of the delinquencies, which means the second half is pretty well determined, as you know, because it's just a march from 36 to 90 to 180. And it will be -- the charge-off rate will be flattish. We're kind of back to normal at 3.80 or so. That's -- we underwrite to actually have a higher charge-off rate, quite frankly, in that intolerance, but that 3.80 is kind of where we see it since, 3.80%. Mike Mayo -- Wells Fargo Securities -- Analyst OK. Credit card charge-offs should flatten or decline in the second half relative to the first half? Brian T. Moynihan -- Chairman and Chief Executive Officer Exactly. Remember, if you think about all the charge-offs, that's not -- that's the dominant part of it on the consumer side by a lot. And then the commercial, we spoke to the question of CRE office, which has been -- dropped quarter to quarter. And we expect the second half to be better also. We'll take our next question from Steven Chubak of Wolfe Research. Good morning, guys. So, I wanted to ask just on -- just building on some of the NIM questions from earlier, a lot of that's been focused on asset repricing, both loans and securities. I was hoping you could speak to the opportunity to potentially optimize some of your higher cost funding. And just given multiple sources of NIM improvement, looking beyond '24, how should we think about the pace of NIM build as we -- I know it's a longer timeline to get to the 2.30 to 2.40, but just how to think about the expectations around the NIM trajectory beyond '24? Alastair M. Borthwick -- Chief Financial Officer Well, your first point is a question of can we pay down some of the higher cost securities, the answer to that is yes. And that would be an expectation of ours as part of this. We've got some shorter dated CDs that can roll off. We can replace those or not. We have shorter dated debt. We've taken our long-term debt footprint down as we've continued to build the strength of the company. So, there's a lot of different ways. It doesn't have to be securities reinvestment. It can be paying down higher cost liabilities as well. So, we've got a lot of different ways that we can use, quote, the reinvestment, if you like, around the fixed rate. And then what was the second -- the second question was over what time period we expect to build? Yes. So, look, we're obviously on it right now. We feel like this is the trough. We're trying to build it from here. We'll make meaningful strides on that through 2025. That's where we're going. We'll take our next question from Betsy Graseck of Morgan Stanley. So, yes, another question on NII. Alastair, I did -- I think, hear you correctly when you said that as you go into the second-half of '25, there's going to be incremental benefits coming from swap roll-offs. Did I hear that right? Alastair M. Borthwick -- Chief Financial Officer Yeah, that's correct, second-half '25. So, as we get closer, we'll be able to give you some kind of bridge like this that allows you to see what that looks like. But it's just -- it's a year out right now. Betsy Graseck -- Analyst Yeah, for sure. But I'm just wondering, is there anything that's -- like, I guess what I just would like to understand a little better is how the swap book is impacting Slide 10. And then is it gradual into the second-half of '25 or is it a switch on in 3Q? Just understand how the swap book is playing into this thing. Alastair M. Borthwick -- Chief Financial Officer Yes -- yes. So, the part that's important for Slide 10 around the second half of this year is just the BSBY piece. It's not from cash flow swaps. Any cash flow swaps we have that roll off in the course of the next 12 months really, they're all kind of current coupon-ish, because anything that we did there was to do with LIBOR cessation or whatever. And so, they all got recoupons. So, I wouldn't worry about that. In the second-half and onwards, some of the older, longer-dated things, they've got the lower coupons. So, that's when, you know, the BSBY number over time will disappear, but in the second half of '25, the cash flow number will begin to appear. So -- and we'll give you a sense for what that looks like over time, Betsy. Betsy Graseck -- Analyst OK, got it. And then on the far right-hand side of Slide 10, you've got the yellow box, 50 million to 200 million. Could you just give us a sense as to what's the inputs to the 50 versus the 200, just so we can be able to track it as we go through the rest of the next two quarters? Alastair M. Borthwick -- Chief Financial Officer Yeah. We're essentially using four variables. We're thinking, what will the loan growth be? What will the deposit growth look like? What will be the rotation between non-interest bearing and interest-bearing, and what will be any pricing changes we need to make, right? Then rotation pricing are pretty closely interlinked, that you could even call them the same thing. If you use more conservative numbers, you get toward the lower end. If you use slightly more constructive numbers, you get toward the higher. I think the point we're trying to convey is this last part, this yellow box is always the unknowable at the beginning of the quarter, where we're projecting. The pieces in the green, we kind of feel like we know what those look like. That's pretty predictable at this point, but we've got a little more certainty around that. So, the teams, we got 213,000 people, who are working really hard to try and make that dotted yellow box at the higher end. But obviously, it depends on our assumptions and it depends on our actions. We'll take our next question from Erika Najarian of UBS. Erika Najarian -- Analyst Hi, good morning. Just -- my first question is trying to square, what you're telling us on the net interest income trajectory in the setup versus your disclosure. So, Alastair, you told us about, as a response to Glenn's question, the benefit from fixed asset repricing, cash flow hedges repricing in the second-half of '25. And when I look at Table 40 from your queue, in both a parallel shift and a steepener scenario, down 100 is negative to net interest income. Is it because this is a 12-month look and like you pointed out, in the second-half of '25, you have underwater cash flow hedges that are rolling off? In other words, as we go through 2025, do you get less asset-sensitive? And additionally, what is the notional on those cash flow hedges that you're talking about? Alastair M. Borthwick -- Chief Financial Officer Yeah. So, the asset sensitivity that we disclose is meant to give a sense for what happens if nothing changes, it's totally static. So, that's one difference. Number two, it's off of the future curve. So, it's a 100 above whatever or below whatever the future curve is. So, I think it's a really helpful thing for sort of short-term moves and rates. Like take, for example, that orange box on Page 10, it's helpful for something like that, but it's less helpful in terms of a predictor of where 2025 NII would be because there's so many other inputs, Erika, over time. Erika Najarian -- Analyst And just what's the notional of the cash flow hedges that you're referring to? And how much of that starts rolling off in the second half of 2025? Alastair M. Borthwick -- Chief Financial Officer Well, I think about it like this, you can almost think about it like it's like 10 billion or so every quarter. It's just that the ones that roll off for the first -- next 12 months, they're all kind of current coupons, so they won't really have any impact. Once you get into the second half of 2025, they're a little bit lower rated. So, that's when you begin to get some benefit there. And then I think probably Lee can give you more of the details following. Erika Najarian -- Analyst Got it. And if I could just slide in one more question on the normalized NIM. Q3 and Q4 clearly is much higher than where you are now. Alastair, you mentioned we should assume a flattish balance sheet, but I think I had conversations with the company before in that half of that path between 1.9-ish to 2.3 to 2.4 has to do with balance sheet efficiency. And I'm wondering if you could carry out the balance sheet efficiency with -- and keep your balance sheet flattish? In other words, you know, obviously what the market is going to do is take your earning assets today and you know, apply two, three, five and say, OK, over time, whether it's '26 or '27, this is what BofA can earn under a normalized curve? I'm wondering if that's the right math to do, or should we expect some shrinkage of the balance sheet if you can -- that's part of the [Inaudible] for? Alastair M. Borthwick -- Chief Financial Officer Yes. I think what will happen is the underlying growth of the company will still be there, but we have some things that we know, just like Steve asked that question, is there any higher rate, shorter-dated stuff you'd like to pay off? Yes, there will be overtime. So, I think we've got some ability to almost like self-fund the first 100 billion, 150 billion of growth in terms of earning assets. So, that's why we're saying that'll keep the denominator down while we're growing the numerator. We'll take our next question from Ken Usdin of Jefferies. Ken Usdin -- Analyst Hey, thanks. Good morning. Hey, Alastair, I just wanted to ask you a little bit more on the securities portfolio side because you also have 180 billion or so of pay-fixed swaps on the AFS book. And so, we know about the HFS -- HTM maturity schedule. But how do you look at that AFS book and how much are those pay-fixed swaps currently in the money and kind of like how you're just thinking about that side of the portfolio as well? Thanks. Alastair M. Borthwick -- Chief Financial Officer Yeah. Just remember, those are received fixed. So, remember that there -- remember that is when we put the AFS in our portfolio, it's so that we've got a group of securities that are sitting there. They're typically treasuries. We swap them to floating, so that they look like they're cash as far as we're concerned. We don't have to worry about -- in fact, then to regulatory capital flowing through. And they just to us, they just look like cash equivalents. So, that's how we think about it, Ken. Ken Usdin -- Analyst OK. And then just how do you manage that going forward with regards to, like the rate forecasts? Do those come off as the securities book matures or -- Alastair M. Borthwick -- Chief Financial Officer Well, I mean, it's less of an interest rate call for us. It's more of going back to this concept of we've got 1.9 trillion of deposits, and we've got 1.05 trillion of loans. So, we've got 850 billion of excess. So, when the excess comes in, we can do a variety of different things. We'd love to put it in loans, but that's always our first -- that's our first love. But in the absence of that, we're going to put it in cash or we're going to put it in available for sale, probably swap to floating for the most part. And we can choose to put things in hold to maturity if we choose to. But obviously, right now, we feel like we want hold the maturity just continuing to pay down. That's what's been happening over the course of the past 11 quarters. We're just going to keep going with that. So, no particular changes to our philosophy around available for sale. Ken Usdin -- Analyst OK. And a quick one on expenses. I believe you said that costs are kind of hang in here at around the 16.3 that was reported. And so, just kind of any color on puts and takes here, just is that better kind of revenue-related comp against your ongoing efficiencies? And just how do you think about longer-term expense growth again? Thank you. Brian T. Moynihan -- Chairman and Chief Executive Officer Sure, Ken. If it -- I think honestly, the second quarter is sort of emblematic if you think about last year's second quarter. And this year's second quarter, we went from -- we went up by 300 billion -- 300 million, excuse me. As Alastair said, 200 million was just wealth management incentive comp and other growth was really other incentive comp. So, the idea, the pressures we face now are really more due to fee growth in the businesses, which typically have a tighter correlation between fees and expenses and incentive comp related to those fees. So, that -- as Alastair said, that's not a -- that's a good expense growth is what you want. It does grow, and it grows at a good rate. Headcount has basically been bounced around relatively flat. We're 212 this quarter and even adding a bunch of summer teammates. We were 215 last year. This quarter, the same summer teammates included. So, managing headcount, redeploying people, we have the huge -- the cleanup stuff going on. We have the new initiatives going on, or freeing up work and moving it over. So, we feel good about managing the company and that's against inflation rate wages at 3% or 5% going on inflation in all the services we buy in the third-party markets, obviously, that the world experiences. So, we feel good about how we're managing expenses. The key is pretty simple. As you -- all the revenue side equation that, yes, Alastair has been talking about their colleagues on NII and stuff is that lifts and expenses stay relatively flat, you start moving toward positive operating leverage. We were minus 1% or something like that this quarter, kind of hanging in there. And we'll expect that to go back to the five-year track we had all the way up until the pandemic hit and things got thrown in the sun. We'll take our next question from Gerard Cassidy of RBC. Brian, you talked -- and Alastair, both of you talked about the excess deposits. I think it was Slide 22 you pointed to. Can you share with us as you go forward and assuming the Federal Reserve does cut interest rates, I know you put, I think, free Fed fund rate cuts in your Slide 10. But as we go out into the end of '25, the forward curve is calling for obviously more rate cuts. Could you tell us how you expect to price your deposits as rates continue to follow with this excess deposit level? Can you be more aggressive in lowering your deposit costs? Brian T. Moynihan -- Chairman and Chief Executive Officer Yes. I think that's very business and more importantly, customer-specific views, Gerard. So, we think of our deposit strategies in the context of how our customers utilize our services. And so, if you think about the parts that priced up in Global Banking or the investment-related cash in the consumer business and wealth management, that will come back down as rates come because the short-term equivalents come down. Some is absolutely mechanical because it's actually priced to meet a money market fund equivalent that will happen. And so, yes, I think if you think about us being all in, if you look on that slide at 203 basis points, there'll be some pickup as rates come down in those higher things. The zero interest balance accounts are low-interest checking. You know, they don't really move because there's zero interest or low interest, so they'll be kind of static, but they're still extremely valuable in the current context. So, when you think of all the consumer, I think 60-odd basis points or something, that's driven by the fact that we have 40-odd million transactional primary checking accounts that is growing at a million a year, meant, multiple years in a row, 900,000 a million a year that are maturing from $3,000 up to $7,000 or $8,000 in balances as people mature the relationship with us, that's where the tremendous value in the deposit base this company goes. And so, if you think about 1.91 trillion having grown $100 billion almost from the trough, you think about it growing linked quarter, multiple quarters in a row, you think about even as we look now to buy the balances above that amount. Yes, that -- those are good dynamics. So, we think about it, but it will move. But if you remember, part of our deposit pricing is never going to move to zero. Gerard Cassidy -- Analyst Right, right. No, no doubt. And those are the golden deposits. And one other question on Slide 10 and also I think if I recall your first-quarter queue, you guys indicated you were asset-sensitive. I would assume that this Slide 10 also shows that with the three rate cuts. Alastair, what would it take to move to a more neutral position on the balance sheet or even a liability-sensitive position should the Fed really get into a rate-cutting environment? Alastair M. Borthwick -- Chief Financial Officer Yeah. So, this is -- this shows that we're asset sensitive. That's why the red box obviously is bigger than the green box. It's the market specifically that's liability sensitive. So, we're still asset-sensitive, Gerard. What it would take for us is either we can have a lot more rotation into interest-bearing, or we could buy some short-dated duration, fixed rate. So, those are the two alternatives. And if you look at the course of time, if you were to go back to our Qs over time, you'd see that we've become less and less rate-sensitive overtime. We've really narrowed the corridor of whether rates go up by 100 or down by 100, what could that outcome look like? Narrowed that pretty substantially over time because we're trying to lock in rates here, recognizing that NII is up 4 billion or 5 billion over the course of the past several years per quarter. Brian T. Moynihan -- Chairman and Chief Executive Officer Yes. The last thing I'd say, Gerard, for a person who's been around this business as many years as you have, this has been a very abnormal rate environment for the last 15 years or so. And if you get to where you have a one Fed funds rate three and a half, which is what our experts predict, it sort of stops out at the ability to bring the asset sensitivity tighter and tighter is there because you actually have room to move down without hitting zero floors and stuff. So, there's -- and so, stability during time periods of which the rate environment doesn't flip around. And then secondly, a higher nominal rate environment allow you to manage to that outcome because part of the other outcome for us is just as rate -- the rate structure is nominally very low is the zero floors kick-in. And that creates a amount of sensitivity that over time will go away if rate structure is higher. Hope that makes sense to you. Gerard Cassidy -- Analyst Yeah. No, it does. Thank you. And just Brian or Alastair, one last quick question. I noticed in Slide 25, your home equity loan balance has actually increased. I think that's the first time in maybe over two years or three years. Was there a new program or what are you seeing that drives that? And that -- and should that or can that continue as we go forward into '25? Thank you. Brian T. Moynihan -- Chairman and Chief Executive Officer Yeah. I think it just reflects that the people have locked in low-rate loans and now that they want to borrow. It's an expensive view because they've got a fixed-rate mortgage loan, and they've got a home equity sitting on top of why wouldn't they use it. I like it for it was only two years. It's been four years or five years since that balance went from 30 billion started declining, so it's good to see. I'll note at the bottom of that page, if you look at year-over-year mortgage production 5.7 billion and 5.9 billion and you look at home equity line production, which is new originations in the boxes, solid. But it is nice to finally see that the actual balances have stabilized. And we'll see. They're kind of flattish, they're not really growing, but it's nice to see them not just keep coming down and hopefully, they'll start to be utilized. Our expectation would be -- they will be as consumers over time want to take out part of the equity in their home at a rate that is reasonable but doesn't require to refinance the whole first. We'll take our next question from Vivek Juneja of JPMorgan. Vivek Juneja -- Analyst Hi, thanks for the questions. Just a little color on noninterest-bearing deposits. When you look at an average basis, the decline has clearly slowed sharply. Period-end was down at a faster rate. Is that just the noise around end of 1Q? Or what are you seeing as you look sort of month by month? Is that truly slowing or yes -- and talk to it a little bit by customer segment, if you can, please? Alastair M. Borthwick -- Chief Financial Officer Yeah. I think, Vivek, you're catching two things. First one is it is slowing, that rotation is slowing and we would expect that because at the end of the day, this is mostly cash in motion, it's transactional accounts. That's why it's non-interest bearing. And the answer why it's a little different this quarter is because of the seasonality of tax payments. For anyone who has a big tax payment due, they frequently just allow it to. They may pull it out of their brokerage account, put it into their -- they may put it into their noninterest-bearing, and then they're wiring it out from there. So, that's, again, an example of money in motion, but that's what's going on this quarter. Vivek Juneja -- Analyst A quick one. Visa B derivative gains, did the -- did you have anything in your equity derivatives trading revenue this quarter? Alastair M. Borthwick -- Chief Financial Officer Nothing to highlight, nothing to note. That's a position we sold years ago, and anything that's happened with Visa would just unwind on the balance sheet. We've recycled it, so it shouldn't have any impact to revenue. We'll take a question from Matt O'Connor of Deutsche Bank. Good morning. How are you guys thinking about kind of targeted capital levels going forward? Obviously, we're still waiting for final rules. Maybe there's a little more volatility in your SCB than you would have thought, but you still got a nice buffer? And then I guess one last piece I was thinking is the remixing of the balance sheet that's been commented kind of throughout this call over time probably causes a little creep in RWAs, right, like loans higher than, say, securities. So, lots of excess capital but some puts and takes. And how are you thinking about it between now and when we get final guidelines? Brian T. Moynihan -- Chairman and Chief Executive Officer So, first off, I think we always want to use the capital to grow the business. So, if we need to use it to support RWA growth for loans or something, that's a good outcome, and that's what we want to do first. Second, we maintain the 11.9% quarter to quarter with a little bit RWA increase, I think that would be emblematic. And we bought 3.5 billion, paid out 1.9 billion in dividends. So, you'd expect that kind of to continue on in terms of that basic idea of we don't need a lot of capital to grow because the RWA demands are met with a fairly straightforward amount. We're earning a nice amount of dollars and we'll deploy it back in the dividend and the buybacks. Well, our job is to maintain -- our view is we will maintain a 50-basis-point type of management buffer to whatever the requirements are. The volatility, well, there's a whole different discussion on that in terms of the wisdom of that. But the reality is the volatility is absorbable because you have time to plan into it and get done within a race we've seen. So, whether we agree with the volatility or not, we've easily absorbed it and the new rule is coming out. We'll see what happens, and we'll adjust. But just think of this as basically, a requirement of 10.7 under the new SCB plus 50 is 11.2. Maybe you get a little tighter if you feel you got great insight to what happens next year. And then I think the finalization of all the three will come through. And we'll see what that is and see how that all correlates to the various aspects. But we feel good about where we are and expect that all current earnings are basically available to support the growth we're talking about in the current economic environment. That's relatively modest need, but really the rest of it just goes plowing back to you. Matt O'Connor -- Deutsche Bank -- Analyst OK. And then just to summarize that, I mean, do you think about bringing down the 11.9 to 11.2 kind of in the near term or to make it obvious, like, wait -- that's a little bit more theoretical and wait for the capital rules to play out? Brian T. Moynihan -- Chairman and Chief Executive Officer I think we just -- we need to see how the next 60, 90, 120 days play out. We heard a lot of discussion about the timing of a reproposal or not, etc. So, we had a lot of flexibility and -- but we continue to focus on shareholder value creation and all of that. But I think we're in a critical spot for the industry in terms of learning the outcome of a lot of these things over the next short period of time here. That concludes our question-and-answer session for today. I'd be happy to return the call to Brian Moynihan for closing comments. Brian T. Moynihan -- Chairman and Chief Executive Officer Thank you, operator. Thank all of you for joining us today. Obviously, a lot of focus on NII, and we gave you the Slide 10 to give you the bridge. Alistair answered a lot of the questions. Lee's here to answer it. The key is to understand what's driving that, which is deposit performance, which is stabilized and starting to grow for like six quarters in a row now, loan growth very low, but just staying positive. Those are going to drive the value of this franchise, and that's organic growth by our customers. That's coupled with strong fee performance this quarter in terms of wealth management fees, investment banking fees, consumer fees, even growing global payment services fees, and, of course, the great work done by our markets team. So, that, leveled with flattish expenses, gives us a chance to start driving operating leverage again in the company. And that generates a lot of earnings, a lot of excess capital, and we put that back in your hands. So, thank you for your time and attention. We look forward to talking next quarter.