America’s biggest banks reported earnings this week and shed light on how this uncertain environment is impacting their outlook. With all major players reporting reserve-building activities and significantly lower earnings, we got an early glimpse into how COVID-19 is impacting the economy as a whole. What were the major trends in executive commentary? What macro assumptions are banks building into their models? We’ve compiled highlights from this week’s Earnings calls.
- Goldman Sachs on lending: we will be quite cautious in terms of credit extension and growing that book. And we'll return to grow that book once this sort of circumstance and market volatility passes.
- JPMorgan on reserves: But all else equal, given the deteriorated macroeconomic outlook, we would expect to build reserves in the second quarter.
- Wells Fargo on CCAR: So just to dimension it compared to other scenarios, thinking about both our performance in the financial crisis as well as our own CCAR severely adverse scenarios, at this point, we see this as not generating that level of loss in our own CCAR severely adverse scenarios
- Bank of America on consumer spending: The overall spending, however, of all types of spending in our customers seems to have stabilized in the last few weeks. During mid-April, we're seeing spending run at about a low $50 billion average level compared to a $60 billion average level before the crisis.
- Morgan Stanley on deposits: And we did see a surge in deposits in March, almost $30 billion in the month of March alone. And the balances are up $45 billion for the quarter. That was generally a result of people shifting out of equities and going into cash in the wealth system.
- Citi on dividend: But to be clear, in our capacity here and the way we're looking at things, we remain committed to paying our dividend.
MACRO / CREDIT
And so certainly, I think if you're trying to prepare for an economic environment, you have to view something that is a slower economic recovery as you come out of this. And look, even if you look at the Goldman Sachs scenario of a very steep decline with a sharp increase in the second and third quarter, they're still only predicting a 50% recovery of the output that we've lost. So I think for anybody operating a business, you have to be planning on an assumption that we're going to be operating in a recession through 2020 into 2021, and you have to plan accordingly.
Will the monetary policy and fiscal policy be a benefit to the positive of what that trajectory looks like in the third, fourth quarter and into the first half of next year? Yes. But it's very hard to quantify what that will be because the uncertainty around the course of the virus will take and how it will affect human behavior is still very uncertain. And anyone who's telling you they're sure that it will look like this or they're sure that it will look like that, I don't think anybody's sure.
The book obviously stands at $128 billion. There was meaningful growth in the quarter, occasioned by the relationship loan book being drawn by about $19 billion. But I think risk is obviously an important governor. And so I would just point out as an example, in the context of the Consumer book, we're ever committed to that business. But at this moment, in this environment, we will be quite cautious in terms of credit extension and growing that book. And we'll return to grow that book once this sort of circumstance and market volatility passes. Just as an example of how risk needs to be the governor in the context of managing this profile and the loan book overall.
It's worth pointing out that in these scenarios, we take a look at what the contraction of GDP is. We look at unemployment. But we don't ignore the fact that there are a number of programs in place across a range of countries, notably the U.S., where central banks and treasuries have put in place monetary and fiscal stimulus that has the potential to serve as some counterbalance, if you will, to what may play. To the extent that holds and that accelerates a recovery, I have every expectation that reserves would reflect it. If this continued on and that didn't have the efficacy that is otherwise intended, one could imagine a scenario that plays more to the downside, and I would expect provisions and losses to reflect the same. And so again, hard to predict what the next quarter or subsequent quarters hold. But I think we'll rely and you should know that we'll rely on a pretty robust modeling exercise that will reflect the circumstances that we see in front of us.
Answer – Jennifer A. Piepszak: Sure. So Mike, as we close the books for the first quarter, just to give it context, we were looking at an economic outlook that had GDP down 25% in the second quarter and unemployment above 10%. It's just important to note that, that kind of gives you a frame of how to think about it, but there's a lot more that goes into our reserving, including management judgment of some like world-class risk management and finance people and also other analytics. And so that just kind of gives you a frame of reference.
But there, we did think about a number of other scenarios that we should contemplate in reserving. And we also thought about the impact, what's our best estimate of the impact of these extraordinary government programs as well as our own payment relief programs.
Since then, as I noted in my prepared remarks, our economists have updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%. That's obviously materially different. Both scenarios, though, do include a recovery in the back half of the year.
And so all else equal, and of course, the one thing -- probably the only thing we know for sure, Mike, is that all else won't be equal when we close the books for the second quarter. But all else equal, given the deteriorated macroeconomic outlook, we would expect to build reserves in the second quarter. But again, a lot will depend on the ultimate effect of these extraordinary programs and how effective they can be in bridging people back to employment.
Answer – James Dimon: I say in commercial real estate, eventually, it will be loan by loan and name by name, too. So if you have reason to believe that a loan is bad, you're going to write it down and put a reserve against or something like that.
This is such a dramatic change of events. So there are no models that have done -- dealt with GDP down 40%, unemployment growing this rapidly. And that's one part. There are also no models that have ever dealt with a government, which is doing a PPP program, which might be $350 billion, it might be $550 billion, unemployment where it looks like 30% or 40% of people going unemployment but higher income than before they went on unemployment. So what does that mean for credit cards or something like that where the government is just going to make direct payments to people? So this is all in the works right now. The company is in very good shape. We can serve our clients, and we're going to give you more detail on this, but it's happening as we speak.
And I think people -- you're making too much mistake trying to model it. When we get to the end of the second quarter, we'll know exactly what happened in the second quarter like we know -- you've got to expect the credit card delinquencies and charges will go up that we've seen very little bit so far, but by the end of the second quarter, you'll see more of it. And then we'll also know if there's a fourth round of government stimulus. We'll know a whole bunch of stuff, and we'll report that out. We hope for the best, which is you have that recovery, and plan for the worst, so you can handle it.
Answer – Jennifer A. Piepszak: Yes. And then in terms of planning for the worst, Betsy, maybe it would be helpful. The extreme adverse scenario that Jamie referenced in his Chairman's Letter had 2020 credit cost of more than $45 billion. So clearly, that is not our essential case, but that's the kind of scenario that we are making sure that we're prepared for.
And then just coincidentally, if you look at our credit costs from the fourth quarter of '08 to the fourth quarter of '09, across those 5 quarters, we had credit cost of $47 billion. So...
Answer – James Dimon: I got this number when the reserves went from like $7 billion to $35 billion back to $14 billion. Reserving itself is procyclical and often wrong. And you're required to do it, but it certainly doesn't match revenues and expenses. And so we like to be conservative in reserving, but I have to point out the flaws of it.
So just to dimension it compared to other scenarios, thinking about both our performance in the financial crisis as well as our own CCAR severely adverse scenarios, at this point, we see this as not generating that level of loss in our own CCAR severely adverse scenarios. I think we produced 9 quarter credit losses of about 2.75% in total, with peak quarterly loss rates expressed on an annualized basis of about 1.7%, 1.75% and an average of about 1.2%. That's got a steeper drop in GDP and a steeper climb in unemployment. And importantly, no stimulus baked into the severely adverse case. It doesn't anticipate the types of interventions that we've already seen and we're waiting to see materialize.
And with respect to the financial crisis as a benchmark, importantly, at least for Wells Fargo, it may be true for other banks as well, but loan portfolios were very different then. The quality of loans, particularly on the single-family side, was worse. I think our auto portfolio was worse then, too. And so there, we did produce somewhat higher loss rates, even higher loss rates than we do today in our own CCAR analysis because the content of the portfolio is different. But I guess I would describe what we're currently imagining now to be, I'll call it, half-ish of an annualized loss rate of the severely adverse version of our own stress test. And so if things play out substantially worse, then there's certainly the possibility that we end up building more or experiencing more charge-offs or both. But we feel good about the approach that we've taken in March, developing our scenarios with our governance around it and coming into the quarter end
Glenn, I would say that the actions that we've seen out of the combination of the fed and the treasury are truly extraordinary, not just in terms of the volume of dollars and programs, but I think the breadth that's there and the speed at which they've implemented them and whether it's been the CP facility, the money market liquidity facility, the repo facilities, the broader corporate pieces, the SBA loans and now not something that's being talked about that much but is this Main Street program that's there.
And I think from a plumbing perspective, your question is a good one because, obviously, the real economy doesn't have direct access to the fed or to treasury. And I think it's the banks and in particular, the big banks' role, one of many roles that we play to be that transmission mechanism between fiscal monetary and the real economy. And I think you can just see in terms of in the early days how the markets were trading, a lot of the fears and concerns that were there and whether it was the early fears of draws, whether it was the early fears of money funds and being able to get liquidity across the board. And I think the programs have gone a long way. I think there's still a few things out there that probably need some work. Certainly, as an institution, as an industry, we're in constant dialogue with the fed and the treasury on those. And again, as I suspect, as those things create challenges, it's likely that we will see a reaction come out of those bodies to be able to address it. So I think the plumbing is actually working pretty well. That in spite of working remotely in the numbers that Mark and I spoke to, we had, in late March, record volumes of trading, in terms of settlement, clearing, margin, margining in the system. And again, most of that done remotely and we all would have said to each other, 6, 9, 12 months ago, we're going to model for this type of stress, we probably all would have been skeptical in terms of how the system performs. So I'm proud of how we've performed, and I'm quite pleased so far how the system has performed.
You saw us kind of put our balance sheet to use, and you saw the CET1 move from the 11.8% to the 11.2%, clearly leaving us lots of room, lots of buffer. And again, we're early in this. We don't know and -- where this will go, but our gut or how we're thinking about this is this recovery is going to be uneven. I would say that, as a team, we've pretty well discounted a uniform v-shaped recovery. The question is it U-shaped, is it W-shaped or parts of it L-shaped. And I think we want to retain a lot of flexibility and capacity to be able to step into the situations that count.
I mean, yes, what I said was that if you take the cards portfolio we have today, which is of a better quality than it was back in '08, and you would destress it for the '08 financial crisis that, yes, our pro forma loss rates would be 25% to 30% lower than what we experienced in the last crisis.
I think we're expected to be there for our clients in a period like this. And you've seen our CET1 ratio drop to 11.2% this quarter. And as the needs of our clients evolve, we're going to be there for them and if that means that our ratio takes more pressure, then we'll manage through that. If we were to drop below the 10% you referenced, there's still plenty of room between that and the use of the buffer that the regulators have authorized.
Answer – Michael L. Corbat: Yes. So, Betsy, I would say, kind of looking at the numbers, we had roughly right around about $30 billion, $32 billion worth of draws in the first quarter. So somewhere 10%, 11%, 12% of our outstanding, but unfunded. So I wouldn't call that an overly meaningful number. And I think going back to my earlier comment to Glenn, I think that the extraordinary actions taken in the CP facilities in terms of some of the corporate facilities, some of the SBA or probably more likely the Main Street lending facilities alleviates a lot of that pressure.
I think we saw 2 things there. There were clearly those industries that were under stress and those were pretty easily identifiable, along the list that Mark had described. And then I think there were those that just believed that it was a good time to bring in liquidity. And I think as the Fed programs and the Treasury programs came into place, the bond markets reopened, you saw record issuance of debt in the late first quarter. And again, when you look at our portfolio, it's predominantly an investment-grade portfolio, and that investment-grade portfolio in times with those programs in place has access to the capital markets, and so we saw people shift there.
Obviously, something we're paying attention to. We're in constant dialogue with our clients. But again, I think, certainly, coming into the second quarter, we've actually seen really de minimis draws on the facilities. And I think, in our dialogues, we don't see or feel that pressure right now.
I would expect that, with that as a backdrop, and again, subject to a lot of things, including how customers respond to the relief programs that are out there, so on and so forth, that we would see additional builds in the second quarter.
And that's kind of where we are. I mean, I'm not going to -- we've got the rest of the quarter to play out. We've got analysis and models that we have to do. We have consumers that have to respond to much of the stimulus that's out there. We've got to understand how it continues to impact the different businesses that we're in. It's way too early to give you any sense for what that number is.
So again, no stress scenario that's been created thus far would have contemplated the amount of fiscal response and monetary response that we've seen in short order. And so that's not modeled. And how customers or consumers react to that is not part of any CCAR or DFAST model that we would have run. How that offsets the impact of unemployment or, ultimately, losses is completely unclear. And so there's a fair amount -- yes, it's a data point, but there's a fair amount of uncertainty and now differences, I would expect, in light of now managing through a real-life scenario.
And in terms of as we -- as I may have mentioned, I think I mentioned earlier, at some point, you've got to put a stake in the ground at the end of the quarter and look at the assumptions that we have to work with in terms of those thousands of variables and certainly the key ones that I mentioned. And this quarter, in particular, we've seen things continue to move. And so even the view that we would have taken at the end of the quarter, around many of those metrics, they have -- the outlook on them has continued to shift. And so we find ourselves running various scenarios to understand the impact on our ratios and on our estimated losses, including ranges of unemployment from 10% to 15% and GDP declines from 20% to 40%. And we're constantly kind of running those scenarios to understand the implications on our CET1 ratio and other important metrics that are required to properly run and manage and plan at the firm.
Bank of America
So when we weighted a scenario that produced clearly a recessionary outlook, which included a significant drop in GDP in the second quarter with negative GDP growth rates extending well into 2021, we also considered the impact of various groups of credits and stressed industries. And while small relative to the impact of scenario weighting, we incrementally factored that analysis into the sizing of our reserve build.
Obviously, there are many unknowns, including how government, fiscal and monetary actions will impact the outcome, but we can try to consider that as well. And we also had to consider how our own deferral programs will impact losses. But perhaps the biggest unknown is how long economic activities and conditions will be significantly impacted by the virus..
Question – Chinedu Bolu: My first question is an ROTCE for the Firm or how to think about downside ROTCE. I mean, given you are putting up 10% ROTCE in what is a very choppy backdrop, how should investors now think about the downside case for the Firm? Is it 10% or close to 10% ROTC now your bottom line as opposed to a couple of years ago where that was your actual long-term target?
Answer – James Patrick Gorman: Well, Christian, let me take a go at it and by the way, we're all coordinating from different locations here. So if Jon and I have a little logistical mess up, forgive us, but I can see him on the screen. So I think we'll manage through it.
We're in a most unprecedented environment. I mean, if you'd said 3 months ago, that 90% of our employees will be working from home and the Firm would be functioning fine, I'd say that, that is a test I'm not prepared to take because the downside of being wrong on that is massive. If you'd said that every restaurant around the country would be shut over a 2-week period and remain closed, I would say it's just not physically possible. So we're seeing -- you saw the jobs numbers, the applications for unemployment benefits, et cetera, coming through. We're in an extraordinary period. So listen, what I look at is how do the businesses perform underlying in this environment? How do we trade through it, what was our risk exposure and how do we manage that, where do we take hits across the various parts of the plant, and you're going to take them, whether it's in the margin book, whether it's in the asset management portfolios, whether it's in the trading businesses and how did all of that look? Now we didn't have a full quarter of being in absolute crisis, we had a half quarter or 2/3 of a quarter being absolute crisis, but boy, it was an absolute crisis. And for this fund, we have come through that and generate $9.5 billion in revenue, and that's net of the deferred compensation plans, which actually puts us a bit over $10 billion in revenue, effectively flat to a year ago. I thought was remarkable.
Now maybe it's my job to think that's remarkable. But I did think it was remarkable. I think the stability and breadth of the franchise, the diversification clearly showed that we have an underlying sort of backstop of our performance. I can't tell you it's 10% ROTCE. I know coming into the second quarter, we'll have less market volume, we have lower interest rates, we have lower asset prices at the moment, although we reprice our assets every month, we'll probably have lower non-comp expenses. I suspect, in the second quarter for a variety of reasons, there will be a lot of things going back and forth.
So is 10% a bottom? I don't want to call that now because I just don't know how deep this recession is going to be. But given what we went through to have produced that felt like a really resilient franchise.
Answer – Steven Joseph Chubak: Quite helpful. James, maybe a question for you. You spoke of some of the risk of the targets that you laid out at the start of the year, certainly not surprising given the world, using some of your words, is anything but normal. But admittedly, the message is a bit more cautious than maybe what you conveyed in your March shareholder letter. And I was hoping you could speak to on macro and market assumptions are informing your more cautious outlook. I know that there's a wide range of outcomes to consider. But if we do see a U shape recovery beginning in '21, is there a path to delivering on some of the targets that you outlined at the start of the year?
Answer – James Patrick Gorman: Yes, is the short answer. The macro environment that I'm making the assumptions on, I mean, take the $5 million -- 5 million job claims this morning for unemployment benefits. I mean, this is -- we're in a wild period. We're going to have negative GDP of, I don't know, 30%. So short term, anybody -- I don't mean to disparage anybody, but a CEO who stands by their short-term targets that was set right before this virus hit, I don't know what planet they're on. It just -- you just -- you can't, you can't predict that. Over a 2-year period, yes, the targets were by the end of '21 and there are the 3 targets, the pretax margin of 28% to 30%. The ROTCE, I think, of 13% to 15%, and the efficiency ratio is 72%. Sure, can we beat that by the end of 2021 on some of these targets? Definitely. But we said and have always said the targets are normalized environment. This is not a normalized environment. We will not hit those targets in the second quarter. That I can promise you, we did not hit them in the first quarter. But beyond that, let's see how this plays out. If the equity markets recover, we're not going to have mortgage prepay, our non-comps are going to be down. Obviously, we're affected by where interest rates are. And if they change, obviously, if there's any move upwards through 2021, that's enormously helpful. And things start getting a lot more interesting 12 months from now than they are right now. But honestly, it would be irresponsible of me to recommit to those targets on this call.
Now on the annual letter, that was different. What I've seen in the annual letter was these were our targets we laid out in 2019. We're not ignoring them. We're not hiding from them. Than what we believe that the business will perform at in a normalized environment. And it will -- I'm totally confident about that. But for right now, given we're dealing with an earnings call and the earnings outlook, right now, those targets are not achievable in the second quarter. They weren't achieved in the first quarter, and it's too early to make the call on what 2021 looks like. But Steven, to your question, is it possible? It's absolutely possible. Is it probable? At this point, you could -- nobody could say that it's probable. You got to see what the environment plays at it.
Bank of America
We saw a severe immediate decline in discretionary payments for travel, leisure and other things that you've read about in entertainment that you expected. This was followed immediately by large increases in payments for necessities around groceries and staples like health supplies, et cetera. Then as large cities and states began to move to voluntary and mandated stay-at-home status orders, we saw large declines in debit and credit card spending into other categories.
At the same time, we've also noted a stabilizing going on and the level of payments in other areas like ACH cash, wires and P2P payments. The broader measure is the black line in the chart. As you can see, overall client payments have declined but remained at a high single-digit pace year-over-year, moving down from double-digit pace to around 8%. The total movement in the U.S. has been pulled down by a significant decline in the card spending, which is more than -- which have been affected by the travel, entertainment and other related areas in retail areas. And that's gone from 7% to 8% to only 2% increases in the month of March, and it has fallen into negative territory in April.
The overall spending, however, of all types of spending in our customers seems to have stabilized in the last few weeks. During mid-April, we're seeing spending run at about a low $50 billion average level compared to a $60 billion average level before the crisis. That's per week spending. We'll see how that plays out through this quarter, and that stability may provide insight to the level of economy activity in a shutdown status.
Client engagement remained strong through February with purchase sales growth of roughly 10% for the first 2 months of the quarter. However, as seen across the industry, purchase sales declined significantly in late March with the implementation of more extensive lockdowns in many states. Categories like travel and entertainment have seen the biggest impact, while there has been some offset from higher spending on essentials as well as higher online sales. So in total, we grew purchase sales 3% in Branded Cards in the first quarter, but the trend line over the past month would indicate a significant decline in purchase activity in the second quarter, which is expected to impact loan growth.
And so, in the quarter, if I think about kind of the last week of March, the card spend activity, just broadly for us, was down about 30%, U.S. spend by category down a total of 30%. The big categories, if you will, impacted are not going to be of any surprise to you: travel, down 75%; dining and entertainment, down some 60%; discretionary retail, which would include apparel, the department stores, et cetera, down 50%; essentials were up 10%. And so as you would -- as I think you would expect, and again, that got us to a total of down about 30% in just the last week. We all have seen what has continued to happen over the past couple of weeks. And so I would expect -- we would expect there to be continued pressure on purchase sale volumes through most of the second quarter, in light of the way this is persisting, and that should play out as well on, ultimately, loan volumes and we should expect to see some top line pressure there.
Similarly, as you've referenced, we have a large retail services business and we have partner clients who we advise in that regard, and we've been working with them to help drive sales digitally. But obviously, the shutdown of most of the economy and the stay-at-home orders as well as the temporary store closures across most of the country will certainly impact our partners and our results, including a slowdown in new customer acquisitions as well as, again, a lower purchase sales volumes -- volume through that part of our business.
In March, we saw a rapid decline in spend initially in travel and entertainment, which then spread to restaurants and retail as social distancing protocols were implemented more broadly. While most spend categories were ultimately impacted, we did see an initial boost to supermarkets, wholesale clubs and discount stores as people stocked up on provisions, but even that is now starting to normalize. And we saw similar trends in merchant services as highlighted in the significant decline in brick-and-mortar spend, excluding supermarkets, whereas e-commerce spend has held up well by comparison
Our customers also meaningfully reduced their card spending late in the first quarter due to the impact of the pandemic. During the first 2 months of the year, credit card volumes were up from a year ago, while March 2020 volumes declined approximately 15% from March 2019, resulting in first quarter credit card purchase volumes being down 1% from a year ago. We also had meaningful shifts in customer spending in March with grocery and pharmacy spending increasing, while all other categories were down from a year ago. Debit card spending trends were similarly impacted, but the change in spend was less significant with year-over-year growth in January and February and a 5% decline in year-over-year volumes in March. Similar to credit card, debit card spending shifted significantly to grocery in March, but the growth in this category started to slow in the last week of the month.
With that said, given the adverse impact of COVID-19, we no longer expect to deliver the RoTCE of 12% to 13% for the full year. Based on what we are seeing today, on the top line, we expect the revenue trend in the latter part of March and the beginning of April, characterized by COVID-related lower level of activity, particularly in banking and our consumer franchise, will continue through much of the second quarter. And in our Markets business, revenue should reflect the broader industry. The first quarter is typically the strongest quarter. And clearly, this year was particularly strong, so we would expect some normalization in activity levels here. And finally, we will see the more pronounced impact of the lower rate environment on the top line.
Looking ahead to the second quarter and the remainder of 2020, we do expect a higher level of losses given our current outlook. And as our outlook continues to evolve, it is also reasonable to expect additional increases in credit reserves if our outlook deteriorates further. However, given the credit quality of our portfolio, we remain confident in our ability to maintain our overall strength and stability as well as continue to support our customers and win new business. Undoubtedly, every company around the world will feel an economic impact from this unprecedented situation, but we are confident that Citi will emerge in a position of strength, having demonstrated that we lived up to our stated objective to be an indisputably strong and stable institution and having shown that we stood by our clients and supported our customers and employees ring this very difficult time.
Question – Kenneth Michael Usdin: Yes, exactly, Charlie. And second question, John, understanding fully the pulling away from giving full year guidance, is there a way you can help us understand on the NII front just how you'd expect the trajectory at least to go from first to second given the changes and all the moving parts that were in this quarter's results?
Answer – John Richard Shrewsberry: Yes. It's a fair question, but not quite yet. We've got the -- I think we're all forecasting something like 0 in the front end or depending on where LIBOR moves over time and then some number between, call it, 70 and 100 basis points at the long end. How deposit pricing reacts to that, and it came down in this quarter and we anticipate it coming down rapidly over the course of the remainder of the year, will be a big driver. What of these recent balances that we just booked stick versus those that have been dialed back down, I think will be a big driver. So not looking for NII growth, I'm sure it'll be down by some amount, but we're not being any more precise. And hopefully, by the time we get to either mid or at the end of the second quarter, we'll be in a position to be a little bit more declarative about that.
And we did see a surge in deposits in March, almost $30 billion in the month of March alone. And the balances are up $45 billion for the quarter. That was generally a result of people shifting out of equities and going into cash in the wealth system. You can see, I think, on Page 11 of the supplement, Christian, that the various balances in the banks. Right now, most of that excess cash -- excuse me, excess deposits is actually sitting in cash. You can see we increased our loans a little bit. We've increased our securities portfolio a little bit, but most of that cash is undeployed and we'll have to see around the resilience of that. Our expectations is that it will be pretty sticky for a while. But again, depending on what our clients do as investment options, that might come down a bit. But it clearly puts us in a much better position. I think our BDP, which is our cheapest source of deposits, which currently have a cost of 1 basis point is now about 65% of the portfolio. It was closer to [60%] or [58%] a little while ago. Our high-cost deposits, I think, the blend between the CDs and some of the other products we have in there is about 160 basis points.
And so obviously, as we can shift more to BDP, that will be significantly beneficial, and I think our deposit cost at the end of the quarter were about 56 or 57 basis points, and those should come down a little bit as we've just repriced our savings product down in light of the rate environment.
So I would say we should -- if we had the opportunity to deploy those deposits into loans, we'll see a benefit there clearly, but we're going to be cautious and just see how those deposits behave for a little while before we sort of fully deploy them.
Answer – Steven Joseph Chubak: So wanted to start off with a question on funding. One of the biggest drivers of the ROTCE build you laid out at Investor Day was the $1 billion benefit from funding optimization. And we tracked the deposit costs pretty closely, we've seen a lot of your competitors aggressively match the Fed rate cuts, but you've maintained very competitive deposit payouts. Certainly helped contribute to strong deposit growth this quarter. I was just hoping you could update us on how your deposit strategy is evolving in the low rate environment and whether the flat yield curve and still-elevated deposit payouts could impact that $1 billion fund benefit you cited at Investor Day.
Answer – Stephen M. Scherr: Sure. Thank you, Steve. So let me start with sort of strategy around rate. We took our rate down actually yesterday in the U.S. relative to where it had been. Our strategy remains unchanged in that regard, which is we aim to be certainly not the top rate payer but somewhere in the 3 or 4 category. And we'll continue to do that with an eye toward building out greater product attributes and a more formidable relationship with depositors such that we rely less on rate in the context of both drawing and maintaining deposits. But it's against that strategy that we saw, at least for us, record inflows on the deposit side.
In terms of the medium-term target which we set out in Investor Day of achieving $1 billion of savings, occasioned by the migration of our funding mix, that's no less an imperative for us now than it was then. And I'd simply point out that the market will pull some volatility into that measurement. So again, this is a medium-term target that we will achieve. We will move closer and closer to 50% of our funding in deposits.
The amount or the delta of savings, if you will, will be a function of where we take deposit rates in as much as where wholesale funding obviously takes itself. And I think, particularly in this market and most notably in March, this was a really good, very stable source of funding for us.
But I think the forward trajectory, both as a strategy and then equally as it relates to our ability to harvest the kind of savings that we talked about over the medium term is one that we are going adhere to and watch and achieve.
Answer – Betsy Lynn Graseck: Got it. And then on the deposit side, can you give us a sense as to the percentage of the draws that went into deposits and how you think about the persistency of those deposits as well.
Answer – Mark A.L. Mason: Let me comment a little bit more broadly on the deposits. So the ICG deposits that we saw come in, in the month of March, were about $92 billion. So deposits grew pretty significantly just in the month of March. And if I break that down, about 1/3 of that were from corporate clients that built liquidity through draws or issuance. And it's not necessarily just liquidity, just draws from us, but about 1/3 of it, we would attribute as being tied towards that increase in liquidity draws or issuances that they've done. About 1/3 were from broker-dealers and clearing houses and financial institutions as they bolstered kind of their liquidity buffers and then 1/3 were from investor clients derisking and moving to cash.
And so that gives you a little bit of a sense for the mix. We obviously look at the persistency of the deposits and some of those are certainly operating deposits. And I think part of what will inform the view to some extent is, as Mike described, the additional channels that are now available for clients to access additional liquidity as needed, but also how long this persists. And there's a fair amount of uncertainty, as you heard us reference as to how long this crisis we're managing through persists. So hopefully, that gives you a sense.
And again, I think, as we said, I think there's 2 roles, one is how do we use our own balance sheet and then how do we actually use and bring to life a lot of these programs and continued programs that are being put out there by the Fed and the Treasury. So in the right situations, we're prepared to let that ratio go down. We're in conversations with our Board. We are in conversations with our regulator. And I think, Mark said, we feel that we've got a lot of capacity in terms of capital and things that we can do before we get near triggering any conversations around dividend. But again, we're going to -- we'll treat that as a time when it comes. But to be clear, in our capacity here and the way we're looking at things, we remain committed to paying our dividend.
It's worth noting here that an environment like this is precisely why we have the buffers in the first place. We currently also have capacity and intend to continue to pay the $0.90 dividend pending Board approval. And as you can see in the CET1 walk on the bottom left, it is a small claim on our capital base.
As it relates to our dividend, given our continued earnings generation and solid capital position, we feel comfortable maintaining our dividend.
Bank of America
But in terms of the dividend, we kept the dividend payout ratio below 30% of the sort of normalized earnings level. And we did it for a reason that we -- one of our operating principles is we wanted to maintain a dividend. And given what we know, we've done twice the dividend this quarter at $0.40 versus an $0.18 payout ratio, and we expect that to continue. And that shows you the 100-plus basis points, 130 basis points of excess capital. We've tested it lots of ways, as you might expect.
As we talk to our Board about capital management, as we talk to our Board about dividends at any given time, we're showing them severely adverse cases, adverse cases and thinking through the pretax PPNR capability of withstanding different reserve builds and outcomes. And so that's what we're doing, and we plan to keep it going.
Well, listen, I think certainly, the dividends are certainly important for all of those that own the stock. And ultimately, those that wind up benefiting from stock ownership are individuals in one way or another, whether it's direct holdings or whether it's pension plans and things like that. And so I think the income stream that people come to rely on, especially at times like this, is important, but there has to be an underlying ability for companies to be able to pay. And so to the extent that they have that ability to pay, I certainly think it's the right thing to do for the reasons that I just said. We have strong capital ratios. We do all the stress tests and whatnot that John referred to and determine our ability to return capital in these severely stressed environments. Also remind you that for us, we are slightly different than others because of the balance sheet cap. So our balance sheet cap does limit our ability to deploy capital internally. And so based on that, that's why we sit here and look at it and say that we think the dividends certainly that we're paying makes sense. But as I alluded in my prior comments, we don't know what the future looks like. Based upon the assumptions that we've laid out in these very stressed environments, we do feel good about it. But ultimately, the timing and the pace of the recovery is going to determine earnings capacity for everyone to be able to continue to support the level of dividends.
And also, I'd add to Charlie's view, though, that as the quarters unfold and we figure out how long we're going to be in this economic state and what the path forward looks like and we use that to interpret and estimate what our go-forward earnings trajectory looks like, that's the context for understanding what the steady state dividend should look like. So in terms of what this year's dividend looks like versus this year's consensus or estimated earnings during a time of stress is less germane, I think, than, a, the fact that we start with ample capital; and b, what we think our run rate, more steady state earnings are on the way out of this and reflect what the dividend is in light of that. Hope that's helpful. But yes, the point that Charlie was making about the fact that we're not really in a position to go out and generate substantial incremental RWA through outsized loan origination is an important one and a distinguishing one versus others who may be doing that right now and expanding their balance sheet intentionally.