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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone and welcome to the today's Bank of America Second Quarter Earnings Announcement Conference Call. 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. Please note this call is being recorded. I will be standing by should you need any assistance.
It is now my pleasure to turn today’s conference over to Lee McEntire. Please go ahead.
Good morning. Thanks for joining this morning's call for a discussion of our 2Q 2019 results. I trust everybody has had a chance to review the earnings release documents which were available on the Investor Relations section of the bankofamerica.com website.
Before I turn the call over to our CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during this call. After Brian's comments, our CFO, Paul Donofrio, will review the details of our second quarter results. We'll then open up for questions. For further information on any forward-looking statements, please refer to either our earnings release documents, our website, or our SEC filings.
With that, I’ll turn it over to you Brian.
Yes, thanks Lee and good morning everyone and thank you for joining us to review our second quarter results. Many of you discussed, written about and engaged in debate about the perceived change and the forward environment that we all saw this quarter. However, we saw in our client base during the second quarter 2019 with solid consumer activity pointing to a continued growing economy in the United States this year albeit at a slower pace.
In that environment our company reported the best earnings quarter in the company’s history. That was made possible through the hard work of my 209,000 team-mates who are driving responsible growth. We reported $7.3 billion in after tax net income and $0.74 per share. Both these items increased on a linked quarter and a year-over-year basis.
Revenue on an FTE basis was $23.2 billion and grew 2%. We increased our return on assets to 123 basis points. Our return on tangible common equity was 16.2% And in the end, responsible growth continued to prove strong earnings, returns and shareholder value.
As we look at Slide 3, we start to highlight how we achieve these results. Revenue grew 2% and expenses were basically flat year-over-year. We generate operating leverage of more than 200 basis points; our credit costs remained low and stable, so that resulted in year-over-year net income growing 8%, and during the past year we bought back 7% of our shares, this reflects the model of combining solid operations with strong capital returns and then thereby driving strong core EPS growth.
This quarter, diluted EPS grew 17% from the second quarter of 2018. All the way along, our capital and liquidity positions are very strong and continue to strengthen. Book value per share grew 10%. We also had important client growth and market share gains in our businesses.
Client activity showed $75 billion of deposit growth, a growth rate of 6% year-over-year. We also had $37 billion of that deposit growth came from people, consumers. At the same time we saw a strong investment flows from those customers.
Loans in our businesses grew $34 billion or 4%. Importantly, we saw progress in other focus areas as well. A year ago, I told you we’d continue to drive to regain our position in investment banking, as a nice start we saw market shares across many of the products, and investment bank in the first half of this year. One example is IPOs we're number one in volume for U.S. IPOs in the first half. [Matthew Koder] [ph] and the team have done a good job and off to a good start driving this business.
All in, we're pleased with the results this quarter. We grew. We did it the right way. We stayed with our risk parameters, and we continue to invest heavily in our franchise -- franchise adding salespeople, more technology, increasing our marketing spend and improving and expanding our physical plant in all dimensions.
This results also led to the highest first half earnings in the company's history. So as we look at Slide four, we show you the last five years results of the first half. For the first half of 2019, we generated nearly $15 billion in after tax earnings. Compared to the first half of 2018, EPS was up 16% and you can see that growth has continued for the last five years.
In those years we have driven operating leverage. You can see that in the lower right. This year we saw that operating leverage continue in the first half. This led to a 57% efficiency ratio. We use the excess capital beyond the need for growth and investments in our company to buy back shares, a trend which has accelerated and you can see on the lower left here.
Now primary goal of driving responsible growth has been to produce sustainable results even if the environment changes. This requires us to drive operational excellence in all we do, so that we can drive operating leverage. And we did it again this quarter.
As you move to Slide 5, you can see our -- we've extended our positive operating leverage streak to 18 consecutive quarters. In those 18 quarters, you've seen many different market environments; changes in interest rates, economic growth has sped up or slowed down, but we still manage to drive operating leverage for four and a half years and successively.
Generating operating leverage doesn't get any easier after four plus years. However, with that strong expense discipline, we remain focused upon it. Now one of the things that you don't see here and you see in our results is the improvement we're starting to see in some of the categories especially consumer fees as you go through the quarters the last four quarters.
Over the last decade, we faced service charge headwinds and consumer from reductions in accounts, and in other fees related accounts for many years. This was based on our consumer strategy to strive to have the best-in-class franchise, were lower fees because of the changes in overdraft policies, but also most importantly the drive we've had towards being the core relationship bank for an American consumer.
Now in the recent past, from offsetting those [rate][ph] fee reductions by increasing the growth in the actual accounts, the number of accounts we have that are primary household relationships the past last few years, we have much higher retention than we've ever had and we're improving client satisfaction to levels that hasn't been seen before.
But most importantly, that focus and relationship depth has resulted in 92% of our households with primary with an average balance of $7000 plus. In card income, we are seeing the consumer debit and credit card spending at a 5% plus level year-over-year. This seems consistent with us to a 2% plus growth U.S. GDP environment. We’re still -- fighting the headwinds of the reward impacts that go on in that business and you see that in us and our competitors, but in the end of the day, we are providing great value for consumers. In the end of the day, when you look at the total relationship and those consumers, it's great economics to our shareholders.
Now next couple of slides we're going to do something we’ve done in each of the earnings reports for some time, but we're going to add a piece to it. We always have talked to you about our consumer business -- banking digital usage which you can see on Slide 6. But importantly on Slide 7, we'll talk about how that impact is now being driven across our corporate and global transaction services business.
So first let's start on Slide 6 with our consumers. Each quarter, we've shown you these charts. In the second quarter, in its broadest context we had 2.4 billion interactions in the second quarter alone with our consumers across all our channels. To show you how dominated it is by digital, 2.3 billion of those interactions were digitally or automated base. This explains why we have to be, and are excellent both high touch and high tech. If you looked at our digital only clients, meaning customers have not used a financial center in the past year, we have 30 million consumer customers across our platform who are primarily digital, who have more than $400 billion and balances with us today. Their entire relationship is managed digitally and the balance and activity continues to grow strongly. But, that's not our business. Our customers want both, physical and digital access. This is why we continue to invest heavily enhancing our number one ranked digital platform, while at the same time enhancing our best-in-class financial centers.
And again this quarter, you see the interaction of those two in the lower left hand side of the slide with a record number of appointments that were set up. 580,000 times a person took their mobile digital device, set up an appointment to come into a branch in the quarter, and you can see that on the lower left.
To better serve the three quarters of million customers that come into our centers every day. This quarter we added another 17 financial centers to help drive the growth in our consumer business. We then renovated 45 more, bringing over 1200 that we've renovated in the last few years, and we remain on track to not only hit the three year targets we established 18 months ago of adding 500 new financial centers, and the targets we established to renovate over 3000.
We also are adding many more relation managers in these new centers and refreshed a lot of centers to bring them up to our modern high touch environment. Now one of the things that we hear a lot about is the millennial customer and the Gen Z customer. Our digital capabilities are one of the things that attract millennials to our platform. Today, in our customer base, we estimate that we have 16 million millennial customers. Those are customers between the ages of 25 and 41. These millennials are very important for our growth, and they hold nearly $200 billion in deposit investments with us. It's a powerful platform to all segments of the U.S. consumer population.
Now turning to Slide 7. Well many of us focus on the consumer digital trends. I think it's also important to recognize a significant activity of the digital transformation in our commercial space. Over the past decade, we've been investing continuously in our global transaction services platform and on Slide 7 we start to show the digital capabilities as part of that investment.
We focus on making the business easier, faster, cheaper and more secure for clients and make it more convenient to access and be in business 24 by 7. We now have nearly 500,000 cash PRO Online users with double digit growth in mobile usage attached to that. Mobile payment approvals by these users were 123 billion in the past year, doubling year-over-year and it's growing very fast obviously. One of the latest enhancements, the type of thing that shows innovation we have is to have mobile tokens delivered through an Apple Watch to help corporate treasurer’s process payments. And at the end of the day the people who work with our companies, in our companies, want the same convenience that our consumers want to be able to deliver the services.
So let me end up here by addressing a few questions which are on your mind. Number one, many of you asked, what -- what we see if the expected forward yield curve comes true, i.e. the reduction in interest rates is in the curve. I asked Paul to lay out our thoughts on that and he'll do that shortly.
The second question is can you -- strong asset quality continue to last? Assuming the economic conditions continue to move along, we think the net charge-offs should remain low for some time and we've told you that for many quarters in a row. This is not because something we're doing in the second quarter of 2019, it's because the work we've done over the last decade to continue to maintain our risk profile on a consistent basis and drive towards it. We see no immediate credit concerns as evidenced by the volume or additions in non-performing loans or delinquencies or any of the statistics around credit that you can see it in the documents.
The third question is, okay, given an environment where you may see a slowdown in economy do you have further expense levers to pull? Well one of the questions we get is because we manage expenses so well, is there more of things you can do? We believe that it's important to continue to invest in the future of franchise. Paul is going to talk to you about near-term expense guidance a little later, but importantly, the reason why you're investing is to produce these investments presumably meaning result -- meaningful results.
But our 2019 expenses are projected to be lower than 2018. And that brings us to every year in the last decade we've had declining expenses except for one. But we as managers you want us to be, agree with you that if there's severe economic issues ahead, we have the flexibility to continue to reshape this expense base, obviously starting with revenue related costs, which would adjust quickly and automatically and then changing our investment strategies.
I considered these areas we focus on and are on our minds just as they are on your mind. So with that, let me turn it over to Paul for a few more details on the quarter. Paul?
Good morning, everyone. I'm going to start on Slide eight since Brian already covered the P&L. Overall, compared to the end of Q1, the balance sheet grew $19 billion driven by loan growth, which ended the quarter more than $20 billion higher in our business segments.
Liquidity strengthened in the quarter, global -- average global liquidity sources of 552 billion remained well above requirements. Shareholders' equity increased $4.4 billion as we issued $2.4 billion in preferred stock ahead of planned calls announced in July, and common equity increased 2 billion, versus Q1, the $2 billion dollar increase in common equity reflects an increase in AOCI as the value of our AFS debt securities rose given the decline in loan and interest rates.
In total, we returned $7.9 billion in Q2 through common dividends and share repurchases, 112% of net income available to common. As a reminder, we recently announced plans for a 20% increase in our quarterly dividend, as well as an increase in our share repurchases to more than $30 billion over the next four quarters.
With respect to regulatory metrics, our key lock ratios remain comfortably above our minimum requirements. Our CET1 standardized ratio increased to 11.7% remaining well above our minimum requirement of 9.5%, higher capital levels drove the increased AOCI excuse me higher capital levels were driven by the increased AOCI, improved the CET1 ratio while higher loan balances and commitments mitigated some of that improvement.
Moving to client activity and starting with average deposits on Slide nine, average deposits grew nearly $75 billion or 6% year-over-year. This was the 15th consecutive quarter in which we grew deposits more than $40 billion.
Global banking alone brought in more than $39 billion. Global Banking continued to benefit from strong customer demand, reflecting the additional bankers we have deployed over the last few years in the middle market franchise. We also continue to see a shift from non-interest bearing to interest bearing deposits in global banking.
Deposits with consumers grew $37 billion or 4%. Within that, Global Wealth Management was up $18 billion year-over-year reflecting client growth with a preference to hold cash amid market uncertainty as well as inflows of about $8 billion from the conversion of some money market funds to deposits near the end of 2018.
Consumer banking deposits grew by $19 billion or 3% year-over-year. More importantly, checking balances grew while more expensive balances declined modestly. In fact, checking balances grew $22 billion or 6% year-over-year to $374 billion while rate paid remained low at 9 basis points, up only 5 basis points year-over-year.
Turning to average loans on Slide 10, overall our loans grew a little less than 2% year-over-year. Our all other portfolio is down to $45 billion and has been running off at a pace of approximately $2 billion per quarter excluding loan sales. Looking at loans across our business segments, core loans grew $34 billion or 4% year-over-year.
Consumer, wealth management and global banking segments each grew at a healthy year-over-year pace. As you can see in the bottom right chart, we continued to demonstrate a fairly consistent pattern of responsible loan growth.
Growth of loans to consumers was led by an increase in mortgages, as lower interest rates stimulated more originations, and allowed many of our customers to lower the cost of owning their existing home or buying a new one. Within global banking, we saw increased activity for middle market clients, complementing the continued activity from large global corporate borrowers.
Turning to slide 11. I'll not only review the drivers of our net interest income this quarter, but also find a few perspectives on the future given the expectation of lower rates embedded in the forward interest rate curves.
Net interest income on a GAAP basis -- on a GAAP non-FTE basis was $12.2 billion, $12.3 billion on an FTE basis. Compared to Q2, 2018 GAAP NII was up $361 million or 3%. The improvement was driven by the value of our deposits as interest rates rose in 2018 as well as loan and deposit growth.
On a linked quarter basis, GAAP NII was down $186 million. In Q2, we benefited from an initial day of interest as well as loan deposit growth, which was more than offset by three factors. First, lower long term rates resulted in higher prepayments of mortgage backed securities, which cause higher write-offs of bond premiums.
Second, Q2 included higher funding costs from growth in non-earning trading assets and other global markets assets. And then lastly, lower short term rates reduced yields on floating rate assets such as commercial loans.
As a result of these impacts, net interest yield of 2.44% declined seven basis points linked quarter, but was up three basis points year-over-year.
With respect to deposit rates, we remain disciplined and saw minimal movement in total deposit repaid at 57 basis point it increased just three basis points from Q1. With LIBOR rates lower than Q1, and the forward curve predicting further declines, we would expect client deposit rates to begin to move lower over the third quarter.
Turning to asset sensitivity of our banking book, we remain asset sensitive given the nature and size of our deposit base and the type of loans our customers have sought from us. Our asset sensitivity in a rising rate scenario increased compared to Q2. This was driven by the decline in mortgage rates, which increases the likelihood of mortgages -- mortgage payments in the baseline.
The lower current forward curve also caused increased asset sensitivity in the falling rate scenario. In the second half of the year, we expect an NII to benefit from growth in loans and deposits, as well as an additional day of interest in Q3. However, lower rates are expected to have three primary negative effects.
First, yields on floating rate assets should continue to decline from short term rate reductions. Second, lower long term rates may continue to stimulate mortgage refinancing’s causing increased right off of bond premiums, and third reinvestment rates on securities and mortgages will dilute current portfolio yields. However, lower labor rates should reduce the cost of a long term debt and other funding partially offsetting these headwinds.
Last quarter on our earnings call, we reviewed our expectations that net interest income could grow roughly 3% for the full year of 2019 over 2018. That was based on a relatively flat forward curve at the time of our earnings call. Since that earnings call on a spot basis, the 10-year rate has fallen more than 40 basis points and short term LIBOR rates are lower by 10 basis points or so.
From here, if we were to assume stable rates, we think our NII for 2019 would now be up approximately 2% compared to 2018. Additionally, the forward curve anticipates two Fed funds rate cuts in 2019 and another in 2020.
If rates follow the forward curve, and the Fed funds rate were indeed to be cut twice this year starting this month, we think it would likely shave another 1% off NII growth for 2019.
Turning to expenses on slide 12, we have now been pacing at our targeted level of non-interest expense for several quarters, and our efficiency ratio has improved 100 basis points year-over-year to 57%.
At $13.3 billion, we were basically flat compared to Q2, 2018 with expenses up less than $50 million. While holding expenses roughly flat, we increased investment in our people, our brand, in technology and in office space. And as you know, we are adding and renovating financial centers, which serve not only consumer clients, but also commercial and wealth management clients.
Investment in people included adding more sales professionals, increased merit and benefit, as well as the shared success bonuses which we have awarded for two consecutive years now, since a portion of shares of tax bonuses best -- best over time we are now covering those programs and our ongoing expense base.
Also in the expense space is the increase in early Q2 of our minimum wage to $17 an hour. And as you know, we announced our intention to continue to raise our hourly minimum wage until it reaches $20 in 2021.
Compared to Q1, expenses are also up modestly as Q2’s decline from the seasonally elevated Q1 payroll tax expense was more than offset by the increase in investment in initiatives and marketing in Q2.
In the second half of 2019, we expect our expenses to roughly equal our first half expense of $26.5 billion. We expect increased technology investment in the second half plus the cost of adding new client facing professionals to be roughly offset by the seasonally lower incentive costs.
We previously projected that we could hold 2019 flat with our 2018 expense of $53.2 billion inclusive of these planned investments. However, as you heard Brian say, we now estimate expense in 2019 will be modestly lower than that.
Turning to asset quality on slide 13, asset quality continued to perform well driven by our disciplined approach to underwriting and a solid U.S. economy. As you know, the industry received annual stress test results this quarter and once again our loss rates in stress scenarios were lower than our major peers.
Total net charge-offs in Q2 were $887 million a little more than $100 million lower than Q1, and the year ago quarter. The client was driven by the sale of $700 million of home equity loans, which resulted in $180 million of recoveries from previously charged-off loans.
Absent this recovery, net charge-offs were just over $1 billion or 43 basis points of average loans and consistent with the net loss of rate ratio in Q1 and the prior year quarter.
Outside of the normal expected Q2 seasonality in our credit card portfolio, we had a modest increase in commercial driven by a couple of single name losses.
Provision expense of $857 million, excuse me provision expense was $857 million and included a modest $30 million net reserve release. Our guidance on net charge-offs from many quarters now has been roughly $1 billion per quarter and that remains unchanged. This guidance assumes current economic conditions continue.
Okay on slide 14, we breakout credit quality metrics for both the consumer and commercial portfolios. With respect to consumer metrics, delinquencies trended lower, which we believe is a good indicator of future losses. Additionally, non-performing loans continued to improve even after taking into consideration the loan sales this quarter.
And in commercial, we also saw a modest decline in non-performing loans, while resolvable criticized ratios remained near historic lows.
Turning to the business segments, and starting with consumer banking on Slide 15, consumer banking produced another strong quarter earnings grew 13% year-over-year to $3.3 billion. Revenue grew 5% and we've created operating leverage of more than 400 basis points. The efficiency ratio also improved year-over-year to 45%.
Even as we invest in new markets and renovate financial centers, the all-in 162 basis point cost of running the deposit franchise was relatively flat compared to Q2 2018 as the decline in the cost of deposits component offset the increase in rates paid.
Client activity remained strong with loans and deposits showing solid growth. Mortgage originations clearly benefited from lower rates. Customer satisfaction improved, asset quality remains strong as a net charge-off ratio was 124 basis points, decreasing 4 basis points year-over-year.
And I would note that much of the loan growth that we have added to our balance sheet is high quality, consumer real estate loans. We continued to add sales people for consumer lending, investment advice and small business lending. And we also increased our spend in marketing via campaign, where our 91 local market teams around the country asked their customers what they would like the power to do.
Turning to Slide 16, note that the 5% year-over-year improvement in revenue was driven by NII. While card income was down modestly year-over-year, card spending grew 5% more than the prior year, which on its own was a strong quarter given elevated spending driven by tax reform last year.
Versus Q1, we saw improvement in card income driven by solid purchase volumes. We continue to expect higher rewards to dampen card income, but would also remind you, that we use awards to deepen relationships with a focus on total customer revenue not just fees.
Enrollment in preferred rewards increased to $5.7 million and now represents 65% of the eligible opportunity and our retention rate of these customers is now 99%.
Balances with these customers grew 11% versus Q2 2018. With respect to service charges, they were also down modestly year-over-year. Again this quarter, we faced the headwinds from actions we took in previous quarters that reduced customer penalty fees.
However, as with card versus Q1, we saw a modest improvement in service charges.
Turning to Global Wealth & Investment Management on slide 17 strong results were driven by new investment accounts and more traditional banking products, as well as the markets rebound in the quarter. Referrals from across the company also gained momentum. Net income, which approached a record level was just over $1 billion and grew 11% from Q2, 2018.
Pre-tax margin was a record 29%. The business created 240 basis points of operating leverage year-over-year as revenue increased more than 3% and expenses grew 1%. Within revenue, positive impacts from banking activities and higher rates drove NII higher while fee improvements from AUM flows and market valuations more than offset general pricing pressures.
With respect to expenses, higher revenue related incentives as well as continued investment in new advisors, technology and brand were modestly offset by lower intangible amortization and deposit insurance costs.
Digital use by affluent clients continues to gain momentum as mobile usage once again grew double digits year-over-year. For example, GWIM clients used E-signature twice as much as they did only a year ago.
Moving to Slide 18, GWIM results reflect continued solid client engagement in both Merrill and the private bank. Strong household growth in both businesses contributed to the 2.9 trillion in client balances. AUM flows were $5 billion in Q2 or $24 billion over the past four quarters, contributing to record AUM balance, balances which rose 6% year-over-year to $1.2 trillion.
On the banking side, deposits of $254 billion were up $18 million or 7% year-over-year driven by client growth and the desire by some clients to hold more cash amid the market uncertainty.
Linked quarter deposit outflows reflected seasonal tax payments by our customers. Loans were 3% higher year-over-year reflecting strong mortgage growth given the decline in rates.
We also saw good growth in customer lending. With respect to client activity one thing worth noting is the increase in client referrals both to and from Merrill and the private bank advisors.
This quarter we had nearly 15,000 referrals, two advisors from other parts of the company and advisors made more than 58,000 referrals back to our other LOBs. In Q2 these introductions added 7 billion to client balances in GWIMs and help us grow households.
As you turn to slide 19, I know many of you look at global banking and global market on a combined basis. So to help you with your comparisons, I know that as I did last quarter, that on a combined basis these two segments generated revenue of $9.1 billion and earn $3 billion in Q2 which is nearly a 16% return on their combined allocated capital.
be a lot lower, GWIM and Global Banking would be a lot higher kind
Looking at them on a separate basis and beginning with global banking on slide 19, the business earned $1.9 billion and generated a 19% return on allocated capital in the quarter. Earnings were strong but down 9% from Q2 2018 driven by the absence of reserve releases for energy exposure in the prior year.
Revenue was down modestly year-over-year as loan spread compression and ALM activities offset the benefit of loan and deposit growth. Strong deposit and loan growth reflects hundreds of bankers we've added as well as continued investments and how we deliver our loan product and treasury services.
With respect to expenses, lower deposit insurance cost mostly offset continued investment in technology and bankers. Looking at trends in slide 20 and comparing to Q2 last year, as you heard Brian mentioned earlier, we have made steady progress in investment banking over the last few quarters.
We saw a nice finish this quarter with IB fees of $1.4 billion for the overall firm down 4% year-over-year, but up 9% in Q1. This performance has to be put in the context of overall industry fees which according to Dealogic were down roughly 20% year-over-year. In fact using Dealogic data our market share has improved across most major products comparing the first half of 2019 to the first half of 2018.
Switching to global market on slide 21 as I usually do, I will talk about results excluding DVA. Global market produced $1.1 billion of earnings and generated return on capital 12%. Overall revenue declined 6%, while expenses declined 2% year-over-year.
Within revenue, the year-over-year decline and sales and trading was partially offset by a gain on the sale of an equity investment. Sales and trading declined 10% year-over-year, FICC was down 8% while equity fell 3%. Decline in equity to $1.1 billion reflects weaker performance and EMEA derivatives compared to a stronger year ago period.
Fixed lower revenue was due to a weaker trading environment with lower overall client activity across most products. The 2% year-over-year expense decline was a reflection of lower revenue- related compensation. On slide 22, you can see that our mix of sales and trading revenue remains heavily weighted to domestic activity where global fee pools are centered. Within FICC, revenue mix remained weighted towards credit products and we have no days with trading losses in the quarter.
Finally, on slide 23, we show all other which reported a small net profit $358 million better than Q2 2018. There are two primary reasons for the improvement. First, provision benefit increased to $136 million from Q2 2018 driven by the non-core loan sale which as previously resulted in a recovery of $180 million.
Second, we had an improvement in our tax rate compared to Q2 2018, the tax rate for the company was 18% in the quarter, a little lower than our expectations. We expect the tax rate in the back half of the year to be approximately 19% absent any unusual items.
Okay. I think with that we're ready for some Q&A.
[Operator Instructions]. And we'll take our first question from Jim Mitchell with Buckingham Research. Please go ahead.
Hey, good morning, guys.
Good morning.
Just might as well as ask the question on NII, appreciate the guidance for this year. How do we think about I guess number one, the impact of just one rate cut is it sort of half? Is it linear? And I guess number two, as we think about next year the forward curve is realized over the course of the next 12 months. How do we think about that impact into next year? And given the strong loan growth you guys have seen kind of accelerated in 2Q, is there enough asset growth that you can still grow NII in this environment next year? Thanks.
Okay. So in terms of just isolating in on a 24 basis points cut on the short end. I guess the crude approximation is the $3 billion impact over the 12 months of a 100 basis points down rate shock on the short end. The quarterly impact of that is a little more than $175 million. But it will be even less than that because that $3 billion is measured relative to the forward curve, which already includes rate cuts, plus that analysis is just on our banking book. If you include our markets book, which is modestly liability sensitive, you get to the approximately $100 million level that I discussed in the prepared remarks.
In terms of 2020, look, I would say it's a little early to be talking about 2020. We don't know what rate cuts we're going to get. We don't know why we're going to get and which is important. So I think as we get a little closer we'll be more likely to be able to talk about that.
Okay. Thanks.
Jim, I'd add one thing. Remember, if you think about the industry's thought process over the last three years basically as rates rose, that was one thought process and how people price deposits and other things, and as that changes you'll see a different thought process take hold at least in our company. And I think if you look at some of the statistics in the material on the – especially on the corporate GTS type business that the necessary increase for the highest balanced customers et cetera, that's occurred, will slow down and come back the other way and that frankly is just the nature of a change in the rate environment which the pricing is still catching up to. And so I think, so as you think about it, as you get out the longer term in 2020 you have to think about that situation sort of reversing back to a different framework than the framework we had literally 200 plus basis points of short-term rate increase.
Okay. Thanks.
We'll take our next question from Glenn Schorr with Evercore. Please go ahead.
Hi.
Good morning, Glenn.
Good morning. One quick one on follow-up on cards. You mentioned spending up, margin compressed and the reward costs continuing to be there, but obviously producing some growth. Can you talk a little bit more about the reward dynamic? How long the current environment you think last? And how you know that it's going to continue to fuel that growth maybe something a little bit more of growth coming from current customer base versus new ones, things like that? Thanks.
So just to start at end of your question working backwards,, we generated another million plus cards this quarter. We've been fairly consistent doing that. What has really happened in our card business over the last few years has been, they continue repositioning it, it's really over now and now you're starting to see it start to work its way up and grow just in terms of balances and numbers of cards and things like that.
If you think about on the rewards question generally, remember that you mentioned it, Glenn, it's a relationship pricing piece. So our cards come with a relationship pricing across the whole relationship including deposit. So you could have $20,000 deposits from these customers and so you reward them with a card because that's the way you can do it, but you're actually getting the deposit. So, we'll keep working that. But if you look at the more recent quarterly trend you're going to see that you're seeing the impact decline. Although it still going to hit, but you're seeing that help fuel our deposit growth and checking deposits especially 6% year-over-year in consumer and that is a huge payback for the reward price.
So, you'll see the dynamic continue. We haven't seen big breakage fees and that's not so volatile. It's kind of study. But the industry dynamics and how people are using rewards not only for the card activity but also more broadly as I don't expect to change, but in the Bank of America context we've been using it for the broadest part of the franchise and that's why you see the good growth in the other parts of the business.
Appreciate that. One other one, a follow-up on wealth management. You mentioned new household growth up 45% year to-date. Are you doing anything specific on incentives to spur that growth? That seems like a big number for such an already big business. And the related question is, do you think of there being a ceiling to margins because they're already huge at 29%?
Couple of things. One, on just on the way the incentive system, works. Andy and the team going back two years ago now, basically added to a modifier for lack of a better term and the incentive compensation construct for requirement bonus. If you grew your households on the numbers and obviously inverse that if you did not, and that just led to the activity that you've seen in the pick up and Andy and team has done a good job.
On the private banking side, we been adding sales teammates and Katie and the team have been driving that. It's been -- it's up dramatically year-over-year and that's critically important because that business profitability and inventory are much -- are even higher. And so it does come from modifying the system and also comes from the way we operate in the markets on a referral business that is in Paul's comments you heard that. There's a huge flow between the FSAs that operate the Merrill Edge platform at the branch to the financial advisors. So somebody comes in, has the amount of assets and desires financial advisors, we move them to the platform that happens a lot.
And then off the business banking, small business banking, commercial franchise, the entrepreneurs behind those businesses referred over and you saw, I think 15,000, I think it was Paul's number towards Merrill and we track that in every market. We make sure that they get executed on the [capital] [ph] success rate, and that energy creates – it’s gold in every market every year and this year we will do 7 million referrals across all the businesses in the markets that we're doing. And so -- and then on the margin we move to 29. As you see NII type activities, as loans to deposits continue to grow, that margin will continue to grow.
We're fighting the fee compression on the pure asset management business that you seen go on for years in this industry. But we have lots of advantage of scale and capabilities on the digitization of the operational side of that business and platforms and statements and things like that. We're getting to 50%, 60% digital statement in consumer. We're not anywhere near that in wealth management. And all that is not some snap your fingers and overnight it happens, but all the grind to make the business more efficient. So our industry-leading margin we think we can keep pushing it up.
Thanks. Appreciate everyone.
We'll now go to Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi. I was intrigued by your comment about 16 million millennial customers, $200 billion of deposits and I think that's the first time that you've disclosed that information. So, I guess what's the growth rate profitability of those customers? And as you look at the millennial customers set what your assumption for how long they'll be customers with you since they are younger and you have more digital banking. Do you now assume that they'll be with you say 20 years instead of 10 years? And if so, how do you change the pricing of the product for that millennial customer set?
One of the things and I don't want to sound perspicacious in terms of people's use the big banks, don't do business with millennials, it just to set the tone, we put the 16 million to give you [in one sense] [ph], it's $400 billion of client balances with us. But if you look at our checking sales, Mike, and you look at the population representation millennials and the population, Gen Z and the population, you look above 18 years old and millennials about 24% and people between 18 to 24 is 11%. But if you look at the rate we sell to that class of our sales, to millennials its 40% of our sales. So it's basically one and a half times the rate and the population we're selling to.
And if you look at their holding and balances today just pure checking, nothing -- not into savings or investment, the millennials hold about $70 billion of checking balance with us and its growing quickly. And so we are gaining share in that class. It's because of the digital capabilities and all the things we talked about. Are they profitable? All our consumers basically are profitable. They represent the big part of our business today. The representation is currently outstanding. Checking account is about 40% just for millennial. So, we're gaining the share in that segment. We got to be on our toes at all times and it's very valuable. If you think you like you've been around this business long time you think about just those checking balances alone provides tremendous value.
Will they stay with us? The answer is they have in the past and we expect in the future as long as we keep driving the great experiences we have. And going back to the comments on the page 6 of the slide deck on consumer strategies, just look of the activity levels and those are generally would have a stronger cohort to younger below 40-year-old people. But on the other hand across the platform it wouldn't work. But if you look at it with Zelle, the activity volumes if you look at with Erica in the year, 50 million plus customer interactions and if you look at it in terms of digital interaction at 2.3 billion in the quarter, mobile log-ins 1.5 billion. This is as advanced stage as anybody and so we are very pleased with team's work in this area.
And then if you go to Merrill Edge, if you look at the millennial balances, again, they represent twice the rate of the population and we're cumulating those balances which when we compare them with other competitors, 64% of our new clients are in the millennial categories for Merrill Edge and our preferred clients and things. So it's very good. We're driving it. But it’s a competency of the team's capabilities in those categories that drive it.
And the other question that I had, how long you assume these customers to stay with you and how does that compared to the past? The reason I ask that, you look at some of the offers out there you can get $400, $500, $600 simply for opening accounts at certain banks. And the assumption is that once you get these customers maybe they'll stay with you longer than they would have say 10 years ago?
Well, that goes back to your colleague question about the rewards and things like that. Our preferred base of customers in the consumer business is 99% plus retention rate. And so, they really all stay with this. And so, that's extremely powerful dynamic. So the assumption, I don't have, that top off my head that the team puts in our models and stuff like that, but if you're retaining 99%, it's a pretty long duration.
All right. Thank you.
We'll take our next question from John McDonald with Autonomous Research. Please go ahead.
Good morning. Core loan growth continues to remain solid at 4%, Paul. Are you seeing some improve momentum in middle-market and small business? And also the 2% reported has closed some of the gap to that core number, I guess, as you think about the run down pace, could we continue to see a narrowing, so that your overall balance sheet growth looks closer to that core?
I guess, I'll do the second one first. The answer is yes. I mean, we have $45 billion in the non-core portfolio. Of that $45 million half I would say is sort of legacy home equity and residential mortgages that will run off and/or depending on market conditions we may see some more sales. The other half is you know mortgages that are previous Treasurer or CFO bought many years ago, its – they're good mortgages. They're going to run-off as well. Together they're running off at about $2 billion a quarter. So yes, I mean, you can just do the math. It's becoming a smaller component of the overall picture.
And as you point out, look, when you look at our LOBs they were up 4% year-over-year this quarter. And we are seeing I think good growth in small business. In fact I think we are the largest lender to small business companies in the U.S. now surpassing a competitor recently. We're seeing in middle market. This quarter we saw pickup in growth that really complemented the consistent growth that we've been seeing for many quarters now from large global corporations. I mean, we don't see anything on the horizon that suggest that we can continue to grow, kind of what we been telling you which kind of the low mid-single digits for the company from the business segments.
I'd just add two thoughts to that. One is, Sharon runs our small business for us and the consumer business and Alastair Borthwick runs middle market. They got their team’s sort of moving along and as you said, growing at a consistent 5%, 6%, 7% depending on the product set. Type of what's real estate slower versus core middle market. And so we feel very good about that. Remember that the runoff pace and that All Other book has been has accelerated by the sales over the last few years and that was to reduce our potential credit risk and stress and you've seen that we've reflected including last year asking for the extra capital return based on selling a bunch of loans during the year which had higher charge-offs in the CCAR process as you might expect.
And then secondly operating risk of the company comes way down because those loans would have a tendency and we sell them servicing release. So, we're getting to the bottom of the barrel, its now 4% of the -- 5% of the portfolio. It used to be 8%, 9% of the total portfolio and maybe 10%. So, we feel good about that impact really narrowing now. And the sales are largely -- we always chipping away. This quarter was a relatively modest balance, but the sales are largely through. The money and stuff we have now is actually 12 years current pay and the thought on these loans were made since the crisis. So we forget about that. And the last thing is think about in the Merrill side in terms of -- in the private banking side in terms of loan growth we're seeing solid performance there and the integration in middle market investment bank and we feel good.
Great. Brian, and then you touched on this a little bit, but could you talk about your feelings or your ability to maintain the strong checking account growth that you've had given the stance on rates paid. What your outlook for that checking account growth to continue maybe relative to GDP or to the industry?
If you look at it we have maintained that pace. If you look at retail deposit growth since beginning of 2016 I think our gross of balances has grown about 20%. The peer groups grown about 12% and so that's significant difference. We've been pretty consistent growing 20 odd billion dollars in checking. That is the core transaction account. So if you look at the – what we're seeing now is the average balance in our checking accounts I think are $7.57 billion – seven point five thousand, seven and half thousand, seven point 7 some like that. 90% current, yet we're still in the last couple years starting to net accumulate. And so we feel good that we can keep that checking balance growth.
It's not depending on rate pay because of the core transactional account. So even though there's some payments to either interest-bearing checking, the dominant part is non-interest-bearing and just the core transaction account. If you look in the money market and stuff and see the rate that's where the people get paid for the excess balance. But this is the money that's flowing through the household on a daily, weekly, monthly basis and then we feel very good about it and feel that we can continue it because we have and all the environments and all the rate changes.
Great. Thank you.
We'll now go to Saul Martinez with UBS. Please go ahead.
Hey, good morning guys. Couple of questions. First, I wanted to key in on something you said, Paul, on the rate sensitivity. You mentioned, I know its crude approximation, but 25 basis point cut on the short end, it's about $175 million a quarter, but that's just the banking book and your liability sensitive in your trading book. And I think you mentioned it's $100 million if you kind of net that out. So should we – is my math right in suggesting that you get something in the neighborhood of a $75 million benefit per quarter for every 25 basis point cut in your trading book? Because obviously in the past sometimes we've kind of looked at your NII growth and expansion in the rising rate environment, and maybe it hasn't grown as much as we thought because of the headwinds in the trading portfolio, but as short-term rates move down should we see the opposite side of that also occur and some of those headwinds get mitigated by expended margins in your trading book?
I think you're close, but the one piece you're missing is that in addition to being modestly liability sensitive in the trading book. When you look at those disclosures about the impact of a 100 basis point shock on the down rate scenario on the short end, remember, that's below the forward curve.
Right.
So you're looking -- you're literally talking about a scenario where short end rates would be shot down to 75 basis points and long end would be at one percentage point. So that 3 billion obviously, you know it get – you have more and more impact, but the lower and lower rates go. That first 20 basis points is not going to be 3 billion divided by the [Indiscernible].
Great.
So you've got to factor in both of those things.
No. Understood there, but is the logic right, I guess, is my question that you'll get an offset and that offset is sort of in that magnitude of for every 25 basis point something in the neighborhood of $75 million on the trading book?
I don't think we're prepared to give too much guidance on how liability sensitive the trading book is, but when you put all the factors together you kind of get to roughly 100 basis points, I mean, 100 million on the first rate cut.
Okay.
And you know remember when I went through the script and talk about how that we'll still end up growing year-over-year 2019 versus 2018, you get a factor in loan and deposit growth. We've got the day coming in the quarter, so all those things impacted.
And you're also baking in a little bit of a benefit, little bit of an offset than from expanding margins and trading book on the rate cut in that guidance?
Yes. In that guidance, we're putting in a little bit, yes.
Okay. Changing gears, and apologize if I missed it, but did you disclose the size of the gain on the sale of the equity investment?
We didn't disclose the equity investment, trading, yes. No. It was $200 million.
200 million. Okay. Awesome. Thanks so much.
Thank you.
We'll now go to Steven Chubak with Wolfe Research. Please go ahead.
Hey, good morning. So I wanted to start off with the question on the investment banking business. So it's pretty nice to fee share increasing in the quarter. We had seen some share loss in some of the more recent quarters. And I was hoping you would speak to some of the factors that maybe driving some improve business momentum whether its leadership changes or anything else that you could attribute it to?
Sure. So just a quick review, year-over-year the market fees according to Dealogic were down I think 21%. Our reported fees were down only 4%. And if you look at Dealogic fees for us, maybe 11%, so clearly we've picked up at least in this quarter meaningful I would say market share. I think this is a result of all the things that we said we were going to do, not that we ever had a problem in investment banking, but we think we should be top three and there was a little bit of slippage there. And so we just reinvigorated the focus. We decided to add more bankers particularly to cover on the middle market.
Remember, we have an army of corporate -- our commercial bankers out there. They have great relationships. They've been making loans to clients for years. And there's certainly opportunity when those companies need do something, need to use investment banking product for us to be there. We just needed to probably add a few more bankers dedicated to that segment. We've done that. We've got regional bankers now all around the U.S. We're going to be adding more. They're in the market with the commercial bankers. And that and I think just the reinvigoration from the leadership team across global corporate investment bank and commercial bank and business banking, I just think is having an effect.
Helpful color. And then, Paul, just one more from me and it's on the topic of NII, I mean a slightly different tack. There's obviously pretty heavier lines across the industry on the 10-Q disclosures, which I know are inherently flawed, it's a very static snapshot. Also maybe you speak to some of the doctors that are driving more benign impact in terms of the rate sensitivity that you cited versus what explicitly disclosed in the 10-Q whether it's volume growth, some issues relating to your comparing it versus the forward curve, deposit offsets or anything else you can speak to?
Just one thing to be precise, Paul said a couple of times that gets lost sometimes, and I'll let Paul get into the broader statement. When we disclosed 900 basis points shock down to 100 basis points across the curve that is on top of what the forward curve has in it. And so sometimes people get confused by that because they think its from the current rate and by stable rate environment we see today minus 100, its actually in the case of forward curve having the rest of the year two cuts and its 50 off and then another 100 off. And so that dynamic, Paul has mentioned twice that sort of make sure people don't get ahead of us. But Paul can take you through the broader factors. But just be careful that you're not making that miscalculation which we've seen other people. We're not saying you have, but other people have.
Sure. Look, I'm not sure what else I can add. I mean if you think about our clients, right, you've got GWIM clients, we've got Global Banking clients where if rate change, the pass-through rate on those clients are going to be roughly the same up or down, right. And you got consumer clients where because of the great job we've done on rate paid in the cycle, there just isn't lot of room on the downside, but if rates go up they probably be a little bit more pass-through. So that's the dynamic we're living with.
On top of that you've got to factor in when long term interest rates go down, the quarter later or the month later you're going to see an impact. That doesn't continue forever. It's only an impact when the rates go down you get a lag effect on some increase in write-off of premium, and so that what's going on.
Paul, just on that this quarter a couple of basis points of the compression due to the amortization in the premium which goes away next quarter if the tenure doesn't fall by 50 basis points again during the quarter, so and another basis points sort of seasonality. So, when Paul talk about some of these sort of spot issues early on, of that seven basis points, three of it is really just literally a quarterly effect that goes away. And that's where you think -- as you think about it and go back to all the factors, listed loan growth, deposit growth, deposit pricing, loan pricing. But then the twist in the market when things change instantaneously can have a quarter affect and go away next quarter as long as rates don't move the same velocity that they move this quarter. And those are – that's why that we are always careful about these estimates to make sure people understand the online basis.
Now, one of your colleagues said earlier the clue of this is we've got to grow loans and deposits. We grew $70 billion in deposit year-over-year. We grew $30-odd billion in loans. The rest of the deposit is going to securities. That is the core business and that would drive the earnings power this company and average asset growing and that's we're up to. That will ultimately make NII grow. The question is the twist and turns along the way can be little different.
Very helpful, Brian. Thanks for taking my questions.
Our next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning. You mentioned earlier about some puts and takes on the expenses and gave guidance for this year to be little bit below what you have thought a few months ago. But what are your thoughts kind of beyond this year? I think at one point, you have said try to keep costs relatively flat at $53 billion. And then you did mention, if I think you're alluding to call it capital market related or volume related areas if those were weaker there's some levers to pull on costs. But if it's just a lower rate environment, is there other area on the cost side that you can pull? So I guess, question is like on a stable environment your base case, what you thinking on costs? And that if the revenue shortfall is just rate driven or there's some areas that you can tie in?
So I think if you think about it over the last two years plus, I think we've ran around $13.1 billion, $13.2 billion, $13.3 billion in quarterly expenses. Except for one quarter, we had $13.8 billion, which was sort of the seasonality of a strong markets quarter plus. It was the first quarter with the FICA and stuff like that. So basically, we got this thing at a run rate. And so -- but you've got to remember, in 2019, that run rate has picked up. If you go back to when tax reform came through, we said we'd put $500 million more in the technology investment platform. A chunk of them ran through last year, and about $200 million or $300 million of it's run through this year. So that was increased expense. We said we did the share for success. We did over $1 billion in the 2 programs. There is a near-term cost to it and then there's an amortization of the deferred part, so there's stock. That's all in the P&L today. And then you have incentives, great rent and all the other stuff, the benefits. And with all that, we thought we'd be $53.2 billion, $53.3 billion this year.
And Paul has told you basically to assume that we'd be closer to $53 billion with all that going on and all that extra investments. So if you go back to 2016 when we said we're running at $50 billion -- I don't know, [Indiscernible] whatever we were, we told you we'd be $53 billion, low $53 billion. Nobody believed us. We got here. We've invested a lot more and we still are running at $53 billion. That is the inherent ability of the New BAC, SIM operational excellence, org health, which not -- doesn't mean a lot to all of you, but the teammates listening will understand all that, that allows us to keep driving the relative efficiency of the company. And even in environment where the world just kind of -- so it goes on, you have 2% growth. We know there's more we can do.
What we don't want you to do is to get ahead of us because, frankly, the investment year-over-year in marketing was $150 million last year, second quarter this quarter, additional in the quarter. That won't sustain at that kind of level, but it's part of driving that customer satisfaction delight scores through the roof, which then means those -- the millennial accumulation accounts of twice the rate of population, which then turns into customers, to Mike's point, of the future that the digital comp still allows us to serve more efficiency, which then drives down the efficiency ratio. That is the operating model.
And so those investments pay back, and they all were down to our benefit. But that said, we're saying we gave you a flattish from 2018 to 2019 to 2020, and we're basically saying you don't push 2020 down in your models because we will see what happens. But right now, we think 2019 is going to come in a couple of hundred million under what we said, which just goes -- by the teammates here is good management. We didn't do anything. We didn't pull any lever. We just kept driving the basic efficiency of this platform through and we'll continue to do that.
And if that comes in to be lower than the number we're talking about for '20 and we get there, it's going to go to you. But importantly, as we shouldn't change our investment strategy, our belief and our Board's belief and our shareholders' belief, frankly, is don't change your investment strategy because, right now, you're seeing the market share accumulations come that you wouldn't change to pick up expenses by $100 million in the quarter. $0.01 wouldn't make good, but the investments are long-term strategic drives that are happening. And just on the investment banking, adding 50 middle-market investment bankers and adding -- doubling that again over the next couple of years are paying us back.
Okay. It's helpful. And then just separately the CCAR ask an approval, impressive, 30 billion as you mentioned earlier. Do you plan to use all of that? And should we assume the timing if you do plan to use all that is spread even or do you have flexibility to the front end if you wanted to?
Yes. We plan to use all and its spread equally over the quarters under the way the method works and sort of guidance they give you. So its spread evenly over the four quarters and yes, we plan to use 100% of it.
Okay. Thank you.
We'll now go to Ken Usdin with Jeffries. Your line is open.
Thanks. Good morning, guys. Brian, you mentioned in your opening remarks just how strong credit is and expect it to continue. And you guys have then talk about charge-offs kind of living in the 900 to a billion range a quarter. We went under that even this quarter. So can you just talk about any reason why we should see any change in this kind of 900-ish run rate even with card losses or barely even moving as is? Just an update on what you're expecting would be great? Thank you.
I'll let Paul to hit that one, just because he talked about it. Go ahead, Paul.
So, you're right. I mean, our net charge-off were lower than a billion this quarter. But that's because we wrote back charge-offs we took earlier associated with the loans we sold this quarter. So to back that out its approximately $1 billion in net charge-off. And that number, if we think is a good number, approximately that number, it will bounce around because we're bouncing around the bottom on commercials to one commercial client or another can always move thing. But it’s been a billion now or up to a billion now for many, many, many quarters and if we see the – if we think – if the environment stays where it is that's where we think it’s going to be. And then provision will follow that.
And when you think about it, cards the number, right? And if you look at our live charge-off rate because sometimes growth -- we're basically consistent with our current charge-off rates, so the stable portfolio, stable credit. At the end of the day, it's 80%, 90% of all the activity, and you've seen that basically be fairly consistent. And this year is the lowest increase in card year-over-year since 2013. So that prime focused book, that primary customer account basis through the combined rewards is probably going to lead to a very, very strong customer base there.
So we feel good about credit, and our view of the economy is it continues to move along in the low to mid-twos. That's what the research team has and then next year, around 2%. And given that, we would not see a change.
Okay, got it. My second question is just on the preferred stack, you guys did some issuance, and I think some either pending or calls. Can you just talk about just at least where you expect the preferred dividend to lend going forward? And is there a more opportunities to refinance that part of the capital stack?
Well, we never really like to talk about plan stuff. But in terms of the preferred stack, we're going to end up roughly the same place where we started because we're just reducing the cost of that preferred stack by calling some higher yielding preferreds in place of lower-yielding preferreds. So in terms of the dividends in the first quarter and the third quarter, we're kind of approximately in the 440 range and in the second quarter and the fourth quarter we're kind of in the 240 range. That could fluctuate a little bit because it's based upon -- some of them are based upon floating rates. But on the other hand, some of those get forward after a while as well.
Got it, OK. Thank you.
Thanks.
Thank you.
Our next question comes from Gerard Cassidy with RBC. Your line is open.
Morning, Gerard.
Good morning, guys. How are you? Paul, I may have missed this. I apologize if you addressed it already. Can you share with us how you're managing the CET1 ratio with the stress capital buffer that may now be included in next year's CCAR? Have you guys run the numbers? And what is your CET1 ratio comes out under the SEB?
Well, our CET1 ratio and our ratio right now is 9.5. And we don't know what the final rule's going to be yet. But if you look at the past four years and you run using those scenarios, CCAR scenarios, our SEB would be below the 2.5% floor in three of the last four years. And that's just a reflection of responsible growth and how we run the company. We've got loans to consumer that are prime and super-prime. We have very prudent trading, and we've got a legacy portfolio that's running off. So we're below, we've been below for three out of the last four years.
And to be clear, this is Lee. What Paul said, our CET1 was 11.7% and our minimum requirement, which is what he was referring to is the 9.5%.
Very good. And then, Brian, I know you had talked about the economy from what the research has said at Merrill Lynch, but can you share with us what your business customers are saying to you about their outlook? Obviously, the consumer numbers speak for themselves. We all see the employment numbers, which are very strong, but what are you guys seeing both in small business and midsized and larger businesses?
So, the core loan growth is strong. The usage of lines is good. It's running near the high levels and stuff, so the activity is there. I'd say that, depending on the type of commercial customer, the more they're in the global trade international supply chain, whatever words, the more they have. China has slowed down. If that's 20% of the business, they're dealing with that. But they're all sanguine. They all feel good. They all would wish the discussions of trade would come to a resolution and reestablish their relationships and the flows because the fact of the current impact is one thing, the fact that the belief that there's future impact.
So I'd say they're optimistic. They're struggling to get people because that's the thing we're lacking in the U.S. especially. They see their business plans not being as robust as they were in 2018, but still solid growth, but they continue to watch the headlines daily, trying to figure out if these situations are resolved. And I think there's pent-up enthusiasm if these situations start to fall in place that you'll hear more investment in business and things like that. On the other hand, there are -- the indications in our surveys about their confidence are basically more consistent where they were as they were coming up to the peaks they hit in 2018 right after tax reform, i.e., where they were in 2017. So they've kind of come down a little bit, but the levels are as high as anytime they've been, other than -- there's tremendous business enthusiasm came out of the year in 2017 and early 2018 between regulatory reform and tax. That has been mitigated by the trade discussions and uncertainty around them. But overall, they're solid. And I think they're sort of waiting for this to resolve and then they'll get back and they'll push back and accelerate again. Right now, they're staying within the speed limits to say that.
Thank you.
And we'll now go to Brian Kleinhanzl with KBW. Your line is open.
Great, thanks. Yes, just a quick question on the NII sensitivity that you gave. What were the deposit beta assumptions behind those? Are you being conservative? Just trying to get a sense there.
Sure. So again, the way to think about it, and I'll give you a little bit more detail, but just to get the concept down, we've got GWIM clients, we've got Global Banking clients that pass-through rate on an up-and-down scenario of roughly similar, and we've got a consumer franchise where we have not passed through a lot of rate increase in the former rate paid. That's obviously going to have a different sensitivity in the up scenario than in the down scenario. That's just the basics. So if you look at the pass-through rate and the down scenario an average we're talking approximately 40%, and again, consumer would be a lot lower, GWIM and Global Banking would be a lot higher kind of in that 60%, 65% range.
Okay, great. Thanks.
Thank you.
And we'll now go to Kevin St Pierre with KSP Research. Please go ahead.
Hi, good morning. Thanks. Going back to the mobile and digital trends which you're obviously really strong, but looking backwards over the last several quarters, your tax spend has been pretty flat, and you mentioned that tax spend is likely to increase. Is that a reinvestment constant investment in the mobile and digital channels?
Yes. We've been consistent. It's been -- I think what I said is we elevated tax spend after tax savings and then we've been relatively consistent. One of the things I'd say that we're receiving a benefit as you think about that number, if you think about the combinations of money spent on Brexit, broker-dealer separation for resolution planning and a bunch of other initiatives like that, we can reposition that money more toward op ends over time and that's been good. And as we look forward to the next couple of years, a flat number would actually provide more pop, for lack of a better term, and our teammates are always happy to hear that.
But these things are impacts that compound. And so I'll give you an example. If you look at digital mortgage, which the $3 billion were digitally originated this quarter of the 18, so it's growing. But it took us a year -- a little over a year to do the first $1 billion. It took us eight weeks to do the second $1 billion. It took us six weeks to do the third $1 billion. So what happens with these implementations is -- the technology investments made and then it ramps up. And what's really happening in digital mortgage, remember is it's actually saving us a lot of money in the origination process as well as be a good client experience.
And so you take that or take Erica, which is now moved to several million customers, you can see 50 million interactions first year. But each month, it's growing. Business -- small businesses went out, and it's going at 50% a week type of numbers, even though we haven't told people it's out there and things like that.
And so now growing $100 billion year-over-year. Checks written are coming down more effectively. All this really points to the compounding effect of that digitization. So that consistent investment renders benefits two, three, five years out, and that's what we're driving at. So we'll be consistent in our investment. There's only so much you can do. We do about 1 million lines of coding every weekend and conversion so to speak. And there's -- you've got to be careful you don't have a problem, and we've -- knock on wood.
Cathy and the team have done a great job, and we haven't seen any issues that we've implemented tremendous new codes, so to speak over the course of years here. And so we are bound more by what we can get done and getting the benefits out of it than we are by money.
Great. And I noticed the digital appointment continue to grow really strongly. Are you at a point where and I noticed that sort of year-over-year and sequentially your financial center numbers are pretty stable. Can we assume that the foot traffic that's being driven you make sure you think you're at right critical mass of financial centers? Or can we expect over time continued consolidation and rationalization there?
We'll see the numbers not be as dramatic from the 6,100 to the 4,300 obviously, but it's a complete distribution system. So the ATMs have gone up from 16,000 up to, I think 18,000 or something number now. Rates have come down. The branches are completely different. They're bigger. They have more people in them. People go to them because of more complex needs, etcetera versus take the transaction side, take the check and deposit. So we're driving more co-location.
But if you think about the real interesting news is, remember at the end of the day, we have the number one retail deposit share in the United States. We're growing faster than anybody else, but we're still not in several markets in the top 30 markets and that's what we're building out, whether it's Indianapolis, whether it's the Minneapolis, whether it's Denver, whether it's now Cincinnati, Columbus.
And we are in Pittsburgh, and there's many other cities in the top 30 and top 50 that we have to figure out how we drive a configuration against them over the next piece of time here. So the actual branch count may have different elements than you would have thought going back to the constant down. But you see it drift down a little bit net, net, net because even in major cities, the consolidation of branches into bigger enterprises or co-location with Merrill teammates or Business Banking teammates or small business teammates and private banking teammates is part of the drive.
So don't get so focused on that. What I would get focused on is actually the cost of operating the platform. And if you look at that year-over-year it fell by 4 basis points as a percent of deposits. That is phones. That is everything. And if you think about that, if you add that in the cost of deposit repaid, you're basically flat year-over-year and the total cost of goods sold for lack of a better term to produce this wonderful transaction franchise and consumer and further the loans franchise on top of it and the investment franchise on top of that. It is a powerful engine, but it's a combination of everything that we – that I just talked about not five less branches or four or less this.
Great. Thanks, very much.
And we'll now go to Vivek Juneja with JPMorgan. Your line is open.
Hi. Thanks for taking the question, a couple of questions. Firstly, since it was, you pointed out Brian and Paul couple of times about making sure that we take account of the fact that your NII guidance is based on over and above the forward curve. So let's step back, given that that may not be as realistic or likely to happen. What is the outlook for NII if the forward curve is realized when you look out over a 12-month period. I know you've given a second half, but since these things are not linear, can you give us a sense of what --what would that be on NII, what would NII do with the forward curve being realized?
Well I'm not sure, I quite followed your question Vivek. But just to be very clear…
Well could….sorry go ahead.
Well, the asset sensitivity of the company, those disclosures that you read in the Q, that is in excess of the forward curve. What we were talking about earlier in this call, somebody asked about what were the next 25 basis points and we went through what we thought the impact of that was.
Great. And I think Paul’s statements earlier in the prepared remarks are exactly what you're saying, which is stable rates and follow the forward curve of rest of 2019 and he gave you – those that 2% to goes to 1% growth 2018 to 2019.
Right. Right. Now you’ve given that for 2019 and I'm I guess asking for a fuller 12 months rather than just simply the second half. Brian.
Oh he did. We said that we you know as we watch what happens over the next few months, we can do better we'll have a better view of given you 2019 or 2020 excuse me. But you think of the run rate exiting 2019 at that level and you can add two more quarters to it, but loan growth, deposit growth, whether the cut comes, when it comes, those are all factors in there. So I think Paul said, we'll talk about that next quarter when we know a little bit more.
Okay. Okay, so let’s move to another one. Residential mortgage loan growth accelerated sharply this quarter far more than we've seen in the last couple of years, actually probably in dollar mark, double of what you've seen in the quarter. And that's despite lower rates and more refire. So are you holding on to some conforming, or is there such a sharp increase in jumbos?
We have -- we have held all mortgages for six, seven years now.
We mean even the conforming.
We sell -- we basically sell the FHA, VA that and everything else that goes on a balance sheet, because frankly the risk in our mortgage portfolio isn't worth passing to someone to take the risk away from us. And so, that increase is just due to purely the origination platform basically went from $1 billion last year, second quarter to 18 this quarter, maybe nine last quarter year so. That all goes on and increases the growth rate. And then, we're not also in the aggregate sense, remember not selling as much of the portfolio in the current environment but, but we have not sold mortgages to the secondary market for years other than the FHA VA product.
But remember we're focused on prime and super prime. These are our customers. We feel good about the risk.
Okay. Got it. One tiny detail, trade web game. I know $200 million was the amount you gave. Is that included in other income or is that actually in trading?
That was not included in the external sales and trading numbers that we presented in the -- that I discussed today and we presented in the materials. It's in other income in global markets. So it's in the revenue but not in sales and trading.
Okay, great. Thank you.
Thank you.
We'll now go to Andrew Lim with Societe Generale. Please go ahead.
Hi, thanks for taking my questions. I'm just looking for a bit more color on the net interest, sort of the deposit side in terms of mix and rates. So this is related to slide nine. So you know we see here the interest bearing deposits struggling to grow interest and deposits growing quite nicely. And that's very much emanating from what's going on in the global banking side.
So just wondering if you could talk a bit more about competitive dynamics as to why it's a bit more difficult to grow your non-interest bearing deposits especially in the global banking side?
And then my second question is relating to the interest bearing deposit side. So if we looked at a supplement, then the interest rate paid has gone up by 4 basis points. Could you talk about what's driving that? So simply the beta is going up? And then how would you expect that to develop in that declining rate environment?
And then my third question is that, your interest rate guidance and on the yield is based on a static deposit mix. What would you take into account some further mix shifts as we've seen there?
Okay, well let's start with non-interest bearing deposits. And you know you'll have to help me remember your questions as we go through here. So on non-interest deposits, we are growing non-interest bearing deposits in consumer of growing low interest tracking and consumer. Those are -- that's really where you find conceptually the non-interest bearing deposits in the company.
Global banking, we have interest bearing deposits and non-interest bearing deposits. But remember, we paid ECR on the non-interest bearing deposits. The -- as interest rates rise, corporations that were very comfortable leaving excess funds in their non-interest bearing account when rates were lowered. They just get a little bit more careful, and they only leave what in their non-interest bearing accounts what they need, to do their transactions. Think about it like the daily sort of transactions that those quietly they do and any excess liquidity, they're probably pushing into non-interest bearing plus outside the U.S. they don't really have the confidence of non-interest bearing and interest bearing. It's all interest bearing.
So what you should focus on is the fact that we grew deposits in global banking 12% year-over-year. That reflects the sophistication and value we're bringing clients from that treasury services platform and it reflects the bankers we've added, and the relations that they have in the U.S. and around the world. 12% growth in and the climb is gone at 2% feels good to us. So that, that’s all in for the first question. What was the second question?
The rates on your -- non, on your interest bearing deposits. As we look to your -- to your supplement disclosure, then I think we're looking at as a U.S. interest bearing deposit rate going up 4 basis points from 73 to 77.
Yes. I mean, that is probably just reflects the mix shift that we've just been talking about in global banking, that's up. There wasn't a lot of increase other than maybe a little bit of exception pricing and consumer. GUM I think was relatively flat and in global banking, when you have a mix shift, you're going to see more deposits go in to the interest bearing, you going to see an increase in the overall deposit rate of company.
And would expect that mix shift to continue going forward?
Well, I don't know if he's going to continue. It depends what their environment does.
Remember, it really is a question of looking into different businesses, because consumers are checking growing growth 41 consecutive quarters, so that you know that you should expect the trends there to continue like we said earlier in the call were -- were the institutional business in the global banking business. As rates moved, you saw a movement, and then that movement will stabilize as rates stabilize or if they come down, you actually see the thing come back the other way a little bit. And if you look at the wealth manager’s sort of half way between, and you have to then think about the use of cash. Some as transactional, some as investment oriented are either trying to get a yield on it. And where people put money depends on that, and that becomes more exacerbated, more prevalent in the -- in the wealth wealthier part of the consumer client base, then in obviously institutional client base.
So we do use it, when we make our estimates I think was a third party question. We estimate mix as deposits -- deposit growth by categories, by the growth by business line, and we think of all that. And all that's factored in into the question Paul, discussion Paul had with you. I don't want to be stubborn here, but you've got to remember that you back up and think about it $70 billion of deposit growth all a hugely advantaged cost to fund all the core customers is what we drive in this, in one part of our business here. That is a tremendous impact and half of it from the consumer side and then 20 billion in checking in our own, in our consumer deposits segment. These are massive growth engines that exceed the size of many institutions.
That's great. Thanks very much.
And our last question today is a follow up from Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi, Your AOCI I guess it got better by what, $2.5 billion linked quarter, so that's good. You got it from lower NII growth this year. Investors don't necessarily like that. So I guess, I'm asking you this environment with lower interest rates. I know investors don't like guidance lower for credit revenues, but how do you think about it, because while you have lower guidance to spread revenues, you also have better values of those securities better AOCI, better capital and better book value. So when you look at that tradeoff, how do you think about it? Do you think of monetizing from those securities, gains you get as worried as investors, and you say, hey this is fine. You look at the economic value of the firm, we're not paying attention to a few basic points here or there.
We look at the long term Mike as you are well aware and going back to your earlier question. So, we always look at what the most efficient use of all the dynamics you talked about, but we we're not here to trade the balance sheet. We're here to let the customer activity come through it and then optimize that for the shareholder. But and so I, the AOCI came up this quarter. People always forget about that that's the offset to the NII debate with lower rates going forward as the current long term securities you have are worth more and we invest every quarter about half treasuries and half mortgage backs in those treasuries are now advantaged when from the last whatever period of time.
And so -- so we don't try to say let's try to get a penny here as you said because at the end of day we're driving that long term value of the franchise. So I think the spirit of your question is you know you manage a company for the long term value, the answer is absolutely yes. And do we -- are we mindful of trying to optimize things on a given day, months, week, quarter? Yes. But the reality is that we always make the decision for long term value of the company. And the real solve here that you -- that you referenced is, our capital keeps growing even though we're returning a 100% of it and we have an excess for many of the constraints in the CCAR that is tens of billions of dollars, and we're going to turn part of that. That's driven by how we run the company for last decade not how we ran it this week. And we're getting the payback for that.
And then last follow up. Just this whole discussion of low interest rates assumes that maybe we're going to head into recession, maybe activity is falling down. You have better data than we have. So what's your read on the economy? What's your overall read just on the conditions for you to do business?
We don't see any condition. If you think of the U.S. economy, it’s two thirds driven by the consumers, and if you think about the employment level, the job counts. You think about the wage growth. I mean you think about the wage growth in our firm, which exceeds the national averages by two and three times and a lot of my peers I talked to not only in our industry, outside it, wages paying their teammates are much higher their share in the benefits of their success. We do not see anything that says, the U.S. consumer and our business is spending 5% more plus than they did last year for the second quarter. It has grown first quarter second quarter. It is accelerating, and we're in a borrowing in good shape. We don't see anything consistent with a recession. What we can see is, is consistent with a 2% plus growth rate versus a 3% growth rate largely due to the impacts of some of the benefits of tax reform and other things running through the economy last year.
And so we feel very, it’s very solid. And so yes, there is a slowdown but that slowdown was predicted by everybody and now you're seeing it evidenced, but you're actually seeing it pick up a little bit in the consumer side from first quarter, second quarter and we'll see how that plays out Mike.
All right. Thank you.
We have no further questions at this time. It is now my pleasure to turn our call back over to Brian Moynihan for closing remarks.
Thank you very much for your time and your interest in our company. We had a strong quarter of record earnings. We have continued to manage it the right way. Growing responsibly by driving customer growth, by managing the risk well, and by investing in the franchise on a sustainable basis. We’ll continue to do that. We're moderating environment is the question Mike just said, in terms of focused on, any end issue we see where we have to change the operating model. But we continue to deliver a good share of value and plan to push the capital back to you that come off this wonderful franchise that we have. Thank you.
This does conclude today's program. Thank you for your participation. You may disconnect at anytime.