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Remarks to CBRE-NE Annual Breakfast Market Overview (Moynihan)

Brian T. Moynihan, Chief Executive Officer, Bank of America
Friday, January 7, 2011 3:00 am GMT

January, 7, 2011

Boston, MA

 

...as prepared for delivery...

 

…introduction given by Jay Fluck, executive vice president and partner, CBRE…

 

Thanks, Jay… I appreciate it. It’s great to be here this morning with all of you… I appreciate the opportunity to hear your views on the commercial real estate markets in and around Boston… and to give you some of my thoughts on the economy and the banking industry.

 

Bank of America’s relationship with CBRE is almost a perfect example of how we’re working to build our business for the future… by pulling together our global capabilities in ways that help you manage and grow your business. So, for example, not only do we have a significant and comprehensive corporate banking relationship with CBRE… but we also recently won the opportunity to manage the firm’s 401(k) plan for its employees and partners.

 

This is how we’re working to create value for all our commercial and corporate clients.

 

I want all our partners at CBRE to know how much I appreciate the business. We’re also grateful for the terrific job you all do for us, managing more than 48 million square feet of office space for us around the world.

 

As some of you pointed out earlier, commercial real estate markets have reached bottom in most areas… and recovery is underway, specifically in larger urban markets where job creation is gaining momentum and equity capital is available and competing for investment.

 

What we’re seeing in our business is that construction loan demand remains weak, with the exception of rental apartments and build-to-suit development driven by corporate end users. That said, loan demand for acquisition and bridge financing for existing real estate is beginning to pick up. Bank of America extended $34 billion in commercial real estate credit through the first three quarters of 2010.

 

As we know, the pace of recovery in commercial real estate is dependent on broader economic recovery and, specifically, job creation, which is the demand generator for the business. So I’ll start my remarks this morning with some general thoughts about the state of the economic recovery.

 

Economic overview

 

The good and most important news is that an economic recovery is underway and the economy continues to grow. And, while growth was slower than we would have liked in 2010… and forecasts for 2011 are still conservative… we’ve had some good news over the past month in terms of several key indicators picking up steam.

 

Initial jobless claims two weeks ago fell under 400,000, all the way to 391,000, the lowest level in almost two-and-a-half years… and the four-week moving average, including last week’s numbers, is now down to around 411,000, also a fresh cycle low. The December unemployment report this morning indicated a drop to 9.4 percent from 9.8 percent. The number of non-farm payroll jobs created was less than hoped for, at 103,000… but the report is further evidence the recovery is gaining momentum.

 

I’d also note that five of the eight regional manufacturing surveys we monitor improved in December on a month-over-month basis, including the three biggest – NY Empire, Philly Fed and Chicago PMI.

 

At the same time, the housing market continues to bump along the bottom… as is consumer confidence.

 

None of which is terribly surprising. To put the recession we’re trying to recover from in context… during the period from December 2007 to June 2009, the U.S. economy lost 7.3 million jobs and experienced a 4.1 percent decline in economic output.

 

The unemployment rate nationally peaked at just over 10 percent. It was the longest period of economic contraction since the Great Depression.

 

As we contemplate that economic scenario, where are we now, and what does this year look like?

 

For 2011, we believe we’ll have economic growth of approximately 3 percent… and around the world we expect growth to be above 4 percent.

 

There are continuing signs of life in the U.S. economy… in addition to the data I mentioned on jobless claims and manufacturing, we’ve seen spending by our consumer customers on their debit and credit cards grow year-over-year by as much as 4 to 7 percent in recent months.  Factory orders posted an unexpected gain in November… and light vehicle sales in December rose 2.3 percent to a seasonally adjusted, annualized 12.55 million units… the third consecutive month annualized sales have exceeded the 12 million threshold… a good sign.

 

Client companies of ours remain profitable and very efficient; they have weathered the storm well and have built cash in the crisis. In addition, M&A activity is picking up, as is equity capital markets activity, due to a large backlog… and debt capital markets are very strong.

 

However, we face headwinds in the U.S. that will hold back robust growth and take time to resolve…

 

  • Ø    First, our national unemployment rate remains stubbornly high… Unemployment holds back everything else…Since 1948, this period of the last several months of 9%+ unemployment represents half of all of the months unemployment has been above 9 percent. So we are in uncharted territory.
  • Ø    Second, consumers and companies are deleveraging and building cash. Both groups continue to store cash in unprecedented amounts. While there are growing signs that more companies are looking to deploy some of their cash this year, uncertainty about demand, regulation and the durability of the recovery continues to hold many firms back. 
  • Ø    Third, challenges remain for homeowners who became overextended prior to the economic downturn. The country is in the midst of foreclosures at a rate 10 times what existed as late as 2005. (100K in 2005/1.2MM in 2010, according to RealtyTrac.) That creates a lot of anxiety and a difficult societal challenge… although we’ve had good news recently on declining trends in delinquencies.
  • Ø    Fourth, household debt remains higher than it should be. With debt service as a percent of income above 12 percent it is still about 2 percentage points higher than it was prior to the economic expansions of the early ’80s and ’90s.
  • Ø    And fifth… government debt has increased from 40 percent of GDP to more than 60 percent … It is a serious challenge to address that in coming years. At the same time, many states and local municipalities face even greater fiscal challenges.

 

One interesting point about our challenges….we’ve had 11 recessions since 1929… the average sum of fiscal/monetary response has been about 4 percent of GDP… in this cycle it’s been about seven times that… 30 percent… there simply is not much more government can do…It may just take more time for the recovery to build.

 

As we think about business prospects, we have to listen to what business leaders are telling us, whether large or small.

 

The key thing I hear from our client companies is that what is holding them back today is uncertainty… not a lack of good ideas or places to invest, not the returns that might come with that investment… and not credit availability… but uncertainty.

 

Uncertainty in the economic prospects of local economies… uncertainty in the regulatory responses of policy makers… uncertainty in the demand for products…

 

On this point, we’ve been getting hopeful signs from the Index of Small Business Optimism. While still weak by historical norms, the index rose 2.7 points to 91.7 in October, and then another 1.5 points to 93.2 in November… the highest level since December of 2007.

 

Components of the index showing the greatest positive change included expectations for the economy to improve, and intentions to increase inventories, make capital outlays and hire new workers.

 

To summarize on the economy…

 

  • Ø    The economy is growing slowly in the US and more quickly around the world.
  • Ø    Businesses have recovered quickly, with strong productivity.  Those that can take advantage of areas of growth outside the U.S are doing so.  
  • Ø    Consumers continue to move ahead, starting to spend more, but still have work to do in fixing mortgage situation.
  • Ø    We have a long and slow recovery ahead as consumers and governments continue to pay down debt.

 

State of the banking industry

 

One thing that is critically important to help drive the economic recovery is a strong financial services industry. On this point, I believe we’re seeing more unambiguous progress.

 

Year-over-year earnings for U.S. banks have now increased for five consecutive quarters. Asset quality continues to improve, with charge-offs falling in almost every lending category. And, in a sign that credit appetite is beginning to return, commercial and industrial loans increased for the first time in eight quarters, and residential mortgages increased for the first time in six quarters.

 

Most U.S. banks also are in a stronger capital position than before the crisis. Banks have raised more than $350 billion over the past several years, pushing capital ratios – the core measure of our financial strength – to levels not seen since World War II. Banks have paid back most of the capital provided through TARP. (Bank of America paid back all its TARP funds in December of 2009, with interest, and we have literally doubled our capital relative to pre-crisis lows.)

 

And, while the number of banks on the FDIC’s “Problem List” remains high, the total assets of the 157 institutions that failed last year were about $96 billion, or only about 0.73 percent of U.S. banking assets. This is extremely modest compared to what we’re seeing in some other countries around the world.

 

The stabilization of the nation’s financial system should boost confidence, investment and hiring, as it continues in 2011.

 

Mortgage/foreclosure crisis

 

The issue that our industry is most focused on to drive the recovery is healing the housing and mortgage markets.

 

Here, too, we are making progress. U.S. banks have completed about 4 million mortgage modifications since 2008 to help customers remain in their homes. More than 750,000 of those are Bank of America’s, and we are now making about one in three modifications in the country.

 

Bank of America also took an important step earlier this week in announcing our agreement with Freddie Mac and Fannie Mae to resolve most of their repurchase claims on mortgages originated by Countrywide before we acquired that company. The issue of reps and warranties is significant for our industry. Every claim has to be judged on the merits, and we’ll defend our shareholders’ interests in all these cases.

 

Every day we talk to tens of thousands of customers who are facing hardship and looking for help. At foreclosure sale, one in three properties are vacant, and there are far too many abandoned properties driving down home values in neighborhoods across the country.

 

Helping customers remain in their homes where possible is our top priority. We have, however, reached a crossroads between loan modification efforts and the reality of foreclosure. The majority of initial volume and backlog of customers seeking solutions have been evaluated for the many available programs… and many customers who received modifications in the past are now re-defaulting. We’re reaching a peak where some customers will be dealing with the reality that despite the myriad programs and our best efforts, foreclosure is unavoidable.

 

It is important to our economic recovery that the housing market stabilize.  That will require moving through the modification and foreclosure process quickly, clearing vacant properties, helping those who need assistance in transition, and moving forward. 

 

We are now four years into the housing downturn… prices peaked in the second half of 2006… the worst is behind us, but we know that we still have a long way to go before the U.S. housing market fully recovers… we know that in many areas of the country, the pain is still very acute… and, of course, we understand broader market trends don’t help a family faced with losing their home.

 

Reflections on 2010…and looking forward to 2011

 

I spent much of this year traveling across the U.S. and around the world, meeting with customers, investors, associates of the bank, and community and policy leaders.

 

Despite a frustratingly slow economic recovery… despite challenges from the European debt crises… to the difficulties of managing the largest volume of delinquent mortgage loans in history… despite a lot of controversy and spirited debate over the various policy options to put us back on the right track… everywhere I went, and from every quarter, I experienced energy, optimism, and determination.

 

Customers and clients are adjusting to a new economic environment, and are now applying their creativity to new strategies to build – or rebuild – prosperity for the future.

 

Community and policy leaders understand that banks in general – and Bank of America in particular – have the power to make a tremendous, positive difference in our industry and our communities – and they appreciate our commitment to doing so.

 

For example, in partnership with the Somerville Housing Authority, Capen Court opened this past autumn to provide 95 housing units in a new community for senior citizens… BAML provided an innovative mixed finance structure, including $14 Million of tax exempt bonds, to rebuild this outdated state public housing.

 

For the Thomas I. Atkins Apartments on Blue Hill Avenue in Roxbury, 48 units of much-needed affordable housing in an energy efficient building, BAML provided a $7 Million construction loan and $7.5 million LIHTC direct equity investment.

 

And, next week, we’re kicking off a massive renovation and deep energy retrofit of Castle Square Apartments in the city’s South End which we’ve financed with a direct equity LIHTC investment of approximately $28 million.

 

Our teammates at the bank, despite many distractions throughout the year, continue to maintain a single-minded focus on serving customers, solving problems and making money for shareholders.

 

Bank of America is a very, very strong company… one that has the capabilities to do more for our customers… and to do it better… than any of our competitors. We understand the duty we have to help drive the recovery, through our work in mortgages and small business lending, and through our role as a community leader.

 

Having that feeling of confidence about our company’s bright future… and all the good that we are doing for the people and the companies we serve… that’s what kept me energized through 2010, and what I know will keep me excited this year as well.

 

My confidence in Bank of America is rooted in the same convictions I have about the economic prospects for the country.

 

I said earlier that the key issue holding back economic growth is uncertainty. It is this uncertainty we have to push past. As leaders in the business community, it’s our job to bust through and bring certainty, confidence and optimism – to our own businesses, our own industries and in our own communities.

 

It’s not easy, but it’s the key to re-establishing a growth environment. And when we do that, the fundamental strengths of the U.S. economy – our talented workers, our entrepreneurial culture, our world-class research infrastructure – all these assets will combine to return this country and its economy fully back to a vibrant and growing economic leader in the world.

 

I’m excited about the opportunities ahead… for Bank of America, for CBRE, for America… and I’m looking forward to all we’ll accomplish this year, and in the years ahead.

 

Thank you.

 

Now…I’d be happy to take your questions…