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WHEN: Today, Thursday, September 8th
WHERE: CNBC's "Squawk Box"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Bank of America Chairman and CEO Brian Moynihan and CNBC's Wilfred Frost on "Squawk Box" (M-F, 6AM-9AM ET) today, Thursday, September 8th. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000549478, http://video.cnbc.com/gallery/?video=3000549477, http://video.cnbc.com/gallery/?video=3000549462, http://video.cnbc.com/gallery/?video=3000549470, and http://video.cnbc.com/gallery/?video=3000549472.
All references must be sourced to CNBC.
WILFRED FROST: Andrew, thank you very much. Good morning to all of you guys. And good morning to Brian Moynihan, CEO of Bank of America. Thanks for joining us.
BRIAN MOYNIHAN: Thank you for coming to our house.
WILFRED FROST: It's great to be here again. And since we were last here back in early May, we've seen equity markets here stateside pushed to new all-time highs a number of times, despite some big global shocks like Brexit. And we're close to them again. That's happened on low volumes, traditional low volumes over the summer. Is there a sense of complacency in the equity market at the moment, do you think?
BRIAN MOYNIHAN: Well, I think there's it's clearly that there's been low volumes. It's been a one-way trade. But the question, really, is the experts sitting out there in other places tell me is where else is the money going to go, with dividend yields exceeding sovereign yields and you know, the money's going to go in to the equity markets. Because they're looking for returns. So it's complacency then says people are missing something. And everybody every day has a view of this market. But it's clear that the money's gone into the equity markets because of that lack of yield and lack of other returns.
WILFRED FROST: Absolutely. And the yields, of course incredibly low and flat, the yield curve so important to your business model. Is there a chance that that could flip round very quickly, if we do get a rate hike or we do see higher inflation? I mean in that regard, is the bond market looking a little bubble like?
BRIAN MOYNIHAN: I think if you saw, you know, a real backup in yields quickly, it would be because somebody fundamentally saw a view of the economy that no one really sees. And you see that in the curve and all the estimates. It's nobody sees a high inflation yet rates have got to go up to choke it off. That you don't see in any economy in the world, and let alone the U.S. economy. So, I think that there'd be a low probability of that. That being said, it's there is a probability. So, we plan for that. And we manage our company to be okay in all those scenarios.
WILFRED FROST: Let's talk about the possibility of rate hikes. And I'm not so interested in terms of when you think they might come, but what it means for Bank of America as and when they do. The last hike December last year, didn't see a huge amount passed onto depositors. Can that be expected in the next couple of rate hikes as well?
BRIAN MOYNIHAN: Well the issue is that where the floor is zero, in other words we don't charge people to keep their money with us, you have a recovery that's got to go on our industry as rates move up, the short-term rates especially. And, you know, that'll happen.
And, so, I-- the past few rates, one of these great debates, the beta of deposit pricing and everything goes on, and technical skills in banking. But the reality is, is that we run a great franchise. We get our deposits grew $60 billion from the second quarter of last year to second quarter this year. When rates move up, that'll be much more valuable for our company.
WILFRED FROST: And if we saw 100 basis points over the next 18 months of hikes, how much of that's likely to be passed on?
BRIAN MOYNIHAN: Well, there's two parts that under the number's fairly high. But basically, $5 billion, $4 billion to $5 billion of core recurring earnings come out of 100 basis point increase. There's an additional amount of recovery in the way our thing called FAS91 works, but basically thinking about a billion dollars plus a quarter.
WILFRED FROST: Okay. Let's move on in terms of what we're seeing in the space at the moment. Morgan Stanley has just seen an activist investor take a large stake in the company. They're trading below book value as are as are you still. Is that a sort of benchmark that you fear means activist investors might be hovering around to swoop whilst you're still trading below book value?
BRIAN MOYNIHAN: Well the book value multiples and things in banking have changed a lot. Because we have $160 billion of tangible common equity. And if you think about that, we only get to use about $120 billion of it to actually go out and make loans and take deposits and help our customers. The other has to be there for inert capital we can't take risk on. So, that book value multiple has less to do with book value than it has to do with the earnings multiple and how much we're earning. So, at $160 billion of market cap, we run about book value. And, so, I think, you know, we are we have repositioned our company. We're driving a thing we call responsible growth. You've got to grow no excuses. We got to do it the right way. It's got to be sustainable investing in the future, technology, the way we conduct our business and govern ourselves. That we've been driving. And if somebody has better ideas about how to manage our company, I'd we're all ears. And we'll, by the way, we talk to shareholders all the time. We hear from them. And, so, our view is we're driving this company back to the successful point. We're partway there. We're most of the way there. But we have more to go. And that'll then lift the earnings even further.
WILFRED FROST: And one of the concerns of a more medium time timeframe, looking backwards over the last couple years, has been the pace of your cost cutting from investors. And at the Q2 earnings, you give a lot more detail on that than you have in the past. And that was welcomed by investors, both the detail and the scale of what you expect. What drove that? Can you just see the cost-cutting path much more clearly now? Or was it a move to protect from shareholders continuing to be disappointed on that topic?
BRIAN MOYNIHAN: Well, I don't think they were disappointed. The question is there was-- there was a bit of confusion about where the cost went. So, if you think about the second quarter of '16 versus second quarter of '11, we took out $20 billion of operating expenses on an annual basis. People then thought the costs would go back up. And we said, "No, there's still more we can do on the core basis." And, so, the-- what we wanted to do is clarify as you looked over the next six quarters. We were going to bring the run rate down to $53 billion from about $55, $56 billion. You know, that's-- hard work. It's continued work. But it was work that was already put in course. There was no change. We didn't need a program. This was just the ongoing work we've done. The problem is other-- people out there were going the other way because they thought, "Hey, you took all that cost out, $20 billion, you can't keep doing this." And the answer is, we still can't.
WILFRED FROST: And how much is that cost-cutting ability enabled by the take-up of technology, both the technology you guys are developing and the way that consumers and businesses are embracing it enabling you to cut head count in certain areas?
BRIAN MOYNIHAN: Well, a lot of it is. And a lot of it is the core effort of technology, you're converting paper to digitization, how it moves around a company, how we interface with customers, how we send out statements versus electronic statements. All that helps. And it's not been a one-month, one-year effort. This is a long arc of activity that we've been driving. And, so, most people when they think about technology, we are a leader in deploying technology and financial services, you know, $3 billion of spending on pure coding a year across all the different systems and architecture that helps, you know, these guys work and everything goes on. But when most people think about it, the way they can feel it is this is the consumer space. And, so, this isn't something we started last year. It's we started, you know, many years ago 25 years ago with, you know, online banking and mobile banking. And it's really taken off. And it's enabled us to basically, across a course of seven or eight years, reduce our branch count by 20%; increase our earnings, even in a tough rate environment; reduce the total people we have working in branches, but more importantly have more sales going on. And it's all with higher customer satisfaction. So, it's really helped our business model and helped us drive that expense base.
WILFRED FROST: On the flip side, you having to invest lots more in cyber security? Do you fear a hack of some form at some point?
BRIAN MOYNIHAN: We all have to do everything we can to protect what we have most from our customers is trust. We keep their money. We keep their information. And, so, we spend a lot of money, a lot of effort, and we think we're pretty good at it. But we are never sanguine. We just keep working at it, working at it every day.
WILFRED FROST: And your shareholders, they embrace this sort of cost-cutting measure, embracing technology? That's something they want to see more of?
BRIAN MOYNIHAN: Yeah-- because at the end of the day, think about, you know, consumer like yourself. I mean, you know, one of your statistics I heard earlier is, you know, somebody said one third of the people in the United States are millennials. They grew up smartphone enabled. That's what they do. And, so, you know, we'll have 21 million mobile banking customers at the end of the we just passed it last week. That's still growing at 15% a year. It's already penetrated fairly heavily in our business. So, think about that: it continues to grow 15% in a big, mature business. We only have we have 30-odd million checking accounts. So, think about 20 plus of them are mobile using mobile every month. And, so you can't serve customers. It's not for the cost. It's for the service, for the capabilities. It is what the customers need to do. And by the way, the age cohorts that people typically apply are no longer true. My dad and mom use smartphones. They're 88 years old, 85 years old, you know. Everybody uses them.
WILFRED FROST: Just wanted to move onto the state of the U.S. economy. We've seen pretty strong loan growth recently. And I know you repeatedly say the quality of your loan growth your loan portfolio is improving. And part of that's because you're removing legacy bad loans. But if we look at the quality of the loans you're writing today compared to just a year ago and ignore that legacy issue-- are they stronger loans than they were a year ago, in terms of quality? Because the pace of loan growth in the consumer space does look a little worrisome.
BRIAN MOYNIHAN: The consumer loans that we're putting on today, I'd say, compared to a year ago are pretty much the same. Compared to ten years ago, much better quality. But there's still plenty of opportunity to grow. So, the question I often get is can you grow, you know, you talk about responsible growth. Can you grow and be that responsible? Because our industry and our company have a history of, you know, of good times growing by reaching for credit, reaching for terms, and things like that.
So, we've basically driven this idea of responsible growth. Got to grow, no excuses. You have to grow. You have to do it the right way. And you have to do it on a sustainable basis investing in the future. When people think about that, they say, "That's impossible." Now, let me give you an example. Now, the ten mortgage – ten customers who get a mortgage that are Bank of America customers today that fully fit our credit capabilities, we'd make a loan to them, three of them get it with us. It used to be two. We've moved that up dramatically.
When we're at nine or ten, that's an interesting question. But between three and nine, these are not customers that are someone else's customers. These are our customers who get a mortgage somewhere else. So, there's plenty of opportunity to grow and stay within that credit quality. And that's what our team has to be reminded of constantly.
WILFRED FROST: You get a great vision of the U.S. consumer. What's activity been like over the summer, since the end of the last quarter?
BRIAN MOYNIHAN: Well, as you look at the month of August, which we just got the final details on, it'll be the strongest consumer spending growth in debit and credit cards year over year this year. And that's even if you back up. There's one more processing day, but that's kind of – and even you can back that up.
The year-to-date consumers on our debit and credit cards are spending 4.7% more than they did last year and the pace is accelerating. So, the consumer is in very good shape credit quality wise, spending wise. And if you thought about what could slow them down, it'd be confidence in the markets. Those seem to be in good shape. It could be confidence in the economy, not growing as fast as we want but continuing to grow. Unemployment levels. "Am I going to have a job? Am I going to get paid more?" You're seeing wage growth. Not, again, what people would like to see, but in the twos. Unemployment's staying low. So, the consumer's very constructive.
When you go to the commercial side, the middle-market companies and stuff are making money. The credit quality's as good as it's ever been. They're drawing on lines higher than they did last year this time. But they're staying around 40 odd percent. Typically, you know, that's about where they draw it.
And, so, they have plenty of capacity to borrow. They're not being really aggressive. And, so, loan growth is there. And we have to fight for it. But they're not really aggressive, again, because they're worried about all the elections and all the things going on. Until that clears a little bit, I think there'll still be some nervousness. But overall, it's pretty solid.
WILFRED FROST: Brian, we've got a question in the studio from Becky.
BECKY QUICK: Hey Brian, it is great to see you this morning.
BRIAN MOYNIHAN: Hi, Becky. How are you?
BECKY QUICK: Great. I know one of the things you guys have been talking about is trading relative to book value and what has been happening. But let's just talk about the stock itself. If you look at Bank of America shares over the last five years relative to some of your peers like a JP Morgan or a Wells Fargo, you guys haven't performed at the same level. Are you frustrated by that? And how can you address that?
BRIAN MOYNIHAN: Well, we had a war to fight that few other people had between the cleaning up the mortgage mess, the cost structure of that, the litigation. And that war is over. And we can declare that over. But we learned lessons from that war. And that's what we keep applying.
And, so, I think it's, you know, we had to issue shares a lot more shares during the crisis than our peers had to do. And, so, we've been recovering on that. And if you look at it over that time period, it's always frustrating. And you'd rather have the stock price go up than not go up. Who wouldn't, as a CEO?
But the real question is what can you do, what can you control, and what can you drive? And that's what we drive the responsible growth. And by the way, we're in buying the shares. And, so, we're starting to bring the share count back down. And my job as CEO is to continue to provide, you know, profit growth and profit stability and returns. But use the extra capital we don't need to serve our customers to go buy the stock back. And if people give it to us this price, we'll buy it all day long.
BECKY QUICK: Is this a message that you think is resonating with Wall Street? Have you gotten any traction there when you start talking to investors?
BRIAN MOYNIHAN: They agree with that message. And they want us to keep on the course. They want to make sure we stay competitive. They want to make sure the costs we come out are balanced against the opportunities. And I think they see that. But they want – our story is, you know, as a stock, is really about generating capital, getting return back to normal up to, you know, double-digit return on equity, which we crossed in the second quarter.
But we've got some more room to go. And then, taking that excess capital, which we don't need to drive our customer business, and putting it into the stock. And that's a good business model. And, so, our investors understand that. And we just got to keep producing.
WILFRED FROST: Brian, I wanted to touch a little bit on –
BECKY QUICK: We should mention very quickly, guys, we should mention very quickly some breaking news. The ECB out with that rate decision. It is leaving the deposit rate unchanged. It is leaving the re-fi rate unchanged at zero percent. This was expected. That is what we thought was going to be happening. But the real news could be coming in just about 45 minutes time. That is when the ECB President Mario Draghi will be holding a news conference. Again, that is coming up at 8:30 am eastern time. We will keep you apprised of what has been happening. But the futures are in the same position that we saw, relatively speaking. Futures slightly lower, almost at the flat line point. But we will be getting some news a little later.
ANDREW ROSS SORKIN: Hey Brian, before you go, I do have one question for you. It is sort of a local/national political question for you. Bank of America, largest employer in the state of North Carolina. You came out very adamantly and publicly against the LGBT law that was put in place there. Donald Trump, who appeared early on to say that he was with you, if you will, then reversed himself and said he was actually going to support the state. Given that, I wanted to understand, as the CEO of Bank of America, your position on Donald Trump and vis a vis this issue, vis a vis your state in the company.
BRIAN MOYNIHAN: Yeah, let me – on the HB2 issue, our company's been clear. Our position hasn't changed. The team has been working with all the groups to try to figure out a solution. And, you know, it's impacting, you know, the economy. And we have to meet what our teammates believe is the important thing is to provide an environment where they can come to work that they feel who they can be. And, so, as relative to politics, I'll let you figure all that out.
WILFRED FROST: Brian, let's talk a little bit more about the election. And Trump and Clinton, clearly miles apart on certain issues, as we saw in those clips before the interview from last night's NBC's Town Hall. But one area where they do seem to agree on is very tough rhetoric on the banks.
They both mentioned the idea of bringing back Glass-Steagall and regulation can be expected to be tougher. Does that worry you? Does that worry you for Bank of America that this election, whichever way it goes, is going to mean tough situations for Bank of America?
BRIAN MOYNIHAN: Well, I think we still – if you think about banking regulation, all the different pieces have been put in place. You hear the regulators talk about that. We're still fine-tuning. I think we've got to get the regulation that we have today in.
The second thing when people talk about Glass-Steagall and reinstating is a question of the universal bank model. And the universal bank model works. If you look at the statistics in trading, you know, the businesses of the universal bank models have both an issuing-side client-based commercial customers, and an investing-side client-based investors. You see them actually more stable. It's not an annuity. Because trading is never an annuity. But it's close to annuity. It's relatively stable. We brought the cost structure down. We make our cost to capital. And it works for the clients, most importantly. Why does a middle-market company who's doing business in a foreign country need a bank like us is because they got to learn about the country, they got to borrow money in the country, they got new FX –
WILFRED FROST: But regulation aside, Brian, banks remain the political whipping boys. Is it time for that to change? I mean, pay, for example, in Silicon Valley is soaring. It doesn't get the same heat as Wall Street gets. Does it need to change? Are banks doing a good job?
BRIAN MOYNIHAN: Well, if you think about the crisis that occurred in – the financial crisis, it'll take a long time for people to feel comfortable that this industry is there. But it is there. If you look at the way the stress test works, you look – we're going to get the living wills done, which says we can take us apart.
You look at the capital. Two or three times in our company and across the industry. You look at liquidity, $500 billion of liquidity on the balance sheet every day for us. And, so, we have won that war. That war is over. In other words, as an industry it will be done. In the public's mind, that's going to be a fair debate till we get through another crisis, and the cause or the issues around a crisis are not the banking system. We will recognize that.
Now, on the other hand, our consumer scores, you know, our brand scores are as high as they've ever been. Back to the mid-2000s. So, you know, when you literally get down to our customers and how we work with them, we're in the best place we've ever been with them, both a commercial and consumer and wealth management side.
But if you think about it, it's understandable. But that war is behind us. In other words, that regulation's in and stuff. We have to finish it up. There's still hard work ahead. But it's not like this industry shouldn't be very stable and provide a source of strength in the next recession or next set of issues.
WILFRED FROST: Brian, thank you very much for joining us this morning. A pleasure, as always. Brian Moynihan, the CEO of Bank of America. Guys, I'll send it back to you in the studio.
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