Warren Buffett on Crisis Response

Moynihan opened the Q4 2023 review by reporting full-year net income of $26.2 billion and a return on tangible common equity of approximately fifteen percent, with the fourth quarter adjusted net income of $7.1 billion representing the strongest quarter of the year. Management told the call that the consumer deposit franchise had continued to grow despite the regional bank deposit migration that had followed the Silicon Valley Bank and Signature Bank failures in March, and that the Bank had absorbed the FDIC special assessment without breaching the operating earnings power. CFO Alastair Borthwick walked analysts through the net interest income trajectory, indicating that the rate-driven tailwind had stabilised during the quarter and that the outlook for 2024 net interest income saw modest sequential declines as the asset sensitivity of the balance sheet normalised. He flagged that trading revenue had been the second-highest fourth quarter in the Bank's history, that the wealth management franchise had produced positive operating leverage and that the Bank had returned approximately $24 billion of capital to shareholders during the year, including a roughly eight percent increase in the common dividend and a meaningful share repurchase activity authorised under the 2023 CCAR cycle. On the Q&A, analysts pressed on whether the deposit migration that had moved from the regional banks to the money-centre banks during the spring had stabilised or was continuing. Moynihan responded that the deposit balances had stabilised through the back half of 2023, that the uninsured deposit base had been broadly retained and that the Bank was continuing to grow primary consumer checking accounts at mid-single-digit rates. He also pushed back on the suggestion that the net interest income trajectory into 2024 implied a structural compression of the earnings power, arguing that the wealth management and investment banking franchises were positioned to offset the decline in asset sensitivity over the cycle. The call closed with management reaffirming the long-term operating framework of mid-teens return on tangible common equity, positive operating leverage and a return of essentially all of the operating earnings power to shareholders subject to the CCAR cycle, and with the Bank committing to step up the share repurchase pace during 2024 as the CET1 ratio moved through the targeted operating range.

The 2020 Berkshire meeting was held virtually in May, in the early weeks of the pandemic shutdown. I told the audience that I had never seen anything like the speed of the economic collapse, and that I did not know how long it would last. What I knew was that the prices being offered for wonderful American businesses were attractive, and that the long-run outlook for those businesses had not changed. The market-psychology lesson was that the investor who panicked during the March 2020 crash and sold at the bottom had locked in losses that would take years to recover. The investor who held on, or who bought during the panic, owned businesses whose long-run cash flows had barely been dented by the shutdown. The discipline required was patience, and the resource required was a balance sheet strong enough to absorb the short-term paper losses without being forced to sell. The crisis-response discussion at the 2020 meeting was, in some ways, more candid than in past years. I told the audience that Berkshire had not been a major buyer during the March crash, because the prices had rebounded before we could deploy significant capital. That was, in retrospect, a mistake. We had positioned the balance sheet for a prolonged crisis, and when the crisis turned out to be shorter than expected, we had not deployed as aggressively as the situation warranted. The lesson I drew was that even an investor with the resources of Berkshire can be too cautious during a fast-recovering crisis, because the speed of the rebound catches even the patient buyer off guard. The correction is to commit capital more aggressively during the panic phase, accepting that some of those commitments will be early and that the prices may go lower before they go higher. The mistakes-and-learning part of the 2020 meeting was, as always, the most useful. I told the audience that the biggest mistake Berkshire had made during the pandemic was not buying more when the prices were at their lows. The opportunity cost of that hesitation was, in dollar terms, very large. The lesson I tried to convey was that the disciplined investor must be willing to act during a crisis, even when the outlook is unclear, even when the prices may go lower before they go higher. The investor who waits for clarity misses the move. The investor who acts when the headlines are still terrifying, who buys wonderful businesses at panic prices, and who refuses to sell during the early volatility, has an enormous long-run advantage. That is the lesson I have repeated most often in my six decades of investing, and it is the lesson that I expect to repeat as long as I am able.

Chenault's successor, Stephen Squeri, opened the Q2 2020 review by reporting that second-quarter revenues net of interest expense had fallen nearly thirty percent year over year, reflecting the collapse of travel-and-entertainment spend that historically accounted for a disproportionate share of Amex billings. Management told the call that the small-business and consumer services segments had partially offset the T&E collapse, and that the Company had moved aggressively during the quarter to defer marketing, reduce operating expenses and tighten underwriting on new accounts and on existing credit lines. CFO Jeff Campbell walked analysts through the $1.5 billion pre-tax credit provision taken during the quarter, of which approximately $1.2 billion represented reserve builds under the new CECL accounting regime. He flagged that the Company had suspended share repurchases during the quarter, retained capital to absorb the forward expected losses and continued to pay the common dividend, but would not restart buybacks until visibility on credit losses and T&E recovery improved. On the Q&A, analysts pressed on whether the COVID shock would structurally compress the T&E franchise in the way the post-9/11 shock had compressed corporate travel. Squeri argued that the early data from the May and June reopenings, especially the small-business and consumer services segments, suggested a faster recovery path than the post-9/11 trajectory and that the Company's premium Card Member cohort was holding spending better than the broader consumer. He also highlighted that the underlying merchant network had not contracted during the crisis, with the acceptance footprint expanding on net. The call closed with management declining to provide formal full-year guidance given the unresolved visibility on the pandemic path, but committing to a near-term priority of protecting the dividend, preserving capital and protecting the marketing investment behind the premium brand once the cycle turned.

Moynihan opened the Q2 2020 review by reporting net income of $3.5 billion despite absorbing roughly $4.2 billion of incremental credit loss provisions under the CECL accounting regime. Management told the call that the consumer deposit franchise had grown balances by more than twenty percent year over year, that the Paycheck Protection Program originations had reached approximately $32 billion across roughly 300,000 small-business borrowers and that the trading business had reported the highest quarterly revenue in nearly a decade on the volatility surge in March and April. CFO Paul Donofrio walked analysts through the reserve build, explaining that approximately $2.5 billion of the provision had been driven by the macroeconomic forecast adjustments under CECL rather than by actual delinquency migration. He flagged that net charge-offs had remained below pre-pandemic run-rate levels, that the loan deferral balances in the consumer and commercial books were beginning to roll off and that the Bank had continued to hold capital well above the regulatory minima, allowing the common dividend to be maintained even while share repurchases had been suspended. On the Q&A, analysts pressed on whether the Bank would need to build reserves further through the back half. Moynihan responded that the second-quarter build had been sized to reflect a macroeconomic baseline consistent with the consensus forecast and that subsequent builds would depend on whether the actual delinquency migration tracked the forecast. He also defended the decision to maintain the dividend, arguing that the Bank's earnings power through the cycle supported the distribution and that the Federal Reserve's guidance to suspend buybacks was the more meaningful constraint on capital return during the year. The call closed with management framing the next phase as a measured resumption of capital return subject to Federal Reserve guidance, while continuing to invest in the consumer mobile banking platform that had seen login activity grow more than twenty percent during the quarter and to support the broader Federal Reserve lending facilities as the standing balance sheet permitted.

Newly appointed CEO Tim Sloan opened the Q3 2016 review in the aftermath of the September 8 announcement of the $185 million settlement with the Consumer Financial Protection Bureau, the Los Angeles City Attorney and the Office of the Comptroller of the Currency over the cross-sell practices that had driven the creation of more than two million unauthorised customer accounts. Sloan had taken the chief executive role effective October 12, succeeding John Stumpf who had retired in the wake of the settlement; the earnings call on October 14 was his first public appearance as CEO. Management told the call that the Company had ended the product-sales goals that had driven the underlying behaviour, that an independent review was under way to identify affected customers and provide restitution and that the cross-sell model would be restructured around customer relationship metrics rather than around product-count targets. CFO John Shrewsberry walked analysts through the financial impact, indicating that the direct settlement and restitution costs were immaterial relative to the Company's earnings power, but that the indirect effects, including reputational damage, additional regulatory scrutiny and the suspension of the Branch Sales Incentive program, would weigh on the revenue trajectory through 2017. He flagged that the Common Equity Tier 1 ratio remained above the regulatory minima, that the asset quality remained pristine and that the Company's underlying operating earnings power was sufficient to absorb the reputational and regulatory costs. On the Q&A, analysts pressed on whether the cross-sell model that had defined the franchise for two decades could survive the regulatory reset. Sloan responded that the underlying customer relationships remained intact, that the cross-sell ratio would compress in the near term as the new metrics took hold and that the Company intended to rebuild the model around genuine customer outcomes rather than around product counts. He also apologised for the failures and committed to a board-led independent review, while defending the underlying unit economics of the cross-sell franchise. The call closed with management declining to provide formal quarterly guidance for the next several quarters given the unresolved regulatory uncertainty, and noting that the Board had announced the clawback of performance compensation from the senior leadership of the community banking division responsible for the cross-sell failures.

CEO Brian Moynihan opened the Q3 2011 review against the backdrop of the Berkshire Hathaway $5 billion preferred equity investment and the attached warrants to purchase 700 million common shares at an exercise price of $7.14, both announced in late August. Management told the call that the third-quarter results had been hampered by a $3.6 billion pre-tax charge tied to the legacy Countrywide mortgage representation-and-warranty exposures, but that the underlying franchise was now generating operating earnings power roughly in line with the stated objective of the Project New BAC restructuring. CFO Bruce Thompson walked analysts through the third consecutive quarter of operating expense reduction, the build of the capital ratios under the new Basel III regime and the roughly 140 basis points of tangible common equity ratio build achieved during the quarter. He flagged that the Berkshire transaction had been structured to monetise a portion of the embedded franchise value at favorable terms rather than to fill a capital hole, and that the Company remained on a path to exceed the new capital requirements ahead of the regulatory phase-in. On the Q&A, analysts pressed Moynihan on whether the Berkshire transaction implied that the Company would need to issue additional common equity to close the remaining capital gap. Moynihan responded categorically that the preferred investment had been opportunistic, that the warrants were a long-dated option rather than an equity issuance and that the Company did not intend to issue common equity to meet the new capital requirements, pointing to the asset disposition program and the operating expense trajectory as the bridge. The call closed with management reiterating the multi-year Project New BAC objective of removing $8 billion of operating expense from the run-rate by mid-decade, and with Moynihan committing to a transparent disclosure of the legacy mortgage litigation pipeline so that investors could value the franchise against the underlying consumer banking business rather than against the trailing issues.

Kovacevich opened the Q4 2008 review against the backdrop of the early October announcement of the all-stock acquisition of Wachovia Corporation, completed at year-end at a deep discount to Wachovia's stand-alone book value. Management told the call that the merger would create the first coast-to-coast retail banking franchise in the United States, that the integration would be executed off the proven Norwest-Wells Fargo playbook and that the credit marks taken at acquisition accounted for the worst-case stress on the Wachovia loan portfolio, including the option-ARM portfolio inherited from Golden West Financial. CFO Howard Atkins walked analysts through the capital framework, indicating that the Company had issued $25 billion of preferred stock to the U.S. Treasury's Capital Purchase Program to bridge the closing of the Wachovia acquisition and that the operating earnings power of the combined franchise would generate enough internally generated capital to repay the Treasury investment within a few years. He flagged that the integration expenses would weigh on the near-term reported earnings but that the merger synergies were expected to exceed $5 billion annually once the integration was completed. On the Q&A, analysts pressed on whether the option-ARM portfolio represented a hidden credit risk that would force the Company to build reserves further. Kovacevich responded that the marks taken at acquisition had been sized for a severe housing price decline and that the early delinquency migration in the option-ARM portfolio was tracking inside the stress assumptions. He also pushed back on the suggestion that the Treasury investment implied a capital weakness, arguing that the Company had entered the Wachovia transaction from a position of strength and that the Treasury investment had been taken under regulatory pressure rather than out of necessity. The call closed with management framing the next phase as the largest integration in the history of U.S. banking and reaffirming the long-term objective of cross-sell-driven revenue growth, mid-teens return on equity and a sustained pace of share repurchases once the Treasury investment was repaid and the integration was complete.

Chairman and CEO Ken Chenault opened the Q4 2008 review by acknowledging that the Company had entered the worst consumer credit cycle since the early 1990s recession and that American Express had moved during the fourth quarter to materially tighten underwriting, reduce credit lines and reprice risk where the data warranted. Management reported that reported earnings per share for the year had fallen by more than thirty percent, with most of the deterioration concentrated in the Card Member loans segment, where net write-offs had moved above eight percent on a managed basis. CFO Gary Crittenden walked analysts through the $1.4 billion pre-tax charge taken during the fourth quarter, comprising roughly $800 million of incremental loan-loss reserves, $400 million of severance and restructuring and the balance of writedowns tied to the investment portfolio. He flagged that the restructuring would remove more than $1.8 billion of operating expense from the run-rate by 2010 and that the Company had secured a one-year equity injection of approximately $3.4 billion from the U.S. Treasury's Capital Purchase Program to bridge the cycle. On the Q&A, an analyst asked whether the high-end spending customer had actually held up better than the broader consumer. Chenault responded that the high-spend Card Member cohort had seen far less delinquency drift than the broader book, that the proprietary spend data had allowed Amex to take earlier and more targeted underwriting actions than the broad bank-card issuers and that the brand's premium positioning was itself a structural advantage through a downturn, even though it could not fully insulate the Company from a synchronised consumer recession. The call closed with management signalling that 2009 would be a transition year of flat billings, sharply lower credit metrics and operating expense reduction, and that the Company's long-term algorithm of mid-teens return on equity and high-single-digit earnings growth would be reaffirmed once the cycle turned.

Incoming chairman and CEO Douglas Ivester's December 1999 commentary came amid a difficult year in which worldwide unit case volume growth had slowed into the low single digits and a contamination scare in Belgium and France had forced a costly recall. Management told the call that the Company expected reported earnings per share for the year to be roughly flat with 1998 after the impact of the European product withdrawals, even though underlying operating income had continued to grow in line with the long-term algorithm. Ivester and CFO Gary Fayard spent much of the prepared remarks walking analysts through the bottler-infrastructure investments being made in Germany, the Philippines and South Africa, framing them as the price of restoring the system's long-run margin per case. They defended the Company's reported return on equity in the high twenties as the durable outcome of owning the concentrate economics while letting the bottlers carry the capital intensity. On the Q&A, analysts pressed on whether the European crisis pointed to a broader quality-control or governance problem at the bottler level. Management responded that the response had demonstrated the value of a vertically coordinated system and that the trademark's resilience was evidenced by the speed with which European volumes had recovered to prior trends. They also reiterated a long-standing policy of refusing to provide quarterly earnings guidance, preferring to anchor investors to the multi-year algorithm of seven to eight percent real EPS growth. The call closed with the board confirming that the search for Ivester's successor was under way, with directors emphasising that whoever took the chair would inherit a strategy whose fundamentals had not changed.

Chairman Harvey Golub's third-quarter 1991 review came at the moment the Salomon Brothers Treasury-auction scandal had metastasised into a broader confidence crisis across the brokerage arm American Express still controlled through its Shearson Lehman Holdings subsidiary. Management told the call that the Company's core Travel Related Services franchise had continued to grow billings business across both the green-card and the Optima revolving credit product, but that earnings would be obscured in the near term by the additional capital and reserve actions required at Shearson. CFO Michael Mortella walked analysts through the planned $1.4 billion charge to restructure the brokerage arm and to recapitalise the leasing portfolio that had been the source of recurring credit losses. He framed the actions as a deliberate decision to surface the worst-case loss expectations in a single quarter, so that the underlying TRS franchise could be valued on its own merits going forward rather than against the dragging uncertainty of the brokerage book. On the Q&A, analysts pressed on whether the Salomon crisis and Shearson losses would force the Company to issue equity to defend its capital ratios. Golub responded that the dividend on the common stock would be maintained, that the Company would continue to buy in shares opportunistically and that the charge had been sized to remove the optionality of further equity issuance from the brokerage subsidiary. He argued that the Optima revolving product was the more important strategic variable for the long-term value of the Company and would receive disproportionate investment in 1992. The call closed with management declining to provide formal quarterly guidance but committing to a multi-year trajectory of restoring return on equity to the mid-to-high teens, anchored on the durability of the card-fee and discount-revenue economics that had defined the Company's brand strength for a century.