FY26 NII Guide +5–7%, 200bps Operating Leverage, ROTCE Glide Path to 16–18%, FY25 EPS $3.81 (+19%) — Upgrading to Outperform

Rating Action

This print upgrades the rating to Outperform from the Hold we initiated at Q2 2025 and maintained through Q3 2025. The upgrade trigger we held — the FY26 NII framework that absorbs the easing-cycle deposit-beta while the multi-year fixed-rate repricing tailwind compounds — was delivered cleanly on this call. Three items locked in the call:

• Q2 2025 (Initiating at Hold): Best-in-class deposit franchise (avg. consumer deposits $950B at 146bps all-in cost; 92% primary penetration), record Q2 NII $14.8B, 13 straight quarters of S&T growth. But the multiple already reflected the franchise quality, the book was asset-sensitive into a 2026 easing cycle that hadn't been sized, and the revenue line narrowly missed against an elevated bar. Initiated at Hold.
• Q3 2025 (Maintaining Hold): Composition firmed exactly as the bull case required: NII tracked to the Q4 exit guide; IB fees +43% YoY; capital return cadence stepped up under a fresh $40B authorization; CET1 expanded to 11.6%. None of this was missed-call material, but the FY26 framework remained pending. Held Hold with the explicit framing that the upgrade trigger was the Q4 call.
• Q4 2025 (Upgrading to Outperform): The framework landed. NII +5–7% guide for 2026 is internally consistent with $12–15B/quarter of MBS + mortgage roll-off pricing 150–200bps higher and is achieved with 2 rate cuts already in the curve. 200bps operating leverage guidance for 2026; ROTCE glide path articulated to 16–18% over 8–12 quarters. FY25 finished at $3.81 EPS (+19%) with $30B+ capital returned, ROTCE +128bps, NCO ratio 44bps among the lowest in 30–50 years. The asset-sensitivity overhang we held the rating against has been resolved. Upgrading.

Results vs. Consensus

Clean beats top-to-bottom; FY25 wrapped above the framework laid out at the start of the year; Q1 2026 starting point firmly anchored.

Segment Performance

Consumer Banking — Strong Finish, Inflection on Deposits

• FY25: Revenue $44B; net income $12B (+14% YoY); 28% return on allocated capital. Q4 net income $3.3B (+17% YoY) on revenue $11.2B (+5%); efficiency ratio improved to 51% with 350bps of operating leverage in the segment.
• Deposits: Third consecutive quarter of YoY consumer deposit growth; low/no-interest checking +$9B (+2%). 680K net new checking accounts in 2025 (28th consecutive quarter / 7-year streak); average balance maintained at ~$9,000+. Rate paid on consumer deposits fell 3bps Q/Q to 55bps.
• Investments: Consumer investment balances +$81B YoY to nearly $600B; $19B of FY25 client flows + market appreciation. Average balance per investment account $147K (+12% YoY).
• Card credit: Card NCO ratio 3.4% (improved −40bps YoY and Q/Q). Strategy is to accelerate card growth with rewards investments (World Cup, June cash-back, co-brand). Card loan balances up modestly.
• Read: Inflection on consumer deposits is the single most thesis-relevant signal underneath the print. The pandemic-bump normalization is now behind us; Borthwick framed FY26 deposit growth as moving toward the historical GDP-plus level (4–5%).

Global Wealth & Investment Management (GWIM) — Margin Acceleration

• FY25: Revenue $25B (+9% YoY); net income $4.7B (+10%). Net income trajectory across the year: $1B Q2 → $1.3B Q3 → $1.4B Q4. Pretax margin moved into the high-20s by year-end. Return on allocated capital climbed from 20% Q2 to 28% Q4.
• Client balances: Grew ~$500B during 2025 to $4.8T. Loan growth +$30B (+13%). AUM flows $82B; total flows $96B. Combined with consumer-investment flows, total wealth-related flows ~$115B for the firm in 2025. Merrill + Private Bank added 21K net new relationships in 2025; 114K new bank accounts to those relationships.
• Asset management fees: +13% YoY in Q4 — the cleanest fee line of the print and consistent with the 12% Q3 trajectory.
• Read: The cleanest leverage point in the franchise this cycle. Pretax-margin acceleration from low-20s to high-20s plus the organic-flow accumulation supports the Investor Day medium-term 30% margin target. We mark this as a structurally larger contributor to FY26 EPS.

Global Banking — Solid Year, Pipeline Strong into 2026

• FY25: Net income $7.8B, ~25% of company net income. Average deposits +$71B (+13%); ending loans up across every line of business. Roughly 500 new middle-market clients + 1,000 new business-banking clients added.
• Q4: Net income $2.1B (−3% YoY on rate-cut impact to NII from variable-rate assets); fees +6% YoY offset most of the NII headwind. Efficiency ratio 50%; return on allocated capital 16%.
• IB fees: Q4 $1.67B (modestly above Q4 2024). FY25 highest since the 2020-pandemic-rebound period; 2H +25% over 1H. #3 ranking maintained for the full year. Pipeline characterized as strong heading into 2026.
• Read: Margin pressure from rate cuts on variable-rate assets is the structural headwind here, partially offset by fee growth. Pipeline-into-2026 is the lever; the IB-fee acceleration through 2H 2025 is the cleanest signal that capital-markets composition in this segment is structural rather than cyclical.

Global Markets — Record Year

• FY25: Revenue $24B (+10% YoY); earnings $6.1B (+8%); 13% return on allocated capital. 12th consecutive quarter of YoY net-income growth. Sales-and-trading (ex-DVA) FY25 ~$21B (record).
• Q4: Net income just shy of $1B (+5% YoY). Revenue ex-DVA +10%. S&T ex-DVA $4.5B (+10% YoY): equities +23% (driven by Asia activity, with reciprocal BC&E expense growth client-reimbursed); FICC +1% (macro-rates and FX up, modest credit-product decline).
• Loan growth: Continued benefit from highly-collateralized pools of high-quality assets; 10%+ investment in Markets balance sheet supporting NII.
• Read: The cycle engine. Markets is now structurally larger, the ROA is moving toward the 100bps target Moynihan articulated, and the FY25 record sets up an FY26 base that should compound rather than mean-revert. We mark this as a structurally higher run-rate in the model.

Key Topics & Management Commentary

FY26 NII Bridge — The Upgrade Catalyst

Borthwick laid out the FY26 NII walk in detail:

“At Investor Day in November, we indicated our expectation that we would see 5% to 7% growth in net interest income in 2026 compared to 2025, and that's still our belief today based on the latest interest rate curve, which includes 2 rate cuts in 2026. ... we expect roughly $12 billion to $15 billion in combined mortgage backed securities and mortgage loans to roll off quarterly, and those will be replaced with new assets at 150 to 200 basis points higher in yield or they'll allow us to pay down expensive short-term debt.”
— Alastair Borthwick, CFO

For Q1 2026 specifically: use Q4 as a base, less ~$100M of Global Markets activity that is moving back to MMSA fees (revenue-neutral geography shift), less 2 fewer interest days, and absorb the December 25bps rate cut. Q1 NII still expected ~+7% YoY.

Sensitivity: Per Borthwick, dynamic-deposit basis assumes a 100bps instantaneous additional decline (i.e., 100bps below the curve's already-embedded 2 cuts) reduces 12-month NII growth by ~$2B; a 100bps instantaneous up-shock adds ~$700M.

Read-through: The bridge is internally consistent and credible. The fixed-rate repricing tailwind is multi-year (the swap book and the MBS / mortgage book both reprice on multi-year cadence), which means the easing-cycle deposit-beta drag is meaningfully offset rather than dominant. This is the resolution of the bear-case overhang we held against the rating; it warrants the upgrade.

FY26 Operating Leverage & Expense Posture

FY26 operating leverage guided to ~200bps. Q1 expense expected ~+4% YoY (seasonal strength in Markets activity, elevated payroll tax, absence of Q4 FDIC-special-assessment benefit, partly offset by AI/digitization productivity). Headcount held flat across 2025 despite onboarding 2,000 college graduates and replacing ~17,000 departures — the structural head-count discipline lever holds.

“Headcount remains our key driver of expense from compensation and benefits to real estate and technology. ... Since the end of 2023, we've operated within a tight range of 213,000 employees. ... every time someone leaves, we take the opportunity to evaluate whether the role needs to be replaced.”
— Alastair Borthwick, CFO

Erika Najarian's pointed question on the efficiency-ratio messaging drew the cleanest single capital-allocation framing of the call:

“The efficiency ratio came down a couple of hundred basis points on an apples-to-apples basis with the parts of the revenue stream that are least efficient, the wealth management revenue growing very strong in the capital markets revenue. ... we expect to continue to drive it down. It is all going to be due to headcount because that's 60-plus percent of our expenses.”
— Brian Moynihan, CEO

Read-through: Operating-leverage guidance combined with the headcount-discipline framework is what makes the ROTCE glide path arithmetic feasible. We model the Q1 2026 expense step-up as transient (seasonal + benefit-base reset) rather than structural.

ROTCE Glide Path 16–18%

This was the most thesis-relevant single answer of the call. McDonald asked specifically about the trajectory; Moynihan's response laid out the math:

“By the 8th quarter to the 12th quarter, you move in the lower part of the range and then the upper part of the range given a core economy growing it to 2.5% type of number. ... So that's basically 8 quarters from — including this quarter, obviously, first quarter '26 and then we move into the 16 level, and then we move to the upper end of the range as we move through the third year.”
— Brian Moynihan, CEO

Borthwick's earlier framing connected the dots: organic deposit + loan growth + fixed-rate asset repricing dropping to the bottom line + fee growth from AUM / Markets / IB + carefully-managed core expense (~2% growth ex-BC&E and incentive comp) compounds to materially higher ROTCE.

Read-through: 16% ROTCE in 8–12 quarters and 18% by year three is the exact figure that closes the multiple gap to JPM (which prints 21–23% ROTCE on different segment composition). At the FV range we are now framing, this is the lever that drives the rating to Outperform.

Capital Position & CET1 Path Lower

CET1 11.4% (down from 11.6% at Q3) on a $2.1B accounting-change capital reduction (~12bps, reversible over the next several years as the deals wind down) plus $22B of RWA growth on commercial loans. SLR 5.7% well above the 5% requirement and well above the new 3.75% rule BAC adopts in 2026. McDonald asked about the timeline to the mid-10s CET1 target; Moynihan reaffirmed the trajectory but emphasized the binding constraint is the final shape of the regulatory rule set:

“Our goal, we appealed from 11.6% to 11.40%. And you're going to keep peeling that number down through expansion of our markets business, expansion of lending and other uses of RWA. ... the idea is to use the excess to grow the balance sheet and let that work down as we see the final rules.”
— Brian Moynihan, CEO

The capital-return cadence: Q4 $8.4B ($6.3B buybacks + $2.1B dividend; +$1B Q/Q on increased earnings); FY25 total $30B+ (+41% YoY).

Funding Mix & Wholesale Roll-Off — Multi-Year Margin Lift

McGratty asked the leverage point on funding-mix optimization. Borthwick sized the residual wholesale-funding runway:

“I'd say probably at this point, somewhere around $50 billion to $100 billion just on ballparking that between repo CP, some of the short-term wholesale funding institutional CDs that we put out there that are just quietly rolling off now quarter after quarter after quarter.”
— Alastair Borthwick, CFO

Read-through: $50–100B of wholesale funding still rolling off as core deposits replace it is structural margin lift over multiple quarters. This is incremental to the MBS / mortgage repricing tailwind, not a substitute for it.

Stablecoins & Industry Liability Risk

Cassidy asked the Genius-Act / stablecoin-deposit-flight question. Moynihan was direct that BAC will be fine at the firm level (will offer a competitive product when needed) but flagged the systemic concern:

“You can see upwards of $6 trillion in deposits flow off the liabilities of a banking system to as the deposits into the stablecoin environment. ... that takes lending capacity out of the system. And that is the bigger concern. ... If you take out deposits, they're not going to be able to loan or they're going to have to get wholesale funding and that wholesale funding will come at a cost that will increase the cost of borrowing.”
— Brian Moynihan, CEO

Read-through: A non-thesis-input at the firm level. We continue to treat stablecoin / tokenized-deposit infrastructure as 2026+ optionality rather than near-term economic drag.

Credit Quality — Historic Lows

Q4 NCO ratio 44bps; FY25 ~46bps; consumer card NCO 3.4% improving 40bps YoY. Moynihan characterized the environment as "among the lowest in the history that we could find in a company going back 30, 50 years." Through-cycle reference per Investor Day: 50–55bps. Provision $1.3B mostly matched NCOs in Q4. CRE office cleanup tracked through the year (Q2 framing of "tale of two cities" has resolved cleanly).

Martinez asked the question of whether we are below trend; Borthwick acknowledged the through-cycle 50–55bps reference but framed the Q4 44bps as a function of underwriting selectivity rather than benign-environment dependence.

FY26 Guidance

Read: Every FY26 line is sized, internally consistent, and walks back to the Investor Day framework laid out in November. The bridge is no longer aspirational; it is arithmetic. This is exactly the framework gap we held the rating against at Q3.

Analyst Q&A — Notable Threads

• Betsy Graseck (Morgan Stanley) opened on the medium-term efficiency-ratio framework given the accounting-change-driven revenue restatement; Borthwick's response was that prior periods were recast for comparability and the 55–59% range remains the medium-term target with continued downside drift expected.
• Ken Usdin (Autonomous) probed the operating-leverage guidance — whether FY26's 200bps lands at the low end of the Investor Day 200–300bps range and what it would take to push toward 300bps. Borthwick's response anchored on revenue-related expense flexibility (BC&E + incentive comp = ~2% of expense growth) and headcount discipline as the structural lever.
• Mike Mayo (Wells Fargo) asked the AI-investment question that drew the most-substantive technology-spend datapoint of the call: $13B+ total tech run-rate (~$4B+ initiative spend, +5–7% YoY); 18,000 coders with AI tools producing ~30% productivity uplift / ~2,000 FTE-equivalent savings; multiple AI projects underway across audit and operations.
• John McDonald (Truist) drew the cleanest single ROTCE glide path framing — lower end of 16–18% in 8–12 quarters, upper end in 3 years — tied to the CET1 path lower from 11.4% toward mid-10s. The most thesis-relevant single answer.
• Matt O'Connor (Deutsche Bank) asked about loan growth sustainability and card growth pace; Borthwick reaffirmed mid-single-digit loan growth with commercial leadership and consumer acceleration. Card growth was framed as a 2026 priority with rewards-investment levers (World Cup, June cash-back, co-brand).
• Erika Najarian (UBS) pressed on the perceived "expense-messaging gap" vs. JPM and asked specifically what the underlying message should be on operating leverage. Moynihan's response — that operating leverage is the right metric, not nominal expense, and the wealth-and-capital-markets revenue mix has different efficiency-ratio dynamics than consumer + global banking — was the clearest articulation of the "focus on operating leverage, not nominal expense" framework.
• Jim Mitchell (Seaport Global) got the deposit-beta and consumer-vs.-corporate pricing-discipline answer that closed out the asset-sensitivity question. Borthwick was explicit that corporate / global banking deposit pricing reflects rate cuts immediately and in full while consumer is much less sensitive given the noninterest-bearing and low-interest-bearing share. Follow-up on Markets vs. ex-Markets NII drew the framing that Markets benefits from balance-sheet investment + liability-sensitivity-on-rate-cuts dynamics.
• Chris McGratty (KBW) drew the $50–100B wholesale-funding-rolloff sizing — the cleanest piece of FY26 NII bridge color — and asked about the proposed 10% credit-card rate cap. Moynihan's response on the unintended-consequence framing (capping rates restricts credit, hurts marginal borrowers, increases wholesale funding cost) was the most thesis-relevant policy framing.
• Glenn Schorr (Evercore) asked the broader deposit-flatness question across the industry; Brian's response framed the wealth-management cash sweep dynamic and the consumer-balance normalization-from-pandemic-bump. Follow-up on IB pipeline drew the strongest pipeline framing of the call: "we feel good about both" the deal environment and BAC's investments in middle-market coverage (24 cities, 200+ bankers) and emerging tech/healthcare clients.
• Steven Chubak (Wolfe Research) asked the GWIM 30%-margin Investor Day target; Borthwick's response on competitive advantage in cross-LOB client coverage and lowest-in-years FA attrition was the cleanest GWIM-organic-growth answer.
• Gerard Cassidy (RBC) drew the stablecoin systemic-risk framing ($6T potential deposit-flight scenario) and the "what's the next risk?" question; Moynihan's response framing 30–50-year-low NCO levels alongside continued stress-testing discipline was the right capital-allocation governance posture.
• Saul Martinez (HSBC) got the through-cycle 50–55bps NCO reference and the consumer-deposit-growth-toward-GDP-plus framing — the cleanest single normalization-trajectory data point.

What They’re NOT Saying

• No specific CET1 mid-10s timeline. Moynihan reaffirmed the trajectory but explicitly tied the pacing to the final shape of the regulatory rule set (Basel III endgame phase-in + G-SIB calibration). We treat 2026 CET1 as drifting toward 11.0–11.2% rather than mid-10s in the near term.
• No quantification of FY26 IB-fee growth. Pipeline is "strong" but no sized framework. We treat IB fees as compounding off the 2H 2025 +25%-over-1H base with continued mid-teens upside as the modal case.
• No Berkshire commentary. Continues to be the elephant in the room; not raised by analysts, not volunteered. Marginal-bid composition has normalized over the prior two prints.
• No specific commentary on the CFO succession question. Borthwick has been CFO since 2020; no near-term framework signal. We treat as latent and unrelated to the rating.
• No specific framework for SCB compression timeline. Q2 2025 framing of ~50bps target buffer (vs. 130bps current) holds; the path to that buffer compression is contingent on the Basel III endgame outcome and CCAR cycle resolution. We treat as multi-year optionality rather than 2026-modeled.
• No incremental detail on AML / regulatory consent orders. Q2 2025 framing of cleanup-stage holds; no material disclosure on this call. We continue to monitor.

Market Reaction

The print landed pre-open January 14. The initial reaction was modestly negative in pre-market (~−2.4%) despite the clean beat and the FY26 framework delivery, reflecting a financials complex that has been priced for confirmation rather than acceleration heading into the release. Reading the tape: the buyside that was waiting for the FY26 NII walk got it; the buyside that was hoping for the upper-end of the Investor Day operating-leverage range (300bps) saw 200bps and read the gap as conservative.

Our read on the soft early reaction: this is positioning unwind, not a thesis input. The print and the framework are consistent with the upgrade path we laid out at Q3, and the pre-market dip narrows the discount-to-quality we framed at Q2 rather than closing it. The 12-month total-return setup from here is materially better than the immediate post-print tape suggests — the FY26 NII bridge is anchored, the ROTCE glide path is articulated, the capital return cadence is supported, and the multiple has not yet priced the resolution of the asset-sensitivity overhang.

Street Perspective

The bull case being made on the Street post-print converges on three planks: (1) the FY26 NII +5–7% framework is internally consistent with the $12–15B/quarter MBS + mortgage roll-off pricing 150–200bps higher and the multi-year wholesale-funding replacement runway, materially de-risking the asset-sensitivity overhang; (2) ROTCE glide path to 16–18% over 8–12 quarters is the multiple-mover, with the arithmetic feasible at headcount-flat + revenue-growing; (3) capital return cadence is supported by the $30B+ FY25 base with optionality on SCB compression as the regulatory rule set finalizes.

The bear case being articulated on the Street centers on: (1) FY26 200bps operating-leverage guidance lands at the low end of the Investor Day 200–300bps range, raising the question of whether the upper-end is achievable absent revenue-mix tailwinds compounding; (2) Q1 2026 expense growth ~+4% YoY puts Q1 operating leverage at risk if NII delivery is back-end loaded; (3) CET1 mid-10s timeline is multi-year and contingent on final regulatory rules; (4) 30–50-year-low NCO ratio creates negative skew on credit normalization through any meaningful labor-market deterioration; (5) the equity has rerated through 2025 and is no longer positioned at a deep discount to the franchise quality.

Our read: the bull framing on (1) and (2) is the upgrade thesis; we treat the bear framing on (1) and (2) as appropriate model-conservatism rather than thesis-breakers. The bear framing on (4) is a tail-risk monitor not a near-term modeled outcome. The bear framing on (5) is real but does not eliminate the 12-month return potential to FY26 framework delivery + capital-return cadence + ROTCE glide path.

Model Implications

• FY26 revenue: We mark the trajectory implied by the FY26 framework as supportive of $118–121B FY26 revenue (~+5–7% YoY off the FY25 ~$113B base).
• FY26 EPS: NII +5–7% + 200bps operating leverage + continued capital return + favorable tax dynamics underwrites $4.20–4.50 FY26 EPS. Our base case is $4.30 with skew to upside if Markets composition holds and consumer deposit growth inflects toward GDP-plus.
• NII walk: FY26 NII +5–7%; multi-year fixed-rate-asset repricing tailwind ($12–15B/quarter at +150–200bps) extends through at least 2027. We model continued sequential NII growth into 2027 absent a faster-than-curve easing path.
• Capital markets composition: Marked structurally higher in our model. Markets revenue at ~$24B FY25 record + IB fees at the highest level since 2020 + 2H +25%-over-1H pipeline support a higher FY26 revenue base.
• Capital return: $4.5B+/quarter buyback cadence with optionality on SCB compression. Dividend growth in line with EPS. Mid-10s CET1 trajectory as multi-year not 2026-modeled.
• Credit: NCO trajectory at the through-cycle 50–55bps reference; Q4 44bps treated as below trend with normalization toward 50bps in the model. We do not embed a labor-market-deterioration reserve build absent macro signal.
• ROTCE: Glide path to 16% in 8–12 quarters / 18% in 3 years. We model FY26 ROTCE at 14–15% with the upper-end glide path validated by the headcount-flat + revenue-growing arithmetic.
• Fair value: 12–14x our FY26 EPS framework of $4.20–4.50 supports an $52–60 FV range. We underwrite 12-month total return above the S&P 500 from current levels.

Thesis Scorecard

Overall: Thesis materially strengthens. Four of five bull pillars confirmed or confirmed-plus; the new fifth pillar (ROTCE glide path) is now articulated with credible arithmetic. The principal binding bear case (Bear #1, asset sensitivity) is resolved. The remaining bear cases are appropriately scoped — CRE office is at cleanup stage, ROTCE gap is closing not widening, Berkshire overhang has receded, and credit normalization is a tail-risk monitor rather than a near-term modeled outcome.

Action: Upgrading to Outperform. Fair value $52–60 (~12–14x our FY26 EPS framework of $4.20–4.50). We expect BAC to beat the S&P 500 over the next 12 months on the FY26 framework delivering, the ROTCE glide path executing, and capital return cadence supporting per-share compounding. We do not chase parabolic moves but underwrite a 12-month total return above the S&P 500 from current levels. Holders should reassess sizing if the stock breaks meaningfully through the upper end of the FV range without a corresponding thesis upgrade, or if the FY26 NII walk shows early signs of falling short on a faster-than-expected easing path.