Wells Fargo & Company (WFC) — Q4 2022 Earnings Call Transcript

Thank you. Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to remind you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause the actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Thanks, John. I'll make some brief comments about our fourth-quarter results, and then update you on our priorities. I'll then turn the call over to Mike to review fourth-quarter results in more detail and some of our expectations for 2023 before we take your questions. Let me start with fourth-quarter highlights. Our results were significantly impacted by previously disclosed operating losses, but our underlying performance reflected the continued progress we're making to improve returns. Rising interest rates drove strong net interest income growth. Our continued progress and our efficiency initiatives helped to drive expenses lower excluding operating losses. Loans grew in both our commercial and consumer portfolios, and charge-offs have continued to increase, but credit quality remains strong. Our capital levels also remained very strong. And our CET1 ratio increased to 10.6%, well above our required minimum plus buffers. We also continue to make progress on putting legacy issues behind us. Our broad reaching agreement with the CFPB in December is an important step forward that helps us resolve multiple matters, the majority of which have been outstanding for several years. Over the past three years, we have made significant changes in the businesses referenced in the settlement, and many of the required actions were already substantially complete prior to this announcement. While our risk and regulatory work hasn't always followed a straight line and we have more to do, we've made significant progress, and we will continue to prioritize our work here. In addition to our risk and regulatory work, it's also critical for us to continue to invest in the future as we build off the great market positions we have. We are confident our processes will enable us to continue to prioritize our risk and control work. At the same time, we invest in our future. And as I look back at '22, I'm enthusiastic about the progress we've made this past year and feel even better about the opportunities ahead. Let me start with the changes we've made during the year to help millions of customers avoid overdraft fees and meet short-term cash needs. These efforts included the elimination of non-sufficient funds fees and transfer fees for customers enrolled in overdraft protection, early payday making eligible direct deposits available up to two days early, extra-day grace, giving eligible customers an extra business day to make deposits to avoid overdraft fees. And in the fourth quarter, we launched Flex Loan, a new digital-only small dollar loan that provides eligible customers convenient and affordable access to funds. Teams from across the company came together to roll out this new product in record time. The rollout has been smooth and though it's still early, customer response is exceeding our expectations. These actions build on services we've introduced over the past several years, including Clear Access Banking, our account with no overdraft fees. We now have over 1.7 million of those accounts, up 48% from a year ago. We continue to transform the way we serve our customers by offering innovative products and solutions. We continue to improve our credit card offerings including launching two new cards, Wells Fargo Autograph and BILT. Our new products helped drive a 31% increase in new credit card accounts in 2022, while we continued to maintain strong credit profiles. We launched Wells Fargo Premier, our new offering dedicated to the financial needs of affluent clients by bringing together our branch-based and wealth-based businesses to provide a more comprehensive, relevant and integrated offering for our clients. We continue to enhance our partnership within our Commercial business to bring Corporate and Investment Banking products such as foreign exchange and M&A advisory services to our middle-market clients. Our different approach to technology is helping us better serve our consumer and corporate clients. We rolled out our new mobile app with a simpler, more intuitive user experience, which has improved customer satisfaction. In 2022, mobile active customers grew 4% from a year ago. We launched Intuitive Investor, making it easier for customers to invest with the streamlined account opening process and a lower minimum investment. And total active Intuitive Investor accounts increased 56% from a year ago. We completed the development of Fargo, our new AI-powered virtual assistant that provides a more personalized, convenient, and simple banking experience, which is currently live for eligible employees and set to begin rolling out to customers early this year. Last month, we announced Vantage, our new enhanced digital experience for our commercial and corporate clients. Vantage uses AI and machine learning to provide a tailored and intuitive platform based on our clients' specific needs. Over the past year, our industry-leading API platform team continued the development of payment APIs for commercial and corporate clients, invested in solutions to support our financial institution clients, ramped up in group product offerings in consumer lending and began developing commercial lending solutions. We are investing heavily in modernizing the IT infrastructure and the way we develop code. We're implementing a cloud-native operating model that allows us to innovate faster. We've also been investing in modernization in the areas of payments and corporate lending, taking out legacy applications and digitizing processes end to end. These enhanced digital capabilities are just the start of initiatives we have planned as part of our multiyear digital transformation. We also continue to evaluate our existing businesses. As we announced earlier this week, we plan to create a more focused Home Lending business aimed at serving primarily bank customers as well as individuals and families and minority communities. This includes exiting the correspondent business and reducing the size of our servicing portfolio. I've been saying for some time that the mortgage business has changed dramatically since the financial crisis, and we've been adjusting our strategy accordingly. We're focused on our customers, profitability, returns, and serving minority communities, not volume or market share. The mortgage product is important to our customer base and the communities we serve, so it will remain important to us, but we do not need to be one of the biggest originators or servicers in the industry to do this effectively. Across all of our businesses, we must evolve as the market, regulation, and competition have evolved. And while it may seem counterintuitive, we believe the decision to reduce risk in the mortgage business by reducing size and narrowing our focus will actually enable us to serve customers better and will also improve our returns in the long term. Changing gears now, I'm proud of all we did last year to make progress on our environmental, social, and governance work. We are balanced in our approach to these issues and believe that thinking broadly about our stakeholders will enhance returns to shareholders. We provide many examples on Slide 2 of our presentation. So, let me just highlight two examples here. We published our first diversity, equity, and inclusion report, which highlights the progress that we've made on our DE&I initiatives. We'll continue to make progress in our commitment to integrating DE&I into every aspect of the company under the new leadership of Kristy Fercho, who joined Wells Fargo in 2023 to lead our Home Lending business and was named the company's new head of diverse segments, representation, and inclusion in the fourth quarter. We've commissioned an external third-party racial equity audit, and we plan to publish the results of the assessment by the end of this year. 2022 is a turning point in the economic cycle. The Federal Reserve has made clear that reducing inflation is its priority, and it will continue to take actions necessary to achieve its goal. We are starting to see the impact on consumer spending, credit, housing, and demands for goods and services. At this point, the impact on consumers and businesses has been manageable. And though there will certainly be some industries and segments of consumers that are more impacted than others, the rate of impact we see in our customer base is not materially accelerating. This, plus the strength with which consumers and businesses went into this slowing economy is a helpful set of facts as we look forward. Our customers have remained resilient with deposit balances, consumer spending, and credit quality still stronger than pre-pandemic levels. As we look forward, we're carefully watching the impact of higher rates on our customers and expect to see deposit balances and credit quality continue to return toward pre-pandemic levels. While we're not predicting a severe downturn, we must be prepared for one, and we are a stronger company today than one and two years ago. Our margins are wider, our returns are higher, we're better managed, and our capital position is strong, so we feel prepared for a downside scenario if we see broader deterioration than we currently see or predict. We still have clear opportunities to improve our performance as we make progress on our efficiency initiatives and continue to make the investments necessary to grow the business through technology and product enhancements. Two years ago, we shared a path to higher ROTCE by returning capital to our shareholders and executing on our efficiency initiatives. While high levels of operating losses in the second half of '22 impacted our results, our underlying business performance demonstrated our ability to improve our returns. In a moment, Mike will highlight the key drivers of our path to a 15% ROTCE, which we believe is achievable based on the strength of our business model and our ability to execute. While we're focused on improving our returns, making progress on building the appropriate risk and control, and infrastructure for a company of our size and complexity will remain our top priority, and we will dedicate the time and resources necessary. I want to conclude by thanking our employees across the company who are working hard each day to continue to make progress in our transformation. I'm excited about all that we will accomplish in the year ahead. I'll now turn the call over to Mike.

Thank you, Charlie. And good morning, everyone. Slides 2 and 3 summarize how we helped our customers, communities and employees last year, some of which Charlie covered. So, I'm going to start with our fourth-quarter financial results on Slide 4. Net income for the fourth quarter was $2.9 billion, or $0.67 per diluted common share. Our fourth-quarter results included $3.3 billion, or $0.70 per share of operating losses primarily related to a variety of previously disclosed historical matters, including litigation, regulatory, and customer remediation. $1 billion of impairment of equity securities, or $749 million after noncontrolling interest, predominantly in our affiliated venture capital business, primarily driven by portfolio companies in the enterprise software sector. Both slowing revenue growth rates and lower public market valuations of enterprise software companies impact the valuations. It's important to note that even after recognizing this impairment, the current value of these investments at the end of 2022 remained above the amount of the initial investment. $353 million of severance expense, primarily in Home Lending. While we've reduced headcount in this business throughout 2022, this charge includes the actions we plan to take in 2023 related to the mortgage announcement we made earlier this week. These reductions were partially offset by $510 million of discrete tax benefits related to interest and overpayments in prior years. We highlight capital on Slide 5. Our CET1 ratio was 10.6%, up approximately 30 basis points from the third quarter, reflecting the benefit from our fourth-quarter earnings, the annual share issuance for our 401(k) plan matching contribution, and an increase from AOCI. Our CET1 ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to 9.2% at the start of the fourth quarter as our new stress capital buffer took effect. As a reminder, our G-SIB surcharge will not increase in 2023. While we have not repurchased any common stock since the first quarter of 2022, we currently expect to resume share repurchases in the first quarter of this year. Turning to credit quality on Slide 7. Credit performance remained strong with 23 basis points of net charge-offs in the fourth quarter. However, as expected, losses are slowly increasing from historical lows, and we expect them to continue to return toward pre-pandemic levels over time as the Federal Reserve takes actions to combat high inflation. Credit performance remains strong across our commercial businesses with only 6 basis points of net charge-offs in the fourth quarter. Total consumer net charge-offs increased $88 million from the third quarter to 48 basis points of average loans, driven by an increase in net charge-offs in the credit card portfolio but remained slightly below consumer net charge-off levels in the fourth quarter of 2019. Nonperforming assets increased 1% from the third quarter as lower residential mortgage nonaccrual loans were more than offset by higher commercial real estate nonaccrual loans. Our allowance for credit losses increased $397 million in the fourth quarter, primarily reflecting loan growth, as well as a less favorable economic environment. We are closely monitoring our portfolio for potential risk and are continuing to take some targeted actions to further tighten underwriting standards. Let me highlight trends in two of our portfolios. The size of our auto portfolios declined for three consecutive quarters, and balances were down 5% at the end of 2022 compared to year-end 2021. Meanwhile, originations were down 47% in the fourth quarter compared to a year ago, which reflected credit tightening actions and continued price competition due to rising interest rates. Of note, our new vehicle originations surpassed used vehicles in the fourth quarter, reflecting a combination of credit tightening actions that we've implemented and the industry dynamic of higher new vehicle sales growth. Turning to the commercial real estate office portfolio. The office market is showing signs of weakness due to weak demand, driving higher vacancy rates and deteriorating operating performance, as well as challenging economic and capital market conditions. While we haven't seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure and being disciplined in our underwriting standards with both outstanding balances and credits down compared to a year ago. On Slide 8, we highlight loans and deposits. Average loans grew 8% from a year ago and $3.1 billion from the third quarter. Period-end loans increased for the sixth consecutive quarter with growth across our commercial portfolios and higher consumer loans driven by credit card and residential loans, partially offset by continued declines in our auto portfolio. I'll highlight the specific growth drivers when discussing our operating segment results. Average loan yields increased 181 basis points from a year ago and 85 basis points from the third quarter, reflecting the higher rate environment. Average deposits declined 6% from a year ago and 2% from the third quarter. Compared with the third quarter, we saw declines in each of our businesses. Lower consumer balances reflected customers continuing to reallocate cash in higher-yielding alternatives, particularly in Wealth and Investment Management, and continued consumer spending. As expected, our average deposit cost increased 32 basis points from the third quarter to 46 basis points, driven by higher deposit costs across all operating segments in response to rising interest rates. Average deposit costs are up 44 basis points since the fourth quarter of 2021, while market rates have increased substantially more during that same time. As rates continue to rise, we would expect deposit betas to continue to increase, and customer migration from lower-yielding to higher-yielding deposit products to continue. Turning to net interest income on Slide 9. Fourth-quarter net interest income was $13.4 billion, which was 45% higher than a year ago, as we continue to benefit from the impact of higher rates. I'll provide details on our 2023 expectations later on the call. Turning to expenses on Slide 10. The increase in noninterest expense from both a year ago and from the third quarter was driven by higher operating losses. Excluding operating losses, other noninterest expense was flat from a year ago as higher severance expense was offset by lower revenue-related compensation and continued progress on our efficiency initiatives. Our operating losses in the fourth quarter included accruals related to the December 2022 CFPB consent order. As part of that settlement, we agreed to one incremental remediation and one new remediation related to overdraft fees. The accrual related to these two remediations was approximately $350 million. Our operating losses in the fourth quarter also included accruals for other legal actions. Reflecting these accruals, our current estimate of the high end of the range of reasonably possible losses accessible for legal actions as of December 31, 2022, is approximately $1.4 billion. This is down approximately $2.3 billion from September 30, 2022. While we still have outstanding litigation resolved, this estimate would be the lowest level since the second quarter of 2016, though, of course, new matters will arise and existing matters will develop over time. The estimate for December 31, 2022, will be updated at the time of our 10-K filing in February and may change. While we acknowledge the elevated level of operating losses, the past two quarters have been significant. They are important steps in putting historical issues behind us as we've been able to absorb the cost while increasing our CET1 ratio as I highlighted earlier. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer and Small Business Banking revenue increased 36% from a year ago, driven by the impact of higher interest rates. Deposit-related fees continued to decline as we completed the rollout of the overdraft fee reductions and new product enhancements that we announced early last year to help customers avoid overdraft fees. The majority of the revenue impact of these changes was reflected in the fourth-quarter run rate. We continue to focus on branch rationalization as digital adoption and usage among our customers have steadily increased. In 2022, we reduced branches by 179 and branch staffing levels by 10%, and we expect to continue to optimize our branches and staffing levels in response to changing customer needs. While industry mortgage rates declined in the fourth quarter, they were still up over 330 basis points since the beginning of the year, and weekly mortgage applications as measured by the Mortgage Bankers Association were at a 26-year low at quarter end. The economic incentive to refinance is extremely limited. And refinance applications for the industry were down 87% in December compared to a year ago. Reflecting these market conditions, our Home Lending revenue declined 57% from a year ago, driven by lower mortgage originations and gain-on-sale margins, as well as lower revenue from the resecuritization of loans purchased from securitization pools. We expect the mortgage origination market will continue to be challenging and gain-on-sale margin to remain under pressure until excess capacity in the industry has been removed. As we announced this week, we will be exiting our correspondent business, which we expect to be substantially complete by the end of the first quarter. We don't expect this action to have a significant impact on our 2023 financial results. Credit Card revenue was up 6% from a year ago due to higher loan balances driven by higher point-of-sale volume and new product launches. Auto revenue declined 12% from the year-ago driven by continued loan spread compression from rising rates and credit tightening actions in certain areas, as well as lower loan balances. Personal Lending was up 9% from a year ago due to higher loan balances, partially offset by lower spread compression. While originations grew 19% from the year ago driven by strong consumer demand in investments and the business, we have remained disciplined in our underwriting. Turning to key business drivers on Slide 12. Mortgage originations declined 70% from a year ago and 32% from the third quarter, with both declines in correspondent and retail origination. Refinances as a percentage of total originations declined from over half of our volume a year ago to 13% in the fourth quarter of 2022. I already highlighted the drivers of the decline in Auto originations. So, turning to debit card, spending was up 1% compared to a year ago. Holiday spend for debit cards was flat compared to the 2021 season with lower transaction volume, offset by higher average ticket size. Entertainment was the only category with double-digit spending while growth categories such as home improvement, general retail goods, and fuel were all down compared to 2021. Credit Card spending increased 17% from a year ago, and while the year-over-year growth rate slowed from the third quarter, almost all categories continue to have double-digit growth. Average balances were up 22% from a year ago. Payment rates have started to moderate, but we're still well above pre-pandemic levels. Turning to Commercial Banking results on Slide 13. Middle market banking revenue increased 78% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances. Asset-based lending and leasing revenue declined 4% from a year ago, driven by lower net gains from equity securities, partially offset by loan growth. Average loan balances were up 18% in the fourth quarter compared to a year ago, while growth in the first half of 2022 was driven by higher realization. Utilization rates stabilized in the second half of the year. Average loan balances have grown for six consecutive quarters and were up 5% in the third quarter, with growth in asset-based lending and leasing driven by continued growth in client inventory, which are still below pre-pandemic levels. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 22% from a year ago driven by stronger treasury management results due to the impact of higher interest rates, as well as improved lending results. Investment banking fees declined from a year ago, reflecting lower market activity with declines across all products and industries. Commercial real estate revenue grew 16% from a year ago driven by stronger lending results due to higher loan balances and the impact of higher interest rates. Markets revenues increased 17% from a year ago, driven by higher trading revenue in equities, rates and commodities, foreign exchange, and municipal products. Average loans grew 10% from a year ago after growing for the seventh consecutive quarter. Average loans declined from the third quarter as utilization rates stabilized across most portfolios. On Slide 15, Wealth and Investment Management revenue was up 1% compared to a year ago, as the increase in net interest income driven by the impact of higher rates was partially offset by lower asset-based fees due to the decrease in market valuations. The majority of win in advisory assets are priced at the beginning of the quarter, so asset-based increased slightly in the first quarter, reflecting the higher market valuations at the end of the year. Expenses decreased 6% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Even as loan growth in securities-based lending moderated due to demand caused by market volatility in the interest rate environment, average loans grew 1% from a year ago. Slide 16 highlights our corporate results. Both revenue and expenses were impacted by the divestitures last year of our Corporate Trust business and Wells Fargo Asset Management. We sold these businesses in the fourth quarter of 2021, which resulted in a net gain of $943 million. Revenue also declined from a year ago due to lower results in our affiliated venture capital and private equity businesses, including the impairments in equity securities I highlighted earlier. The increase in expenses from a year ago was driven by higher operating losses. Turning to our expectations for '23, starting with Slide 17. Let me start by highlighting our expectations for net interest income. We are assuming that the asset cap will remain in place throughout the year. Moving from left to right on the waterfall, based on the current forward rate curve, we expect our net interest income will continue to benefit from the impact of higher rates, even with deposits repricing faster than they did in 2022. However, this benefit is expected to be partially offset by continued deposit runoff and a mix shift to higher-yielding products with these declines, partially offset by modest loan growth. We also expect a headwind for lower CIB Markets net interest income due to higher funding costs. This reduction is expected to be partially offset by an increase in trading gains and noninterest income, so the impact to revenue is currently expected to be small. Putting this all together, we currently expect net interest income to grow by approximately 10% in 2023 versus 2022. Ultimately, the amount of net interest income we earn in 2023 will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix, and pricing in the loan demand. Turning to our 2023 expense outlook on Slide 18. Following the waterfall from left to right, we reported $57.3 billion in noninterest expense in 2022, which included $7 billion of operating losses. Excluding operating losses, expenses would have been $50.3 billion, which was in line with the guidance we provided at the beginning of last year. If you also exclude operating losses from the guidance, our 2022 expenses were impacted by inflation and higher severance expense. However, revenue-related expenses were lower than expected by market conditions. So, we believe a good starting point for discussion of 2023 expenses was $50.3 billion, which excludes operating losses. We expect expenses in 2023 to increase by approximately $1 billion due to both merit increases, including inflationary pressures, and an approximately $250 million increase in FDIC expense related to the previously announced surcharge. These increases are expected to be partially offset by approximately $100 million of lower revenue-related expense, primarily driven by decreases in loan lending. Based on current market levels, we expect revenue-related expense in Wealth and Investment Management for 2023 to be similar to 2022. We've successfully delivered on our commitment of approximately $7.5 billion of gross expense saves over the past two years. And through our efficiency initiatives, we expect to realize an additional $3.2 billion of gross expense reductions in 2023. A piece of this is related to the announcement we made earlier this week to create a more focused Home Lending business, but expense savings from reducing our servicing business will take more time to be realized. We highlighted on this slide the largest opportunities for additional savings this year, and we believe we'll have more opportunities beyond 2023. Similar to prior years, the resources needed to address our risk and control work separate from our efficiency initiatives. We will continue to add resources as necessary to complete this important work. And while we continue to focus on executing our efficiency initiatives, we're also continuing to invest and expect approximately $1.7 billion of incremental investments in our businesses in 2023. As Charlie discussed, investing in our businesses is critical to our growth across the company and will better serve our customers, but we'll also continue to be thoughtful and evaluate the level of investments throughout the year. So, putting this all together, expenses, excluding operating losses, are expected to be relatively flat in 2023 compared with 2022, even with inflationary pressures, a higher FDI surcharge, and increased incremental investments in our businesses. As 2022 demonstrated, operating losses can be significant and hard to predict, and therefore, we have not included them in our expense outlook for 2023. However, we currently anticipate ongoing business-related operating losses, such as fraud, theft, and other business-as-usual losses to be approximately $1.3 billion this year, which is the same assumption we provided last year. As previously disclosed, we had outstanding litigation, regulatory, and customer remediation matters that could impact the amount of operating losses. It's important to note that while we made substantial progress executing on our efficiency initiatives, we still have a significant opportunity to be more efficient across the company. This remains a multiyear process with the goal of achieving an efficiency ratio that aligns with our peers based on our business mix. Given how critical continuing to invest is to our story, on Slide 19, we provide details on our primary areas of focus for 2023. As we've highlighted, continuing to build the right risk and control infrastructure remains our top priority, and we will continue to invest in this important work. Charlie discussed many of the investments we started to make in digital payments, and we plan to continue to invest in these areas this year to make improvements for both our consumer and commercial customers. We also plan to continue to invest to expand our client coverage and investment banking, Commercial Banking, and Wealth and Investment Management, and to continue to transform our technology platforms, including moving more applications to the cloud, consolidating our data centers, and increasing investments in cyber. Finally, by investing in our operations and branches, we expect not only to improve the customer experience but also improve efficiency, reduce operational risk, and drive account growth. As we show on Slide 20, in the fourth quarter, we reported an 8% ROTCE. But as I highlighted at the start of the call, our fourth-quarter results were impacted by several notable items, including higher operating losses, elevated impairments of equity securities, severance, and discrete tax benefits. If you exclude these notable items, our fourth-quarter ROTCE would have been approximately 16%. However, we don't believe this accurately reflects our longer-term expectations for the following reasons. Net interest income was higher than our long-term expectations due to interest rates, funding penalties, mix and pricing. Also, net loan charge-offs were at historically low levels. If rates, funding balances, mix, and pricing were closer to our long-term expectations and charge-offs were higher, our ROTCE would be lower. Depending on what adjustments you make here, we may all arrive at a slightly different answer. So, to be clear, because the interest rates are higher and charge-off costs are lower than our longer-term expectations, we believe we have more work to do to improve our returns. On Slide 21, we highlight our path to higher returns. Since we first discussed our ROTCE goal in the earnings call for the fourth quarter of 2020, we have executed a number of important items. We executed $20 billion of gross common stock repurchases, $16 billion in net issuances, including our 401(k) plan. We increased our common stock dividend from $0.10 to $0.30 per share. We delivered approximately $7.5 billion of gross expense saves and reduced headcount by 11% since the end of 2020. So, we've made good progress over the past two years on things that we can control, and we believe we have a clear line of sight to a sustainable ROTCE of approximately 15% in the medium term. To achieve that, we need to continue to optimize our capital, including returning capital to shareholders and redeploying capital to higher-returning products and businesses. Adding more focus on our Home Lending business should also be a positive contributor to higher returns. We also have additional opportunities to execute on efficiency initiatives. Additionally, we expect to benefit from the investments we are planning in our businesses, which I highlighted earlier. While some of these investments will be dependent on the market environment, we expect them to increase ROTCE. At the same time, we will continue to prioritize building our risk and control infrastructure. In the longer term, we believe that running a company in a more controlled and disciplined manner will continue to benefit returns. Our goal is for our four operating segments to produce returns comparable to our best peers. In summary, although the high level of operating losses we had in the fourth quarter significantly impacted our results, the underlying results in the quarter continue to reflect an improvement in our earnings capacity. As we look forward, we expect to continue to grow net interest income. Our expenses, excluding operating losses, are expected to be relatively flat even after inflation and incremental investments in our businesses to drive growth. Both our credit performance and capital levels remained strong in the fourth quarter. We expect to resume share repurchases in the first quarter. We will now take your questions.

Hi. Good morning. Good afternoon, I should say. Mike, I’d like to follow up on the net interest income outlook for the year. You've had a strong finish to the year at $13.5 billion FTE. Considering the guidance suggests a slight decrease moving forward, could you explain how you expect the betas to change and what factors may not carry through from this point? Thanks.

Yes, Ken. Thanks for the question. I'll walk you through some of the key factors. For loan growth, we are expecting low to mid-single-digit growth throughout the year, which indicates a moderate pace. We anticipate some modest declines in our deposit base that should stabilize later in the year, but we do expect those declines over the next few quarters. Additionally, we think the betas will continue to rise slightly from here. The first half of the year will likely see higher betas compared to the second half if our outlook holds true. We don’t expect a significant decline in the first quarter. There may be opportunities in the second half of the year if we don't see a sharp drop in deposits or if the betas perform better than expected. It's worth noting that in the fourth quarter, betas were slightly better than we had forecasted. We're navigating some uncertain conditions, but I see potential opportunities in the second half of the year depending on how the next couple of quarters unfold.

Okay. Got it. And so, second question, I heard your commentary about the $1.3 billion of op losses and the fact that the RPO is down to 1.4 billion. Just how do you kind of help us understand your range of confidence? Obviously, last year, op losses ended at $7 billion as you made progress. So, how wide is the range of expectations around your confidence on that level of op loss for the year?

Well, I think if you look at what we've said over the last quarter or two, there's been roughly in the third and fourth quarter $200, $250 million just BAU op losses that have happened, just broad normal stuff that you should expect to continue. That gives you sort of a bottom end. The rest will be a little dependent upon how we work through the rest of the issues for next year. If you look at the RPL going from $3.7 billion to $1.4 billion, as those big items have become more probable and estimable for us, we booked them. Hopefully, that gives you confidence that we're putting some of the big things behind us. But we still have stuff to work through, and there'll be more over time, I'm sure. But we've put a lot of big things behind us.

Thank you for the question. I believe there's a similar concern here. The tone regarding the regulatory issue seems to have improved compared to three months ago, and the assessment of possible losses appears to be more data-driven as well. Charlie, could you share the major priorities currently on your agenda? While I understand that everything ultimately pertains to lifting the asset cap, I would like to know your thoughts on the most significant outstanding issues.

Yes. Listen, we still have a series of consent orders, of which, and I always point this out, the asset cap is a piece of one of them. So, all roads don't lead to the asset cap. The roads in this respect lead to us building the proper control environment, which will satisfy ultimately all the consent orders. I've tried to be clear that we are making progress on that work. It is a lot to do. Our tone hasn't changed relative to the confidence in the progress we're making there. We're going to continue doing it. Hopefully, it's done to the satisfaction of the regulators, but they'll have to decide that. As we continue to tick off the to-dos on that work, the control environment gets better and better. We become a better run company that doesn't have those kinds of operating losses that you've both seen in the past.

Okay. Alright. Perfect. And then, Mike, when you talk about resuming share repurchases in the first quarter, maybe you can give us sort of a sense for the magnitude and maybe just an even higher level, sort of how you get comfortable repurchasing in the face of what same sort of still uncertain rules out there.

Well, I would start with where our CET1 ratio is at the end of the year at 10.6%. So, we're well above our current regulatory minimum and the buffers that are included there. We have plenty of flexibility regardless of any outcome that comes out of the new rules that will be proposed. That will take some time to come out, get implemented and phased in. It’s not going to happen in a day. We will manage somewhere in the 100- basis point range, plus or minus.

Hey, Mike, I wanted to clarify your answer to Ken, about the first quarter NII. I think you said you do not expect a big step down in the first quarter. Maybe you could just frame first quarter NII a little bit for us relative to the $13.4 billion. What are some of the headwinds, tailwinds? And what might you expect at this point?

Yes. Thanks, John. First, you have to normalize for a couple less days in the quarter. That’s going to be a step down of about $150 million to $200 million just there from the flex days. It should be relatively stable to the fourth quarter, but there could be some little bit of wiggle room in there.

Stable minus including the day count or…

You've got to take the day count into account. Yes.

You have to reduce for the day count. Yes.

Okay. Got it. And then, Charlie, maybe a bigger question, just kind of where are you on the efficiency journey when we think about $50 billion of core expense for this year? And the time frame for ROTCE, what will it take? Is there an efficiency ratio we should keep in mind? Or is that too hard to forecast? Maybe a little bit on that would be helpful.

That's a great question. I want to make a couple of comments regarding the expense guidance we provided. Within that guidance, we are still working to reduce the core expenses of the company. However, as indicated in that slide, we expect to increase our spending on technology and digital investments, which somewhat offsets the goal of maintaining a flat expense base. Mike mentioned in his remarks, and I want to reiterate, that we will not spend this money at any cost. We'll evaluate how the year unfolds. We intend to spend this money and plan to do so, but we have a lot of discretion regarding expenses. We aim to continue improving our efficiency ratio. If we do not see revenue growth or returns from our initiatives, we will cut back on spending. That’s our strategy. We can either enhance the efficiency ratio if we get tangible results or decrease it overall. There are still gross expenses that should be removed from the company, providing us with the opportunity to increase our investments. Targeting a 15% efficiency ratio is a medium-term goal, which is not too far off but also not immediate. It's something we are aiming for as we look ahead, and we should reach it, but we are being cautious in quantifying our starting point.

Hi. Good afternoon. So, Charlie, I was hoping to ask a follow-up to that last line of questioning around expenses. You indicated that the expense work is going to continue beyond 2023. The one metric we've been tracking is headcount. In terms of the benchmarking analysis that we've done, headcount is down more than 10% since the 2020 peak or roughly 30,000, but it's still elevated versus your money center peers. I was hoping you could just speak to what inning you're in currently in terms of optimizing headcount. As we look beyond '23, whether there is a credible path to actually driving investments lower, you had talked about balancing investment with the need to drive those efficiency gains. I want to think about the expense trajectory beyond '23, whether further reductions are achievable given some of that inflated headcount still?

Yes. Your point on headcount versus peers is one we've made. Yes, we are higher than we need to be. We still have higher headcount and higher expenses than people who are more complex than us. Some of that is explained by the work we're doing and the expenditures going into the control infrastructure, but there’s a lot more beyond that. That's the work we're doing to peel that back piece by piece. We still have a huge amount of manual processes inside the company, and we have duplicate systems, and that is the work we are on. When I say we still have gross expenses to be reduced in the company, that's exactly what we're talking about. The question is when we get to a net basis, where does that come out? As I said before, that's a decision we'll make each time by looking at our performance. We're not going to spend at all costs. If we don't see net improvements in performance, we've got the ability to ration back discretionary spending so that we will see improved performance in the company. What we'd like to see is that these things are paying off. We're seeing real sustainable revenue growth based upon these things, and we’re able to invest.

That's helpful color, Charlie. For my follow-up, just also as it relates to the discussion around the buyback. You guys are uniquely positioned in that you aren't migrating into a higher G-SIB bucket. Because of the asset cap, you're not going to necessarily see quite as much expansion in terms of balance sheet. You've conveyed a high level of confidence around a 15% ROTCE, where your stock is trading today, at least on price tangible, reflects a pretty healthy degree of skepticism and your ability to get there. Given your strong capital position, why not get a bit more aggressive with the buyback here? Recognizing the significant amount of capital you'll generate, and some of the concerns around AOCI seem to be abating. Would be helpful to get some perspective as to whether you might be willing to step it up meaningfully closer to a 100% type payout here.

It sounds like you're drawing conclusions to the pace at which we said we're going to buy stock back, which I don't think we have actually said. We've said that we haven't been buying stock back. We absolutely anticipate we're going to begin buying it back. As we think about how much we have available in that capacity, what Mike said was our CET1 went up to 10.6%. Our required minimum is 9.2%. We manage 100 basis points above that. We do have substantial capacity, but the ongoing earnings capacity of the company is our framework to target a reasonable CET1 ratio. If we need to raise capital levels because of Basel III changes, we've got earnings capacity to do that. But we do have the flexibility. Now that we've resolved issues with the CFPB, we can buy stock back. That decision will be made based upon our views on the value of the stock, liquidity in the market, and other factors.

Good afternoon. I wanted to see if you could just give a little bit more color on the net interest income side. Maybe if you can talk a little bit more about the noninterest-bearing deposit mix shift that you think could continue here. It looks like that could be a pretty material offset to your interest rate benefits. So, I just wanted to see if you can perhaps talk about that and then maybe also help quantify the runoff that you expect to continue on the deposit side in terms of balances overall. Thanks.

Yes. John, it's Mike. Overall, as I said earlier, we do expect a moderate decline in balances and some more mix shift changes as we go throughout the year. You should expect that to continue. It’s all part of the environment we’re in. We're seeing it most acutely happen in the wealth business as people move into cash alternatives, out of deposits, and that's happening in many wealth management businesses these days as people move that cash around. In the rest of the consumer businesses, it's part people looking for higher yields and also part with people spending more. You're seeing some of those declines as stimulus has worn off. There are several drivers here. The NII pacing in the first half will certainly be higher than in the second half of the year, depending on how things play out in the first quarter or two.

Okay, Mike. Thank you. That’s helpful. And then separately, you gave some good color obviously, around NII expectations now. And then also on expenses. On the fee side, can you perhaps give us your expectation around overall growth that you expect in noninterest income and maybe some of the major drivers of where you see growth? And if you could possibly size it up around the investment banking area, etc.? That would help. Thanks.

Sure. As you break apart fees, the biggest line item there is the investment advisory fees, and that's going to be somewhat dependent on where the market goes. If we start to see recovery in the equity markets at a substantial pace, that will obviously be a big benefit for that business. For other line items, deposit fees, as I mentioned in my commentary, the decline was expected as a result of the overdraft policy changes and the new products we implemented, most of the revenue impact is already in the fourth-quarter run rate. Investment banking fees will be market dependent, and it’s too early to know how that's going to shape up in terms of overall industry volume. We continue to position ourselves better in investment banking, especially in the commercial bank and middle-market space. So, we are confident in our investments that will pay off over time, but it may take a little time depending on the market dynamics.

Good afternoon. I just have one question. Charlie, in your opening remarks, you mentioned that the impact on customers from higher rates, I think you implied was not getting worse with the incremental sales. Was that the right takeaway? And if so, and if the Fed were to stop after another hike, do you actually see that the impact on your customers may not be as meaningful as feared over the last six to 12 months and implications of that on the credit quality and the credit performance of your book? Would love to hear any perspective you can share.

Sure. What I was trying to say in those remarks was the impact of rising rates is continuing to impact customers on a period-over-period basis, and we would expect that to continue. However, it's not accelerating; it's much more linear than exponential. The fact that it's more linear is helpful because it gives people a chance to adjust their spending patterns, saving patterns, and borrowing patterns to adjust for the reality of higher rates. We would anticipate that we would continue to see deterioration in those metrics after the Fed stops raising rates, for a period just because of the amount of time that it takes those changes to filter through the economy.

That's helpful. Just a quick follow-up. I think you mentioned earlier around commercial real estate. Are you seeing any stress? There are some discussions around the ability of these loans to get refinanced, given the move in rates we've seen over the last year. Any steps within the CRE book? And anything in terms of home state, given a lot of negative headlines around San Francisco? Would love to hear your perspective on that, too.

It's Mike. I'll try to take that and Charlie can add if he needs. When you look at the office space, there's certainly more stress than a few quarters ago. It hasn't translated into lost content yet. However, we are keeping a careful eye on it, particularly for older, lower-class properties. Over 80% of our portfolio is in Class A space, so we feel like the quality is good, but we expect to see some stress as we go through here. We are watchful in cities like San Francisco, Los Angeles, and Washington D.C., where lease rates are overall much lower than in other areas. We're being proactive with borrowers to ensure we're a step ahead of maturities or extension options.

Hi. Good afternoon. Just one more clarification question, if I may, on net interest income. You know, Mike, your underlying assumptions to your NII outlook in terms of low to mid-single-digit loan growth, moderate declines in deposit balances in the first half, and stabilizing, doesn’t feel very different from what consensus had been assuming to get to $51.5 billion for '23, which is clearly higher than what's implied by your outlook. So, I'm wondering if I could reask Ken's question: what deposit betas, what terminal deposit betas, what range of expectations are you baking into that $49.5 billion forecast? Did you make a significant amount of conservatism as you think about your NII outlook? I'm asking that question because one of your peer CEOs said their $74 billion outlook was not conservative.

Yes. I would like to add that when the Federal Reserve stops increasing rates, there will be a delayed effect on pricing that may last for one to three quarters. The exact timing will depend on the competitive landscape, and there will be some delay involved. We are all attempting to make predictions. We aim to provide you with clarity regarding our expectations as we approach these periods, especially for the first quarter, which appears to be more straightforward. After that, it becomes quite challenging. We won't go into every assumption we've made in our forecasts.

And just to clarify, on what we’re offering in terms of deposits, we're thinking of the long-term relationships, not maximizing short-term NII. The value of relationships is critical, so we’ll continue making decisions on deposit rates with this in mind.

Yes. If the model is in our favor, asset cap will remain throughout the year. We expect our NII will continue positively from rising rates despite deposits repricing faster. This benefit may be offset by deposit runoff and mix shift to higher-yielding products, alongside modest loan growth. Lower CIB Markets NII is expected due to higher funding costs, yet an increase in trading gains and noninterest income could offset this reduction.

I would like to clarify a few points regarding the correspondent exit and also address some follow-up questions related to the mortgage business. You mentioned that the impact is not substantial, but could you provide more details about revenues, expenses, and earnings per share? I've made my own assumptions, but I've received many inquiries from others regarding management's perspective. I would appreciate your insights on that matter. Additionally, could you explain how you plan to approach the mortgage business after leaving the correspondent space? Is there any originate and sell servicing retained in any panel, or will you be fully transitioning to portfolioing for yourselves, leading to a gradual wind down of the mortgage servicing rights? Any clarification on this would be helpful. Thank you.

Yes. We are not assuming we will balance sheet every loan originated in the future. We're focused on the importance of mortgage to the consumer base. We are staying in the business but viewing it as an essential part of the broader relationship. We will originate both conforming and nonconforming mortgages and determine what goes to our balance sheet as we have in the past. Originating less means that over time, the MSR and the servicing book will naturally decrease, but we will look for intelligent ways to reduce complexity and size as well. Regarding the impact of exiting the correspondent business, given the low mortgage volumes and revenues today, the immediate revenue impact is not meaningful. It's a small number of people involved. The real benefit comes over time as we downsize servicing because it is unprofitable for us in numerous segments where we’re serving.

The only thing you lose initially is the gain on sale on the origination. The servicing is still here. In any given quarter over the last couple of years, the originations are low tens of millions of dollars. So, it's a really small impact.

Because one of the follow-ups I got was it, does it impact the scale? Obviously, it reduces the flow over existing plants. So, does that matter to how you price your reach?

No, it doesn't significantly matter. The amount we're currently originating versus the scale we have is immaterial. Even if the servicing book decreases substantially, we will still have scale to originate the product profitably.

Thanks. Thanks for taking my questions. A question for you. With the CFPB settlement, there was a comment by the head of CFPB about growth initiatives slowing your progress. So, Charlie, as a question to you is what are you planning to do in regard to that comment on the growth initiatives? Are you trying to slow anything? Any color on that?

Yes. I addressed it in my remarks, which is we've been very, very clear. I think if you look back on every earnings call, let alone any time I speak publicly, we're very consistent about making sure that everyone understands internally and externally, our No. 1 priority is getting that work done. That is how we're running the company.

Thanks. A completely different question. In the past, you've given some color on deposits among different tiers of customers. Any update on where those stand currently and your outlook on that?

It's still very much the same. Those who went in with lower balances are experiencing more stress than those who have not. However, the rate of change remains consistent across most of the affluent spectrum.

Thank you. Good afternoon. Charlie, to turn this question around, are there any business areas that you are looking to grow and enhance, perhaps by hiring teams to strategically increase capabilities?

When we look at our various businesses, all will be based upon returns and market competitiveness. There’s opportunities for growth in Commercial Banking, through coverage and product additions. In investment banking, we're focused on building out corporate investment offerings. We also see growth opportunities in wealth management business to bring on additional investment teams. Consumer lending has shown growth in credit cards, and we’re evolving carefully to capitalize on these segments. We have multiple avenues to increase growth rates organically and we will continue evaluating those as we move forward.

Regarding the equity write-down in the quarter, it was about a $1 billion write-down, $750 million after noncontrolling interests, primarily driven by some investments in enterprise software companies. It was mainly due to one investment. We still value this investment, and it's being held well above our invested amount.

Just to be clear, we're holding it at something around $0.5 billion. It's still 10 times what we invested in it.

Our team has done exceptionally well in the venture space over a long period, and we still consider it a very profitable part of our business.

Okay. Thank you, all. We appreciate the time, and we'll talk to you next quarter. Take care, everyone. Bye.