Wells Fargo & Company (WFC) — Q1 2023 Earnings Call Transcript

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause 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 first quarter results and update you on our priorities. I'll then turn the call over to Mike to review first quarter results in more detail before we take your questions. Let me start with some first quarter highlights. Our results in the quarter were strong and reflected the continued progress we're making to improve returns. We grew revenue from both the fourth quarter and a year ago. We continue to make progress on our efficiency initiatives and expenses declined from both the fourth quarter and the year ago, driven by lower operating losses, but we continue to be focused on controlling other expenses as well. The consumer and majority of our businesses remain strong. Delinquencies and net charge-offs have continued to slowly increase as expected. We're looking for signs of accelerated deterioration in asset classes or segments of our customers. And broadly speaking, we saw a little change in the trends from the prior quarter. However, weakness continues to develop in commercial real estate office, and Mike will discuss this in more detail. Given what we're seeing, we're taking incremental actions to tighten credit on higher risk segments but continue to lend broadly. We increased our allowance for credit losses for the fourth consecutive quarter. Our economic expectations used to support the allowance have not changed meaningfully, but we do continue to look at specific asset classes, such as commercial real estate, to appropriately assess the adequacy of the allowance. We will continue to monitor the trends in each of our loan portfolios to determine whether future action is warranted. Both commercial and consumer average loans were up from a year ago, but were relatively stable from the fourth quarter. Consumer spending remained strong with growth in both debit and credit card spend, but spending began to soften late in the quarter. The decline in average deposits that started a year ago continued in the first quarter, primarily driven by customers seeking higher-yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press, but those inflows have abated. Our CET1 ratio, which was already strong, increased to 10.8% even as we resumed common stock repurchases in the first quarter, buying back $4 billion in common stock. Let me share some thoughts on the recent market events impacting the banking industry. We're glad that the work we have completed over the last several years has put us in a position to help support the U.S. financial system. Along with 10 other large banks, we utilized our strength and liquidity, and we made a $5 billion uninsured deposit into First Republic Bank, reflecting our confidence in the country's banking system and to help provide First Republic with liquidity to continue serving its customers. I'm proud of everything our employees have done during this historic period to be there for our customers. We believe banks of all sizes are an important part of our financial system as each is uniquely positioned to serve their customers and communities. It's important to recognize that banks have different operating models and that the banks that failed in the first quarter were quite different from what people think of when they think about the typical regional bank. These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with a broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear. Our diversified business model provides opportunities to serve our customers broadly, which reduces concentration risk across the different elements of risk. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies. We also have strong capital and liquidity positions, which include a mix of deposits and access to multiple funding sources, and our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles. Now let me update you on the progress we've made on our strategic priorities. Our top priority remains building out our risk and control framework appropriate for our company. I spent time in my recent annual letter highlighting why we remain confident in our ability to complete this work, including having much more effective reporting and processes in place to provide appropriate oversight, adding close to 10,000 people across numerous risk and control-related groups as part of our commitment to make the investments needed to complete and building the management discipline and culture to govern and execute the work, which includes the operating committee reviewing risk and regulatory progress and escalations on a weekly basis. I also summarized the actions we've taken to simplify the way we operate. This work continued in the first quarter as we largely completed the exit of the correspondent home lending business as part of our plans to simplify that business. We're also narrowing our retail mortgage business to focus on predominantly bank customers and underserved communities. Our strategy includes broadening our existing investment from the special purpose credit program to include purchase loans, investing an additional $100 million to advance racial equity in homeownership and deploying additional home mortgage consultants in local minority communities. We continue to transform the way we serve our customers by offering innovative products and solutions. We announced a multiyear agreement with Choice Hotels to launch a new co-branded credit card this month, creating a best-in-class credit card program designed to enhance our customers' experience and bring them more value. We rolled out early payday late last year, which makes eligible direct deposits available up to two days early. In the first quarter, this enhancement provided customers early access to over $200 billion in direct deposits. We launched Flex Loan in the fourth quarter, a digital-only small dollar loan that provides eligible customers convenient and affordable access to funds. Customer response continues to exceed our expectations; we've originated over 100,000 loans since November. Digital adoption and usage among our consumer customers continued to increase. We added over 500,000 mobile active customers in the first quarter, and digital logins increased 6% from a year ago. Since rolling out Vantage, our new enhanced digital experience for our commercial and corporate clients late last year, we've received overwhelmingly positive feedback on the new user experience. Vantage uses AI and machine learning to provide a tailored and intuitive platform based on our clients' specific needs. We also continued to make progress on our environmental, social, and governance work. We announced a $50 million grant to the NAACP to support efforts to advance racial equity in America. This is the single largest donation that the NAACP has ever received from a corporation and builds on our long-standing relationship with the NAACP that spans more than 20 years. The Wells Fargo Foundation expanded its commitment to housing affordability through another $20 million housing affordability breakthrough challenge to advance ideas to help meet the need for more affordable homes across the country. We also announced a $20 million commitment to advance economic opportunities in Native American communities, including addressing housing, small business, financial health, and sustainability. Before concluding, I wanted to highlight the management changes we announced yesterday. Mary Mack, the CEO of Consumer and Small Business banking, is retiring this summer. She spent her entire career at Wells Fargo and has led consumer and small business banking for the past seven years through a significant amount of change, including defining a new path forward for the business. I can't think of few Wells Fargo colleagues who have done as much for our company and have been as visible in the communities that we serve over such a long period of time. We also announced that Saul Van Beurden, Head of Technology at Wells Fargo, will succeed Mary. Sal is a strong leader and technologist, and he knows how to run a business. This makes him the ideal person to lead consumer and small business banking into the future. Our branch network will continue to be key to the business. But our customers expect us to provide them with increasingly digitized and seamless banking experiences across all channels. Saul understands this deeply and has consistently proven his ability to convert new products and services across Wells Fargo. Finally, Tracy Karen, currently Head of Consumer Technology, will become head of technology for the company, reporting to me. Tracy has worked with the technology and finance industry for more than 20 years and has led a series of business critical initiatives to modernize our technology platforms across our consumer businesses. She is a strong results-driven leader. It's always great when we can tap our own leaders for roles within the company, and I want to thank Mary for everything she's done during her tenure at Wells Fargo. It's truly been a pleasure working with her. As we look forward, we're carefully watching customer behavior for clues on how the economic environment is changing. Customer activity is still relatively strong and delinquencies remain low, though they are increasing. There are pockets of risks such as commercial office real estate, which will likely impact institutions differently, and we're proactively managing our own exposures. We continue to expect economic growth to slow, and we are preparing for a range of scenarios. We will continue to monitor both the markets and our customers and will react accordingly. Our diversified business model should enable us to support our customers throughout economic cycles. I will now turn the call over to Mike.

Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $5 billion or $1.23 per diluted common share. While there was a lot going on in the banking industry around us, we continue to focus on our priorities, and our results reflected the progress we are making, which I'll highlight throughout the call. Starting with capital and liquidity on Slide 3. Our CET1 ratio was 10.8%, up approximately 20 basis points from the fourth quarter, reflecting our earnings in the quarter and lower risk-weighted assets. After pausing share repurchases for the previous three quarters, we repurchased $4 million of common stock in the first quarter. Our CET1 ratio remained well above our required regulatory minimum plus buffers, and we expect to continue to prudently return excess capital to shareholders in the coming quarters. In the first quarter, our liquidity coverage ratio was approximately 22 percentage points above the regulatory minimum. We continue to benefit from a diversified deposit base with over 60% of our deposits in our Consumer Banking and Lending segment as of the first quarter, which is a higher percentage than before the pandemic. Turning to credit quality on Slide 5. Net loan charge-offs continue to slowly increase to 26 basis points in the first quarter but were still below pre-pandemic levels. Commercial net loan charge-offs decreased $16 million from the fourth quarter to 5 basis points. However, while losses improved, we continue to see some gradual weakening in underlying credit performance, including higher nonperforming assets. We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase. Total consumer net loan charge-offs increased $60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago, and we've continued to take credit taking actions to position the portfolio for a slowing economy. Nonperforming assets increased 7% from the fourth quarter, driven by higher commercial real estate nonaccrual loans, down 12% from a year ago due to lower residential mortgage nonaccrual loans. Of note, 87% of the nonaccrual loans in our commercial real estate portfolio were current on interest and 75% recurring on both principal and interest as of the end of the first quarter. Our allowance for credit losses increased $643 million in the first quarter, reflecting an increase for commercial real estate loans, primarily office loans, as well as an increase for credit card model loans. Given the increased focus on commercial real estate loans, especially office, we provided more details on our portfolio on Slide 6. We have $154.7 billion of commercial real estate loans outstanding at the end of the first quarter, with 35.7% of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs, and challenging capital market conditions. While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been derisking the office portfolio, which resulted in commitments declining 5% from a year ago, and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted. As you can see in the slide, we've provided some additional data on the office portfolio, including approximately 12% owner-occupied. Therefore, the loan performance is mostly tied to the cash flow of the owner's operating business rather than rents paid by tenants. Nearly one third had recourse to a guarantor, typically through a repayment guarantee. The portfolio is geographically diverse, and as you'd expect, the largest concentrations are in California and New York. Over two-thirds of our office loans are in the corporate investment banking business, and the vast majority of this portfolio is institutional quality real estate with high-caliber sponsors. While approximately 80% of its cost, keep in mind that this is a single measure that is hard to evaluate in isolation. For example, newer or refurbished properties may perform better regardless of whether they are at A or B. We are providing this data to give you more insight into the portfolio, but as is usually the case in commercial real estate, each property situation is different and a myriad of other variables, such as leasing rates, loan-to-value, and debt yields, can determine performance, which is why we regularly review the portfolio on a loan-by-loan basis. As a result of market conditions and the recent increases in criticized assets and nonaccrual loans, we've increased our allowance for credit losses for office loans for the past four quarters. The allowance for credit losses coverage ratio at the end of the first quarter for the office portfolio in the corporate investment bank was 5.7%. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period as we actively work with borrowers to help resolve issues they may be facing. On Slide 7, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the fourth quarter, while period-end loans declined 1% from the fourth quarter with lower balances across our consumer and commercial portfolios. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 244 basis points from a year ago and 56 basis points from the fourth quarter, reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% for the fourth quarter due to the consumer deposit outflows as customers continue to reallocate cash into higher-yielding alternatives and continued spending. During the market stress last month, we experienced a brief increase in deposit inflows that has since abated, and while our period-end deposit balances were slightly higher than we expected at the beginning of the quarter, they're still down 2% from the fourth quarter. As expected, our average deposit cost increased 37 basis points from the fourth quarter to 83 basis points with higher deposit costs across all operating segments in response to rising interest rates. Our mix of noninterest-bearing deposits declined from 35% in the fourth quarter to 32% in the first quarter but remained above pre-pandemic levels. Turning to net interest income on Slide 8. First quarter net interest income was $13.3 billion, which was 45% higher than a year ago as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days. Our full year net interest income guidance has not changed from last quarter, as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. Ultimately, the amount of net interest income we earned this year 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 repricing and loan demand. Turning to expenses on Slide 9. Noninterest expense declined 1% from a year ago, driven by lower operating losses and the impact of efficiencies. The increase in personnel expense from the fourth quarter was driven by approximately $650 million seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement-eligible employees and 401(k) matching contributions. Our full year 2023 noninterest expense, excluding operating losses, is still expected to be approximately $5.2 billion, unchanged from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses. Turning to our operating segments, starting with Consumer Banking and lending on Slide 10. Consumer and Small Business Banking revenue increased 28% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. We are continuing to make investments in this business. We're beginning to increase marketing spend. We're accelerating the efforts to renovate and refurbish our branches; for our bankers, we're investing in new tools and capabilities to provide better and more personalized advice to customers. We're continuing to enhance our mobile app and mobile active users were up 4% year-over-year, and we're also seeing increased activity and positive initial indicators after our rollout of Wells Fargo premium last year. It's early on for all of these initiatives, but we're starting to see some green shoots. At the same time, we continue to execute on our efficiency initiatives. Teller transactions continue to decline with reduced headcount. We reduced headcount by 9%, and total branches were down 4% from a year ago. In home lending, mortgage rates remained elevated and the mortgage market continued to decline. Our home lending revenue declined 42% from a year ago, driven by lower mortgage originations, including a significant decline from the correspondent channel and lower revenue from the resecuritization of loans purchased from securitization pools. We continue to reduce headcount in the first quarter, and we expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the correspondent channel as announced in January and began to reduce the complexity and the size of the servicing book. During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances driven by higher point-of-sale volume. Auto revenue declined 12% from a year ago, driven by lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due to rising interest rates. Personal lending revenue was up 9% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 83% from a year ago and 55% from the fourth quarter, with declines in both correspondent and retail originations. As I mentioned, we stopped accepting correspondent applications in January. So, going forward, our originations will be focused on serving Wells Fargo customers and underserved communities. The size of our auto portfolio has declined for four consecutive quarters, and the balances were down 80% at the end of the first quarter compared to a year ago. Origination volume declined 32% from a year ago, reflecting credit tightening actions and continued price competition. Debit card spending increased 2% in the first quarter compared to a year ago, an increase from the 1% year-over-year growth in the fourth quarter. Discretionary spending drove the growth with nondiscretionary spending stable from the fourth quarter levels. Credit card spending increased 16% from a year ago, in line with the year-over-year growth in the fourth quarter, with sustained growth in both discretionary and nondiscretionary spending. Spending growth slowed throughout the quarter but was still at double-digit levels in March. We continue to see some slight moderation in payment rates in the first quarter, but they were still well above pre-pandemic levels. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances, while deposit-related fees were lower, reflecting higher earnings credit rate on noninterest-bearing deposits. Asset-based lending and leasing revenue increased 7% year-over-year, driven by loan growth, which was partially offset by lower net gains from equity securities. Average loan balances were up 15% in the first quarter compared to a year ago, driven by new customer growth and higher line utilization. After being stable in the second half of last year, volume utilization increased slightly in the first quarter. Average loan balances have grown for seven consecutive quarters and were up 2% from the fourth quarter, with growth in asset-based lending and leasing driven by continued growth in client inventory. Growth in middle market banking was once again driven by larger clients, including both new and existing relationships, which more than offset declines from our smaller clients. Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 37% from a year ago driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment management investment banking fees declined from a year ago, reflecting lower market activity with clients across all major products in nearly all industries. While commercial real estate market transactions are down across the industry, our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates and higher loan balances. Markets revenue increased 53% from a year ago driven by higher trading results across all asset classes. Average loans grew 4% from a year ago but were down from the fourth quarter. Lower balances in banking reflected a combination of slow demand, increased payoffs and relatively stable line utilization. The decline in commercial real estate balances was driven by the higher rate environment and lower commercial real estate sales volumes. On Slide 14, Wealth and Investment Management revenue was down 2% compared to a year ago, driven by lower asset-based fees due to lower market valuations. Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives. At the end of the first quarter, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Expenses decreased 4% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Average loans were down 1% from a year ago, primarily due to a decline in securities-based lending. Slide 15 highlights our corporate results. Revenue declined $103 million or 83% from a year ago as higher net interest income was more than offset by lower results in our affiliated venture capital and private equity businesses. Results in the first quarter included $342 million of net losses on equity securities or $223 million pretax and net of noncontrolling interests. In summary, our results in the first quarter reflected an improvement in our earnings capacity. We grew revenue and reduced expenses and had strong growth in pretax free provision profits. As expected, our net charge-offs have continued to slightly increase from historical lows, and we are closely monitoring our portfolios and taking credit tightening actions where appropriate. Our capital levels grew even as we resumed common stock repurchases, and we expect repurchases to continue. In the guidance we provided last quarter for the full year 2023, net interest income and expenses excluding operating losses, have not changed. We will now take your questions.

Thank you for taking the question. Mike, I was hoping to just start out on the deposit side. So, when you talk about the influx of deposits from some of the sort of special situations having abated, does that money actually leave the bank? Or is it just sort of the inflows that have stopped?

Yes, the inflows stopped, right? And they came in a pretty short period of time, and those inflows stopped. And I think what you're seeing since then is just normal spending in the consumer side and normal activity across the other businesses.

Okay, perfect. I wanted to switch topics a bit. In your prepared remarks, you mentioned plans to carefully return excess capital in the upcoming quarters. I was pleased to see the resumption of share repurchases in the first quarter. However, given the various challenges we face, such as uncertainties in the regulatory environment and the economy, I’m curious about how you plan to approach share repurchase for the remainder of the year, especially considering your strong capital levels.

Yes, this is Charlie. Let me take a stab. I would say, listen, I think the way we feel about it is our capital levels grew quarter-over-quarter even after we purchased the $4 billion of stock. So, it just shows our ability to generate capital, if necessary, because of the environment or regulatory changes or things like that. So, because of that, we do feel like we have the ability to continue to return capital to shareholders while we still have plenty of flexibility to deal with anything that could come our way. And so, our excess above the regulatory minimums plus buffers is extremely high beyond what we feel that it needs to be. So we think we can continue to address that and still be very prudent with how we manage capital.

Wonderful. Okay. I have a bunch more questions, but I have a feeling they'll be asked going forward as well. So, Charlie, Mike, thank you guys very much. Really appreciate it.

Hey, good morning. So, I wanted to get a little bit more granular on some of the expense trends that we're seeing. We've gone through the exercise of benchmarking your segment efficiency ratios versus peers. Clearly, you've made significant strides improving profitability across virtually every segment, commercial CIB and wealth, the PPNR margins are running really in line with the peer group. It's still the consumer efficiency ratio in the mid-60s, which is running well above peers. And I was hoping you could just speak to the opportunity on the expense side within consumer. How much of a benefit should you see from the retrenchment in mortgage? And maybe what do you see as a normalized efficiency target for the segment just given your current mix of business?

Steve, it's Mike. I'll start and Charlie can chime in if he wants. I think when you think about consumer, I think, we still have a lot more work to do there. And it's both in the consumer lending space or the mortgage space as we simplify the servicing side of that business, and that just takes a little bit of time to work its way through and needs to be thoughtful and in some cases, requires a little bit of investment in technology and the like. And then on the consumer banking side, we've continued to rationalize the branch footprint and branch set up. We've continued to see teller transactions and other things decline. And so, I think you'll see us focus there. And hopefully, what you've seen in that segment is a consistent quarter-on-quarter decline in headcount and other factors, and that will sort of continue to hopefully be the case. And then when you think about just where the end state is, we shouldn't look any different than our peers, our best-in-class peers for each of our segments, including that one. So, over a period of time, that's the goal.

When considering that segment, our mix compared to others is a challenge. Our home lending business is currently quite inefficient, which is part of the reason behind our recent decisions. We have a lot to work on there, and improvements will take time to enhance efficiency. As we've mentioned regarding consumer banking, for many years after Mary took on her role, our primary focus was on cleanup, which the team has managed exceptionally well in the consumer and small business bank. We have since turned our attention to becoming more efficient, and Mary has put in considerable effort in this area. This involves evaluating our branch network, staffing levels, and encouraging a shift towards digital services, an area where we lagged. However, significant progress has been made over the last 1.5 to 2 years. There is still a vast opportunity for improvement, but we are actively working on it.

Really helpful color. Just for my follow-up, I wanted to unpack some of the NII trends that we're seeing within the wealth side specifically. And there's a big focus right now on yield-seeking behavior if the higher-for-longer rate environment persists. You and your peers have seen contraction in NII sequentially and continued deposit outflows. I was hoping you could speak to whether you're seeing any abatement in just the pace of cash sorting or yield-seeking behavior as of yet or if it's continued at a pretty healthy clip.

Sure, I'll address that. The sequential change in net interest income (NII) was primarily due to having two fewer days in the quarter. Overall, it remains relatively flat compared to the fourth quarter, as we anticipated in January. In terms of wealth management, the trend has been stable; it's neither accelerating nor decelerating significantly at this time. We're observing that clients are opting for cash alternatives within the wealth business, and I believe this trend will persist for a while. The positive aspect is that we are benefitting from this trend in other ways, and it is likely to remain stable for a bit longer.

Mike, I was wondering what your outlook is for the second quarter NII. If you could talk a little bit about the puts and takes to that and what you're thinking for second quarter? Thanks.

Yes, John, looking at the trends, you can observe the average deposits at the end of the period. That’s probably the first key factor. Additionally, deposit yields have increased. These two elements will likely be the primary drivers. Therefore, you should anticipate a slight decrease from Q1 to Q2. We'll have a clearer picture of how that plays out as we move further into the quarter. However, I believe the factors are in place to forecast a range of outcomes.

Yes. Okay. And the outlook for the full year obviously embeds a pretty big step down from the first quarter starting point. Can you give us any more color about the types of assumptions you have embedded into the full year outlook on deposit flows, mix shift, and reprice data?

Yes, absolutely. As we've discussed in previous quarters, there remains significant uncertainty regarding various inputs involved in this situation. This includes factors like the mix of deposits, the overall levels, and pricing expectations. Our guidance reflects the belief that the competition for deposit pricing will stay elevated, that we will experience some shifts in mix, and that moderate declines may occur as spending patterns change. As mentioned last quarter, we expect to gather more information over time. While we are optimistic about potential positive developments in our forecast, we anticipate these will emerge in the latter half of the year, dependent on how all these elements unfold. We remain hopeful for some upside in that regard.

I just want to ask a follow-up on the cost side. So, I think we're all pretty clear on your view of continuing to hold the core flat from here. But I think an ongoing question is just as we look further out, and I know there's no crystal ball here. Like, what would you give the line of sight when that next wave of gross saves related to all the duplicative and extra buildup in the infrastructure related to risk compliance, et cetera? When you get the line of sight on when you can start to sunset that? Because I know you talked about that as a big point of how you get the ROE up over the medium term.

Yes, Ken, I want to clarify a few points. When we discussed achieving a 15% ROTCE in the medium term last quarter, we did not take into account the need to eliminate a significant portion of costs associated with our ongoing risk and regulatory efforts. The benefits from improving those expenses may take some time, potentially years, before we begin to see real results. Our primary goal is to achieve a sustainable 15% return without relying on those efficiencies. It comes back to our earlier conversation about optimizing capital, not just for shareholder returns but across the entire balance sheet. This requires us to keep executing our efficiency initiatives beyond just the risk and regulatory projects. Over time, we expect to realize the benefits of the investments we've made in recent years.

I want to clarify that when we consider ways to enhance efficiency within the Company, we do not view expenses related to our risk and regulatory work as a hindrance. Those expenses are essential, and they do not excuse a lack of efficiency in other areas. As we mentioned earlier regarding our consumer businesses, we see significant opportunities to improve efficiency, which can lead to either a reduction in our expense base or increased capacity for future investments. While we may eventually find ways to make our risk infrastructure more efficient, that is not currently a priority and is not required to meet our efficiency targets.

Yes. And thanks for those clarifications. One, just a question on the fee side. I know watching your trading results are a lot different than watching some of the bigger peers. But just looking at that $1.3 billion on the face of the income statement this quarter, in the context of the environment, can you help us put that into context? Was that just an exceptional result this quarter? Did it have anything we should be mindful of as we think forward and just your general outlook there? Thank you.

Yes, sure. We certainly benefited from the volatility that we saw, particularly in the rate market and some of the other asset classes in the quarter. And you can see that in the results. But when you look at some of the core platforms in FX and other areas, we've been just consistently investing in some of those platforms. So hopefully, over time, you'll see good results there. But the quarter definitely was influenced by the volatility that we saw across the market.

I just wanted to follow up on the capital comments. I guess, Charlie, you talked about this. Is it fair for us to assume, clearly, we have the SCB coming out of the stress test that will be one data point and then the Basel reforms. Should we assume that the CET1 likely drifts higher, maybe 11%, maybe higher in the near term, while you still buy back stock? Is that the right assumption? And secondly, I think, Mike, you mentioned optimizing for capital and RWA. Just maybe if you can call out a few things that you can do to optimize RWA relative to where the balance sheet is today?

Yes, certainly. The straightforward answer to your first question is no. We don't anticipate that continuing to increase. We will learn the results of CCAR in June, just like everyone else. Regarding Basel IV, that has a longer timeline. However, we are currently 160 basis points above the regulatory minimum buffers, so we have ample capital to manage whatever outcomes arise. Over time, we expect to approach around 100 basis points above the 9.2%. Therefore, we have sufficient capacity to handle any developments and to continue returning money to shareholders, as Charlie mentioned.

I want to emphasize that we have significant flexibility to manage any challenges that may arise. We do not expect to have significant additional capital requirements, even in the event of a downturn. If any unexpected situations occur, we are equipped to handle them due to our earnings and existing excess capital. Additionally, during this quarter, we returned $4 billion in stock buybacks. We believe we can continue to return capital while maintaining a conservative financial position.

Yes. To illustrate capital optimization, let's consider the mortgage business as an example. If we want exposure to mortgages, we can opt to buy securities instead of holding the mortgages directly. We don't necessarily need to purchase UMBS; acquiring Ginnies is also an option. There are numerous opportunities for us to assess each underlying portfolio to ensure we are obtaining adequate returns from client relationships, whether that be through the commercial bank or the corporate investment bank. I believe there are many avenues where we can either redistribute capital to clients we believe will yield better returns or optimize some of the underlying portfolios.

Got it. And just one separate question. You made tremendous progress, Charlie, since taking over on the compliance risk management front. There was a news article last night talking about some OCC MRAs. I don't expect you to comment on that. But, just give us a sense from a shareholder perspective, your level of confidence around the risk of another major setback to all the efforts and actions that you've taken to address the regulatory orders, to the extent you can, just to provide assurance that the progress that's been made is getting us closer to the finish line rather than facing another significant setback that could set us back again.

Yes. Listen, I would refer you back to my shareholder letter where I wrote about it extensively. And I think we still continue to feel exactly the way we felt when we wrote that letter. It wasn't that long ago, which is we have continued work to do. We feel very confident in our ability to get the work done and that we're making progress. And so, we live in an environment where things can come up. That's always the case. So, we don't want to pretend like there are no risks of other things out there. But if there was anything specific, we would do our best to let you know. And we feel good about the progress that we're making and are extremely focused on making sure that we've got all the attention decked against it. But we're confident that the things that we're doing will close the gaps that existed at the Company when we got here.

Can you provide an updated expectation on loan growth as you look through 2023? I know there are pressures on the consumer side, but there are still some favorable trends in commercial. Additionally, do you have an updated expectation regarding your total deposit beta given the ongoing pricing pressure?

Yes, thank you. On the loan side, we are seeing areas of growth, particularly in the commercial bank, and this has been consistent for a few quarters. However, the overall growth rate for total loans has slowed down over the last three quarters, which is in line with our expectations from last summer. I anticipate that growth will remain moderate moving forward, and I do not expect significant increases in loans for the remainder of the year. Our guidance includes a low single-digit growth rate for loans for the year. What was the second part again, John? Sorry.

Yes, it was around the deposit beta.

Yes. On the deposit side, to date, the betas have turned out almost exactly as we anticipated. Moving forward, the trajectory of rates and competition will be important. As I mentioned earlier, we still expect it to be quite competitive based on the guidance we've provided. We may find that we are being a bit conservative in our outlook, but we believe it will remain competitive for now. We expect the betas to be reasonable, particularly when looking at the consumer side once the rate hikes cease.

I was hoping you guys could elaborate on the slowing consumer spending towards the end of the month? Any more color there and any thoughts on what's driving that?

Yes, the change was quite small, so I wouldn't place too much emphasis on it. There is still considerable activity, and consumers continue to spend on both debit and credit. Therefore, I wouldn't overanalyze a couple of weeks.

Okay. I want to address some regulatory issues that I often discuss. I appreciate the article in the New York Post yesterday, which I can't comment on specifically. However, it raised concerns about your trading business, which has performed exceptionally well. While you've been growing it, the pace doesn't seem overly aggressive. There were some political comments about six months ago suggesting that you shouldn't expand your capital markets business while investing in other areas. Could you provide some insights into how you're growing the trading business responsibly and how you're ensuring adequate oversight of risk management? Externally, everything appears to be going well, but it's challenging to gauge the full picture. Thank you.

We have no concerns over what we're doing in the business. We're not increasing risk in any meaningful way. We've had strong oversight in that business, and we think it continues. And we benefited from business activity, which is focused on customer flow. We have strong financial risk management in the Company and have had that for a long time. We have strong risk management over our trading businesses and controls. And I would just be really careful to take the source that you're taking and using that to expand into anything beyond from whence it came. If it was anything meaningful to report, we would report it. And as I said, we feel really good about the progress that we're making, and we feel good about the performance of the company. And I think that stands on its own.

Mike, you mentioned some of the reasons behind the strong year-over-year growth in your commercial loans. Can you let us know if you're observing any reintermediation, particularly considering the weak DCM market this quarter and last year? Are you noticing that corporate and commercial customers are increasingly relying on your balance sheet compared to about 1.5 years ago?

Not in any meaningful way. There's always an anecdotal story, I'm sure, out there, but I wouldn't say it's meaningful.

Very good. And then, as a follow-up, I know you gave us some details about the net interest income growth this year. They're still being annualized, the first quarter results...

Hey Gerard, we lost you there for a second. Can you just repeat the whole second part?

You provided some information about the outlook for net interest income growth, which is expected to be up 10%. If we annualize your first quarter number, it would actually exceed the 10% growth forecast for the full year. You also mentioned the reasons for the uncertainty surrounding this. My specific question, however, is whether you have a perspective on the yield curve. I understand it's difficult to predict its direction, but do you believe that a rate cut could happen sooner and that the yield curve might lower according to your outlook, or has your perspective on interest rates changed?

I believe that the market is currently suggesting a decline in the latter part of the year, which is being factored into prices. However, it's important to be ready for the possibility that this decline may not occur. As we approach the time frame, we will have a clearer picture. In our guidance, we try to incorporate market signals. If a decline doesn't materialize and interest rates remain higher than the market anticipates, there could be some positive surprises.

Yes. The only thing I'd add is that we constantly emphasize we don't know what the future holds. We observe the market's signals, but it's uncertain whether the market is right or wrong. The Fed chair is indicating that rates may remain high for an extended period, so we are prepared for various scenarios. When providing guidance, we choose the market as a benchmark, allowing you to consider different scenarios based on your own perspectives. We aim to offer both a benchmark and the reasoning behind it while being transparent that there are multiple alternatives that could lead to different outcomes.

No, I appreciate the further insights. That's very helpful. Thank you.

Sure.

I appreciate all the color on some of the deposit flows. But let me just ask it in a little different way. From a noninterest-bearing deposits figure, the number, the percentage has come down, how do you expect that concentration to change over the course of the next several quarters?

I wouldn't try to predict it exactly over the next couple of quarters. However, we are currently at about 32% this quarter. Looking back a few years, prior to the pandemic, that figure was in the mid-20s. So, it could start to trend towards that level. Whether it will actually reach there is uncertain, but I believe you will see it trend down a little bit more.

Sure. If you look back over, call it, the last 15 years since the great financial crisis, rates have been pretty close to zero outside of brief periods, just before the pandemic. Do you see noninterest-bearing deposits going back to pre great financial crisis levels for Wells Fargo or the industry, but we had numbers there in the mid to high teens?

I think that's almost impossible to predict.

I guess, I wonder, how do you anticipate managing the duration of your investment securities portfolio from here? I mean, obviously, it must have extended out quite a bit last year. And we saw the mark-to-mark on it increase across the industry. But I noted kind of the HTM portfolio is down about 7% during the quarter. And I mean, do you anticipate running that down? And if so, how quickly does it run down if you do nothing?

Well, I think, obviously, that's going to be a little bit dependent on rates and where rates go, given there's some mortgages - mortgage securities in the portfolio in terms of the burn down. And I think we're going to continue to be thoughtful as we have in the past around thinking about the size of the portfolio in total, including the AFS. And that's really a function of a bunch of things, including how much loan growth we expect to see over a period of time. And then, we look at all of the other constraints that we've got to worry about around liquidity and everything else, and we decide on how much goes into HTM and what the makeup of it is. But at this point, we feel comfortable with the quantum and both in terms of the size of the portfolio and the duration of the portfolio.

Okay. So you anticipate keeping it roughly the size, all things being equal, or does it run down?

I think we'll make that decision over time. I don't anticipate the portfolio getting much bigger from here over the next few quarters, but I think we'll make that decision over time. And then, the burn down will be what it is based on where rates and natural maturities of the portfolio go.

Alrighty. Everyone, thanks so much. We appreciate it. And we'll talk to you soon. Take care.