Wells Fargo & Company (WFC) — Q1 2024 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 financials 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 then update you on our priorities. I'll then turn the call over to Mike to review our results in more detail before we take your questions. Let me start with some first quarter highlights. Our solid results reflect the progress we're making to improve and diversify our financial performance and the continued strength in the US economy. It's gratifying to see the investments we're making across the franchise contributing to higher revenue versus the fourth quarter as an increase in non-interest income more than offset the expected decline in net interest income. Non-interest income also benefited from higher equity markets, which benefited our wealth and investment management business. Net charge-offs were higher than a year ago, as expected, and stable from the fourth quarter. Credit trends remain generally consistent, consumer delinquencies continue to perform as we’ve forecasted and year-over-year growth in consumer spend remains consistent with prior quarters. In our commercial portfolios, the weakness we see continues to be in certain commercial office properties, but our expectations have not significantly changed versus what we anticipated last quarter. Mike will discuss the specific items that drove an increase in expenses from a year ago, but we continued to execute on our efficiency initiatives, including reducing headcount, which has declined every quarter since the third quarter of 2020. Average commercial and consumer loans were both down from the fourth quarter as higher rates are impacting demand and we are continuing to reduce our exposure in certain portfolios. Average deposits were relatively stable from the fourth quarter as growth in interest-bearing deposits offset lower non-interest-bearing deposits. Our capital position remains strong and returning excess capital to shareholders remains a priority. As we stated on our last earnings call, we expect to repurchase more common stock this year than we did in 2023. In the first quarter, we repurchased a total of $6.1 billion in common stock and our average common shares outstanding declined 6% from a year ago. Now, let me update you on the progress we're making on our strategic priorities, starting with our risk and control work. Earlier this year, the OCC terminated a consent order issued in 2016 regarding sales practices misconduct. The closure of this order was an important milestone as it is confirmation that we operate much differently today around sales practices. As I repeatedly said, our risk and control work remains our top priority and closing consent orders is an important sign of progress. This is the sixth consent order that our regulators have terminated since I joined Wells Fargo in 2019. Building our risk and control framework is a continuous, ongoing effort. And as we implement changes, we track effectiveness along the way. The numerous internal metrics we track show that the work is clearly improving our control environment and we see that we are completing interim deliverables, but we will not be satisfied until all of our work is complete, so it will remain our top priority and our approach will not change. As I highlighted in my recent annual letter, we have added approximately 10,000 people across numerous risk and control related groups and we're spending over $2.5 billion more per year than in 2018 in these areas and we are a stronger, better company for our customers, communities and employees. While we're moving forward with confidence, I will repeat what I've said in the past. Regulatory pressures on banks with longstanding issues such as ours is high, and until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions. Additionally, as we implement heightened controls and oversight, new issues could be found and these may result in regulatory actions. At the same time, we're making progress on our risk and control work. We're executing on our strategic priorities to better serve our customers and help drive higher returns over time. We continue to introduce attractive new products as we build our credit card business. Last month, we launched Autograph Journey, designed for frequent travelers who can earn points wherever they book travel. Our new product offerings continue to drive strong credit card spend, up approximately $5 billion or 14% from a year ago. We continued to make investments in talent and technology to strengthen corporate and investment banking. More than 50 new senior hires have joined our CIB since 2019, with many of these in key coverage and product groups within banking. In February, Doug Braunstein, who has more than 35 years of industry experience, joined Wells Fargo as a Vice Chairman. Doug is a world-class banker and he's working alongside the great team we've assembled to continue to grow the franchise. In addition, given the breadth of Doug's experience, he's also providing counsel on broader business issues beyond client development. As we look forward, it's always helpful to be grounded in the facts. We continue to see strength in the US economy. Spending patterns of consumers using our debit and credit cards remain generally consistent and continue to grow year-over-year. Consumer credit is performing as we expect. Wholesale credit continues to perform well and our views around commercial real estate have not significantly changed since last quarter. These are all positives. In addition, we remain committed and confident in our ability to increase efficiencies across the enterprise and areas we have targeted for investments such as credit card, investment banking and trading are performing well. We are beginning to see early signs of share and fee growth, which will be important as we diversify our revenues and reduce net interest income as a percentage of revenue. And we remain bullish on opportunities across our other businesses, again, more positive. Having said that, markets and rates will likely remain volatile, and as risk managers, we are prepared if trends were to change. We've historically managed credit through multiple cycles and believe that the actions we've taken over the last several years position us well. We have strong capital and liquidity positions. As we're building many of our businesses, we have done so within a consistent level of risk appetite, and our business model and franchise value differentiates us from most of who we compete with regardless of the environment. So what does all of this mean for our outlook? Simply said, our views haven't changed from last quarter. While we could look at specific data points on a specific date and alter our guidance, there is not enough of a consistent fact pattern to change our views, but what we see is helpful. Our focus remains the same. We are transforming Wells Fargo and are investing to build a well-controlled fast growing and higher returning company while we work to become more efficient. I'm pleased with the progress we've made and I'm optimistic about the future opportunities ahead. I will now turn the call over to Mike.

Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $4.6 billion or $1.20 per diluted common share. Our first quarter results included $284 million or $0.06 per share for the FDIC special assessment as a result of the regional bank failures last year. Recall, last quarter our results included $1.9 billion for the special assessment and this additional amount reflects recent updates provided by the FDIC, including potential recoveries which were highlighted in their disclosure. The ultimate amount of our special assessment may continue to change as the FDIC determines the actual losses and recoveries to the deposit insurance funds. Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets. First quarter results were largely as expected with loan balances a little lower and deposit balances in the businesses a little higher than our expectations. Our full year net interest income guidance has not changed from last quarter and we still expect 2024 net interest income to be approximately 7% to 9% lower than 2023. We also continue to expect net interest income will trough towards the end of this year. It is still early in the year and ultimately the amount of net interest income we earn will depend on a variety of factors, many of which are uncertain, including deposit balances, mix and pricing, the absolute level of interest rates and the shape of the yield curve and loan demand. On Slide 5, we highlight loans and deposits. Average loans were down from both the fourth quarter and a year ago. Credit card loans continue to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 69 basis points from a year ago to over 6%, reflecting the higher interest rate environment. Average deposits declined 1% from a year ago, reflecting lower deposits in our consumer businesses as customers continued spending and reallocating cash into higher yielding alternatives. While growth in average deposits from the fourth quarter was modest, we have grown deposits in our commercial businesses for two consecutive quarters, which reflected our success in attracting clients' operational deposits. Period-end deposits included in the chart on the bottom of the page were up 2% from the fourth quarter, but some of this growth reflected a temporary increase driven by quarter end that was on a payday and a holiday. While the pace of growth slowed, our average deposit costs continued to increase as expected, rising 16 basis points from the fourth quarter to 174 basis points, with higher deposit costs across most operating segments. Our mix of deposits continued to shift with our percentage of non-interest-bearing deposits declining to 26%. Turning to non-interest income on Slide 6. We were pleased with the growth in non-interest income across all of our business segments. Growth in non-interest income more than offset lower net interest income, reflecting revenue growth from both the fourth quarter and a year ago. Non-interest income was up 17% from a year ago, with strong growth in investment advisory fees and brokerage commissions, deposit and lending fees, related fees, trading and investment banking fees. As Charlie highlighted, we benefited from market conditions as well as the investments we've been making in our businesses. I will highlight the specific drivers of this growth when discussing the segment results. Turning to expenses on Slide 7, first quarter non-interest expense increased 5% from a year ago, driven by higher operating losses, the FDIC special assessment, an increase in revenue-related compensation, predominantly due to higher investment advisory fees in our wealth and investment management business and higher technology and equipment expenses. These increases were partially offset by the impact of efficiency initiatives, including lower professional and outside services expenses, which declined 10% from a year ago. The higher operating losses were driven by customer remediation accruals for a small number of historical matters that we are working hard to get behind us. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement-eligible employees and 401(k) matching contributions. Not including expense for the FDIC special assessment in the first quarter, our full year 2024 non-interest expense guidance is unchanged and is still expected to be approximately $52.6 billion. However, we continue to watch a couple of items. Our guidance included $1.3 billion of operating losses for the year, which we still believe is a reasonable estimate even with a higher level of operating losses in the first quarter. However, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses during the remainder of the year. Also, if market valuations remain at current levels or move higher, that could increase investment advisory fees and revenue-related compensation could be higher than we assumed in our expense guidance for this year, which would be a good thing. We'll continue to update you as the year progresses. Turning to credit quality on Slide 8. Net loan charge-offs declined 3 basis points from the fourth quarter to 50 basis points of average loans. Credit performance trends were consistent with what we saw last quarter. The decline reflected lower commercial net loan charge-offs, which were down $131 million from the fourth quarter to 25 basis points of average loans. The reduction was driven by lower losses in our commercial real estate office portfolio. We did not see further deterioration in the performance of our CRE office portfolio versus the fourth quarter and, therefore, our expectations have not changed. We continue to expect additional losses in the coming quarters. However, the amounts will likely be uneven and episodic. Consumer net loan charge-offs continue to increase as expected and were up $28 million from the fourth quarter to 84 basis points of average loans. While auto losses continue to decline, benefiting from the tightening actions we implemented starting in late 2021, credit card losses increased in line with our expectations. Non-performing assets declined 2% from the fourth quarter, driven by the lower CRE office non-accruals, reflecting the realization of losses and paydowns in the quarter. Moving to Slide 9. Based on the consistent credit trends I noted before, our allowance for credit losses was down modestly, driven by declines for commercial real estate and auto loans, partially offset by higher allowances for credit card loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We didn't increase our allowance for this portfolio in the first quarter and the coverage ratio in our CIB commercial real estate office portfolio of 11% was stable compared with the fourth quarter. Turning to capital and liquidity on Slide 10. Our capital position remains strong and our CET-1 ratio of 11.2% continues to be well above our 8.9% regulatory minimum plus buffers. We repurchased $6.1 billion of common stock in the first quarter. While the amount of stock we repurchased each quarter will vary, we continue to expect to repurchase more common stock this year than we did in 2023.

Turning to our operating segment, starting with Consumer Banking and Lending on Slide 11. Consumer, small and business banking revenue declined 4% from a year ago, driven by our lower deposit balances. We continue to invest in talent, technology, and branches to improve the customer experience. Our branches are becoming more advice focused with teller transactions declining while banker visits have increased. We are modernizing and optimizing the branch network. The number of branches declined 6% from a year ago, while at the same time, we are accelerating the refurbishment of our branch network. In addition, the enhancements we are making to our mobile app continue to drive momentum in mobile adoption and we surpassed 30 million active mobile customers in the first quarter, up 6% from a year ago. Mobile logins also reached a milestone, surpassing 2 billion logins for the first time in the first quarter, up 18% from a year ago. Home lending revenue was stable from a year ago as higher mortgage banking income was offset by lower net interest income as loan balances continued to decline. Credit card revenue increased 6% from a year ago, driven by the higher loan balances. Payment rates remain relatively stable compared to the fourth quarter and were above pre-pandemic levels. Auto revenue declined 23% from a year ago, driven by continued loan spread compression and lower loan balances. Personal Lending revenue was up 7% from a year ago and included the impact of higher loan balances. Turning to some key business drivers in Slide 12. Retail mortgage originations declined 38% from a year ago, reflecting the progress we made on our strategic objective to simplify the business as well as the decline in the mortgage market. We also made significant progress in reducing the amount of third-party mortgage loans we serviced, down 21% from a year ago. We also continued to reduce the headcount in home lending, which was down 33% from a year ago. Balances in our auto portfolio were down 12% compared to last year. Origination volume declined 18% from a year ago, reflecting credit tightening actions, but increased 24% from a slow fourth quarter. Debit card spend increased 4% from a year ago with growth in most categories except for fuel and travel. Credit card spending remains strong. It was up 14% from a year ago. All categories grew with stronger growth in non-discretionary spend. Turning to Commercial Banking results in Slide 13. Middle Market Banking revenue was down 4% from a year ago, driven by lower net interest income due to higher deposit costs partially offset by higher deposit-related fees. Asset-based lending and leasing revenue decreased 7% year-over-year and included lower revenue from equity investments. Average loan balances were stable compared to a year ago as growth in asset-based lending and leasing was offset by declines in middle-market banking. Weaker loan demand reflected the impact of clients being cautious given the higher-rate environment and the anticipation of lower rates this year as well as some potential uncertainty in an election year. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 5% from a year ago, driven by higher investment banking revenue due to increased activity across all products. Our results benefited from the areas where we have had strength for some time, such as investment-grade debt capital markets and from the talent we've been attracting into the business. While it’s still early, we are encouraged by the green shoots we are seeing. Commercial real estate revenue was down 7% from a year ago and included the impact of lower loan balances. Markets revenue increased 2% from a year ago, driven by continued strong performance in structured products, credit products, and foreign-exchange. Our trading results continue to benefit from market conditions and the investments we've made in technology and talent to round out the business have enabled us to produce strong results even as market dynamics have changed. Average loans declined 4% from a year ago. Banking clients have taken advantage of strong capital markets to pay off loans. In addition to weak loan demand in commercial real estate given market conditions, balances also declined due to credit tightening actions we implemented last year, along with our efforts to actively reduce certain property types in the portfolios. On Slide 15, Wealth and Investment Management revenue increased 2% compared to a year ago. Lower net interest income driven by lower deposit balances as customers reallocated cash into higher-yielding alternatives was more than offset by higher asset-based fees due to increased market valuations. While cash alternatives as a percentage of total client assets was higher than a year ago, it has declined in the past two quarters as the migration of deposits into cash alternatives has slowed significantly. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first-quarter results reflected market valuations as of January 1st, which were higher from a year ago. Asset-based fees in the second quarter will reflect market valuations as of April 1st, which were higher from both a year ago and from January 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results in our affiliated venture capital business on lower impairments. In summary, our results in the first quarter reflected the progress we're making to improve our financial performance. We grew revenue, driven by strong growth in our fee-based businesses. We continue to make progress on our efficiency initiatives. We increased capital returns to shareholders and maintained our strong capital position. We'll now take your questions.

Hi, good morning. Guys, I wanted to ask about your profitability targets and kind of how you're seeing the journey to the mid-teens ROTCE goal. Mike, maybe you could talk about that through the lens of 12% return on tangible common equity this quarter. Where do you think you're kind of over-earning, under-earning, and what does that journey to the mid-teens look like over the next couple of years?

Hey, John, it's Mike. Thanks for the question. I believe our perspective on this matter remains consistent. Looking at it from a long-term standpoint, we still see no reason why our businesses can't achieve returns comparable to the best in our industry. As we progress on this journey, we acknowledge our current returns, and as we aim for 15%, it will be driven by the same factors we've discussed for some time. We need to focus on optimizing our capital and balance sheet. You saw us return some capital through buybacks recently. We're also investing in our various businesses, and we need to see returns from those investments. This quarter was just one part of that, but it was a positive quarter that highlights the benefits of our investments across a range of businesses, which is encouraging. Charlie mentioned several points about that in his comments. Additionally, we must remain committed to improving efficiency, which we believe is an ongoing effort. We have significant work ahead to enhance efficiency throughout the company, and we will maintain that focus moving forward. Ultimately, it's these drivers that will lead us, and we remain confident that we will achieve our goals.

Hey, John, it's Charlie. Let me add a couple of things. First, as a reminder, we've tried to communicate clearly that as net interest income was increasing and approaching its peak, we recognized that those return on equity figures were not sustainable. Our goal has been to reach a sustainable level. Second, it's quite difficult to draw conclusions from a specific quarter due to factors like the FDIC and the operating losses we've mentioned, which differ from our expectations for the full year. So, it's hard to determine based on one quarter alone. However, we are consistent in what we believe will drive our success. This includes improved business performance, where we have highlighted areas of progress. We remain optimistic about areas we haven't discussed as much but want to see improvement in to enhance our returns alongside continued capital return, taking into account the limitations imposed by the asset cap. Overall, our approach hasn't changed, our perspective remains steady, and we are confident in our ability to achieve our goals.

Okay. And then one just quick follow up there. Do you think this 11% CET-1 is probably kind of the ballpark of where you hang out regardless of the minimum just because it feels like you have super regional banks that aren't G-SIBs are running at, 10%, 10.5%. You have bigger banks at 12%, 13%. Does 11% kind of feel like the right ballpark, which means you can return most of what you're generating now?

I would say it's something that we continue to think through. You know our existing needs today with buffers are at 8.9%. At 8.9%, everyone understands that Basel III Endgame is coming, but likely with significant revisions. So I think as the quarters continue, we'll learn more about where that will come out and we'll be able to be more informed about where we'll wind up. We've always tried to be on the more conservative end, but there's a point at which too much is too much, which is why we bought the amount this quarter that we bought back.

Hey, good morning. I guess just following up on that, as we think about Basel, your capital levels, even with 100 basis points above, you probably have $12 billion of excess capital. Given what we saw in 1Q and I heard you Mike, year-over-year you're going to be higher, but that doesn't give enough color. I'm just wondering should we expect the pace of buybacks to continue given that where the stock’s trading which is still fairly effective valuations?

Thank you for the question. We won’t provide specific quarter-to-quarter guidance on our pacing. As you mentioned, we have significant excess capital. We are well-positioned to manage any requirements from Basel III and have the flexibility to invest as opportunities arise with clients. Every quarter, we will evaluate the capital requirements, assess various risks, and analyze client activity to determine our pacing. We are confident that we will perform better than last year, but we will discuss pacing in detail each quarter after our reports.

Got it. And I guess just separately, I think there's a lot of focus on market share opportunity for Wells, be it in capital markets, IB, corporate lending, and I think Charlie referenced the hiring of Doug Braunstein. Would appreciate additional color in terms of areas where you see within corporate capital markets where there's market share to be had and what's the level of investment/infrastructure needed in order for competing in that space and winning market share?

Sure, let me begin. Firstly, regarding the necessary level of investment, we are already making those investments, and they are part of our current spending. We are funding this through our regular business operations. Some of the new hires are replacements, while others are additions to the team. We do not foresee a significant increase in our expense base to support these initiatives, which we are confident about. We have the capacity to invest and see returns on these investments. I have consistently stated that we are significantly underrepresented in nearly all segments of the investment banking sector. We have excelled more in the debt area than in equity. The reasons for this are tied to our management's willingness to invest over the past fifteen years, rather than a lack of opportunity or issues with our business model. The senior management team had different priorities, but our current outlook is different. When looking across various equity sectors and how they connect to our existing robust debt platform, we are focusing on industries where we have established relationships and where there is significant financial opportunity. We are optimistic about our ability to meet a wide range of customer needs and their willingness to engage with us due to our strong platform and talent. Additionally, in the trading aspect of our business, a significant portion of our efforts is aimed at supporting our investment bank while also enhancing our relationships with institutions. We have been doing a lot with those institutions but have not fully leveraged trading flow in that context. Therefore, we are investing in both people and technology. As I mentioned, we are not changing our approach to risk tolerances; rather, it's about getting the right products and services, employing the right people, and engaging with our customers in a more credible and enthusiastic manner than we have in the past.

That's good color. Thank you.

Thank you. Good morning. I'm wondering if we could talk a little bit about just that kind of last mile of deposit repricing. You talked about the mix shift and non-interest down and interest bearing up, but just wondering just what's happening on the pricing side and are you still seeing both sides, consumer and wholesale, if you can maybe just kind of give us the dynamics that's happening underneath and how you expect that to continue as we stay in this rates peak? Thanks.

Sure. I'll take that, Ken. As you look at the commercial side, not much has changed. It's pretty competitive. We're not seeing it move one way or the other in a significant way as you sort of look over the last quarter. Good news is we've been able to attract good operating deposits in corporate investment bank. We've seen some growth in commercial bank as well. And so all that's kind of performing as you'd expect. And you wouldn't really expect pricing to move there until the Fed starts to move. And it'll stay pretty competitive at that point. And we still expect betas to be pretty high on the way down as you start to see that eventually happen. On the consumer side, standard pricing is not moving. Really what you're seeing is you're seeing people continue to spend some of the money that's in their checking accounts and/or move some of it into either CDs or higher yielding savings accounts. And so you still see some of that activity happening across the consumer space and the well space where you still have some people moving into higher yielding alternatives. The pace of that migration has slowed, at least for now. And so, we'll see how that progresses through the rest of the year, but it has slowed a bit over the last number of months.

Okay. And on the lending side, I think what you guys showed is not unexpected at all based on general softness at the start of the year. So I think you and others have just kind of generically hoped that we get an improvement. But with rates where they are, is there any impediment to just seeing an improvement in loan growth as the year goes on or is it baked into kind of the demand function that you're seeing underneath?

What we are experiencing so far aligns with our expectations at the beginning of the year. While opinions varied back in January, the current demand levels are precisely what we anticipated, although slightly lower than our projections. It's primarily a demand issue. Feedback from clients in the commercial bank and corporate investment bank indicates they are being cautious, opting not to build inventories as they might in a healthier environment. They are considering the cost of credit and how it affects their investment decisions. On the commercial side, the focus is definitely on demand. For consumers, we are observing some growth in card balances, but given the overall size of the balance sheet, this will not significantly impact it. The mortgage sector continues to see a slight decline in this market. In the auto sector, we are also noticing a decline due to credit tightening measures implemented about a year or so ago, though we expect that to improve in time. These are the dynamics we are currently witnessing.

Okay. Thanks, Mike.

Hi, good morning.

Hey, Betsy.

Hey. Okay, a couple of just quickies here. One is, on the net interest income outlook that's unchanged, could you remind us what the interest rate environment is that's the base case for that analysis?

Sure. Hey, it's Mike, Betsy. Welcome back. Sure. When you look at the environment, we're not guessing at sort of what's going to happen, right? So, I think as you sort of look at the different variables that are embedded in our baseline forecast is that we would expect somewhere around three rate cuts this year. And that's what's underlying sort of our thinking at this point.

And was that the same as last quarter, same assumption set, or has that changed?

No, it's definitely less than what I think was projected by the market. That's what we wanted to convey on our slide in January. When you consider the impact of that on its own, you would certainly see a benefit from fewer rate cuts. However, it's important to consider how client behavior and mix shifts will play out for the rest of the year. We feel more confident today than we did in January about our guidance and forecast, but we need to allow more time to see how people will respond to the current situation. It's crucial to be cautious about taking the recent fluctuations over a day or two and extending those patterns too far. We are even seeing some of that being reversed today. Historically, whenever there has been a strong reaction, whether upward or downward, in expectations for rates, that reaction tends to settle down within a short period. We'll see how this unfolds.

Okay. And obviously, we've had quite a bit of activity volatility on the long end of the curve. How do you think about that? And is there opportunity set for maybe pulling in some more deposits and reinvesting in securities given the slightly improved long end rates here?

Yeah. And we've started to do that to some degree in the first quarter where we have been starting to buy some securities, mainly mortgages, given where rates and levels have been. And that's been a good trade, I think, for us so far. And so I think you'll certainly see us continue to deploy more cash into securities, at least at some modest levels as we look forward over the next quarter.

Okay, super. Thanks so much, Mike.

Hi, good morning. Just to follow up on Betsy's question about the net interest income outlook, you had a peer that made a smaller than expected upgrade to their outlook, while you remain firm on your NII guidance. Considering whether there will be three rate cuts or none, beyond just market adjustments, the NII relative to the rate curve relates to volume implications, right? You mentioned client behavior in response to Betsy's question. I wanted to clarify how you view the potential range of outcomes from zero, which has been discussed recently, to three cuts included in your estimates. How do you approach volumes regarding loans and deposit behavior? In other words, have you thought about a broader range of volume outcomes as you assess the rate curve outlook?

I'll take a shot at answering that, Erika, and let me know if I cover everything. We're at a point where it's challenging to predict the various outcomes for net interest income due to the current dynamics. The fact that interest rates may be higher than anticipated could significantly alter the situation for everyone in the industry and trading. We are continuing to make targeted investments and feel positive about those efforts, which are showing good performance regarding market share in the areas we've invested in. However, as Charlie mentioned, we do face some limitations in certain segments. Overall, we're pleased with the progress made by the team over the past couple of years.

Regarding your question on expenses, we are currently not focused on that area. We are not considering whether there are efficiencies to be gained from our risk and control work. In fact, we still have several open consent orders to address, and we remain committed to completing this work effectively, even if it requires significant spending, and integrating it into our company’s infrastructure. Once this becomes part of our culture and processes with a high level of confidence, we will explore ways to improve efficiency. However, that is not a priority for us at the moment. Our primary concern is addressing existing inefficiencies within the company, separate from our spending in this area. This focus allows us to invest in cards, investment banking, trading, accelerate branch refurbishments, and hire additional commercial bankers. Therefore, I want to emphasize that we are dedicated to completing the necessary work and willing to invest in it, but it is not currently our focus concerning efficiency.

That was clear, Charlie. Thank you.

Hi, good morning, Charlie. Good morning, Mike. So I wanted to start off just on a question maybe unpacking the NII commentary a bit more. In the prepared remarks, Mike, you noted that you expected NII to be troughing towards the end of this year. So less concerned about the full year '24 outlook. I was hoping you could just speak to the inputs or assumptions that, that's supporting that expectation around troughing or stabilization, given further rate cuts that are reflected in the forward curve beyond '24.

When considering all the various factors, Steve, there's nothing particularly unique about our balance sheet. However, if you examine the asset repricing occurring in securities and project forward regarding loans and other aspects of the balance sheet, those elements are crucial for future predictions. At some point, we anticipate that the migration and mix of deposits will start to stabilize. I want to be deliberate with my language when discussing the timeline—whether it's right at the end of this year or early next year, we are approaching that moment when it will reach its lowest point. Accurately predicting the exact timing in this environment is challenging. However, the factors we've been discussing over the past few quarters will influence this process, starting with deposits, their mix, and pricing, and then extending to how we believe the assets will ultimately balance out.

That's helpful color. And for my follow-up, might be regretting this question, but Charlie, it relates to how you responded to Erika's last one relating to the asset cap specifically. I recognize that you're focused internally on just addressing or remediating all the various consent orders. But externally, investors are clearly spending much more time evaluating the different potential sources of earnings or return uplift once these regulatory restrictions are eliminated, whether it's deposit recapture, growth in trading book and reduction in that elevated risk and control spend. Don't expect you to quantify it, don't expect you to speculate on timing for when the asset cap can get lifted. But just given that focus for investors, it might just be helpful if you can contextualize how you're thinking about some of those potential benefits.

Sure. You should always feel free to ask any questions you have. I aim to be as clear as possible about what we can discuss, and I want to avoid any frustration regarding the consistency of our responses. To address your reasonable question, I would categorize my thoughts into a couple of areas. Firstly, the primary aspect of the asset cap isn't just the economics that will come from lifting it; it also has a reputational impact on us. While removing the sales practices consent order was significant, people following the market are particularly focused on the asset cap, and we recognize that. So, that’s an important factor in how we are perceived. Regarding our management of the company under the asset cap, we have made adjustments in two ways. One area involves deliberately reducing our business size due to normal deposit flows and consumer activities, which has led to some asset pressure that we need to offset. The second area involves the opportunity cost of what we have missed out on due to the asset cap. For example, in our trading businesses, we’ve limited our capacity to provide low-risk financing to our customers, which has resulted in lost trading flows. In our corporate sector, we have advised our bankers to bring in significant corporate deposits that are not strictly operational and, at times, been more assertive in asking them not to retain those deposits in order to prioritize strategically important areas like keeping our consumer side operational. These are the short-term areas that would benefit from lifting the asset cap. Beyond that, considering our excess capital, we are focused on deploying it through dividends and share buybacks, as there is a limit to what we can retain without returning value to our shareholders. However, we believe there are many opportunities within our various businesses to achieve higher returns by reinvesting. This is not overly dramatic, but without the constraints, it allows us the capability to grow in our strong areas, both in consumer and wealth services, to enhance our banking products and become more competitive in lending and deposits. Overall, without the asset cap, the situation improves positively since there are many proactive measures we have taken and limitations we have faced in leveraging our franchise’s full potential compared to others without such constraints, who have benefitted more significantly.

That’s really helpful context, Charlie. Thanks so much for taking my question.

Of course.

Good morning. On the 2024 NII guide, I understand that you feel better about the NII outlook here but you're watching customer behavior. I know you did mention loan growth. Did you lower your loan growth outlook that's baked into that guidance this quarter versus what you had in there last quarter? And either way, are you able to help us with what that expectation is on the loan growth front?

Yes, John, it's Mike. In January, we indicated that we expected loans to decrease in the first half, and that's what we are observing now. It’s slightly below our model, but it aligns closely with our expectations. We anticipate some growth in the second half of the year, but overall balances are not expected to change much for the entire year. We might be slightly off from that, possibly lower or higher. Importantly, the key factors that will influence where net interest income ends up will depend on deposits, including their level, mix, and pricing considering the current environment. This will be the crucial area to focus on.

Okay. And related to that, any deposit growth expectation that you could share?

I believe our full year guidance from January suggested that the commercial side would remain relatively flat compared to the beginning of the year, and it is performing slightly better than we anticipated. On the consumer side, we expect to see a bit more of a decline along with a change in the mix, which is what we have observed so far.

We want to be careful about our statements. We're trying to be as transparent as possible about our observations without making predictions that are uncertain. Overall, customer activity shows slight variations; there have not been significant changes compared to what we reported three months ago regarding deposits and lending flows. These changes are relatively minor in the context of our overall net interest income and its drivers. If we noticed major changes, we would consider adjusting our guidance, but right now, things are evolving gradually, and we will see how they develop. Regarding the interest rate environment, it's still too early to make definitive assessments since we are looking at a full year perspective, and we've only experienced a couple of months. However, the context we've provided has been beneficial in understanding the overall rate and curve situation.

Okay, that's very helpful. I appreciate the color there. If I could just ask one more along the credit side. NPA decline is encouraging there and I know it can be volatile. Can you just maybe talk about NPA inflows? Did you see a pullback there? Did you see that on the CRE side? Is there anything to extract from that? Thank you.

I believe when discussing commercial real estate, the focus is primarily on office spaces. During the last quarter, there was no significant change in the office sector; it remained stable. There was a slight decrease in non-performing assets in the commercial real estate area due to some loan charge-offs that were not offset by new items. This is a positive indication, as the situation isn't worsening at this time. Other areas of the portfolio are showing typical fluctuations, with no major shifts overall.

Great. Thanks, Mike.

Hi, good morning. I want to follow up on the comment that costs this year could come in higher on higher revenues, investment advisory, and I would assume the same if banking and trading continue to be so strong. Obviously, that's a net positive to earnings overall. But how would you frame the operating leverage if you can pick which revenue buckets, but if those market-sensitive revenues are $1 billion higher, is there kind of 40% cost against that, 50%? How would you frame that? Thank you.

Yes. What we're mainly referring to is the wealth management business, especially considering the current market levels. The cost-to-income ratio in that sector remains quite stable regarding revenue-related compensation, sitting just under 50%. Therefore, the operating leverage looks positive.

That's helpful. Regarding banking and trading, I understand you have made investments in those areas which incur upfront costs before revenues are generated. However, it appears that the operating leverage in that segment has been exceptionally strong. Do you believe this trend can persist if revenues continue to exceed expectations, or could we face increased costs as a result? This would ultimately have a positive impact on earnings overall. Thank you.

Yeah. No, look, I think the cost to invest there, as Charlie noted, is in our numbers, right, so that's already there. So we're already anticipating that. And at this point, we don't see that being a big pressure point one way or the other. But obviously, as you know, if revenues like far exceed our expectations in a positive way, that would come with a little bit of comp, too. So that would be a good thing overall.

Thank you. Hi, Mike and Charlie. Mike, you touched on your non-interest-bearing deposits declined to about 26% of deposits. Do you guys have a sense what's the long-term normalization level for non-interest-bearing deposits as you look out over the 12-month horizon? Assuming rates do not go up, we have stable rates, maybe they come down a little bit?

It's difficult to say with certainty where things will stabilize, Gerard. It will eventually stabilize, especially considering the mix of our consumer deposit base. A significant portion of our consumer deposits are in accounts yielding less than 2.50, and these are typically operational accounts for many customers. We anticipate that stabilization will occur as we move forward. Over the past few quarters, we've noticed some consistent fluctuations, but we expect this to stabilize soon; we just need to see exactly where it lands.

And is it fair to assume that the rate of change in the deposit betas is declining, where eventually those deposit betas flatten out as well?

Once there is more stabilization in the mix, deposit costs for consumers will also stabilize. Currently, people are spending from their checking accounts, which incurs low interest costs for us. At the same time, there is growth in CDs and certain savings accounts that come with higher costs. This shift in mix will stabilize and is closely related to the non-interest-bearing accounts. Once we reach a core operating balance in customer accounts, we can expect both factors to stabilize.

Great. And then just as a follow-up on credit, obviously, you guys put up overall good numbers and especially in that commercial real estate area, as you highlighted. Coming back to the credit cards, you pointed out that the charge-offs were up, but they’re in line with the expectations. Assuming the economy does not head into a recession later this year and unemployment goes up to 6%, say it stays around 4%, what are you guys thinking for like a peak in net charge-offs or credit cards? And when do you think you could reach that?

I think it's important to really examine the fundamental trends happening within our portfolio. We're currently rejuvenating our product offerings, and we're experiencing quicker growth in new accounts and balances compared to others in the industry, thanks to the investments we've made over the last three years. This growth phase naturally leads to a maturation of our newer products. Eventually, we expect this growth to peak, at which point we will return to more typical patterns. However, I want to emphasize that we've been closely monitoring each product cohort, and overall performance has met or exceeded our expectations in most cases. The credit quality of the new accounts remains strong. We're in a standard maturation phase, and as we approach the peak, we will keep you informed, which we anticipate will occur in the upcoming quarters.

Great. Thank you.

Hey, good morning, guys. Appreciate all the color on the NII and loan trend outlook. I was just wondering on the loan side, if you've noted any sensitivity at all in activity levels in general amongst your commercial customers to Presidential elections in the past. And how big of a headwind, if any, you think that could be this year?

Yeah. I mean, that's hard. I think certainly it will be a factor that people incorporate into their thinking of how aggressive or not they want to be and investments they're making. But at this point, that would be really hard to kind of prove out with any sort of empirical data. I think at this point, what we're seeing most is related to the overall sort of macroeconomic environment we're in with such high rates and people having some uncertainty just generally around where things go from here. So, but I'm sure that will factor in at least to a small degree at some point as we go through the year.

Yeah. Okay, appreciate that. And then just on the trading line, Matt had mentioned the momentum you've seen earlier. You obviously had a great year in trading last year. You had your strongest quarter yet this year. And you've talked about making a lot of investments in the business in recent years. You're still making those now. It seems like you have a lot of momentum in this area where you could grow that this year as well despite having a huge year last year. Just wanted to get your take on all that.

The environment will play a significant role in our performance. We've benefited from the volatility over the last several quarters, which could greatly impact outcomes for everyone in the industry and the trading sector. It's important to consider this. As mentioned, we are consistently investing in this area and feel positive about it. We’ve observed good market share performance in the areas where we’ve invested. However, as Charlie pointed out, there are some limitations in certain businesses. Overall, we are pleased with the progress the team has made over the past couple of years.

All right. Great. Thanks.

Hi, thanks for taking my questions. Couple of questions. Firstly, financial advisors. Can you give some color on what those numbers have been doing over the past year, past quarter since that's not disclosed anymore? Are you building? What types of advisors? Is that new recruits from college? Any color, Mike?

Sure. As you mentioned, if we look back a couple of years, we did experience some declines in our advisor workforce. However, Barry Sommers and his team have been putting in significant efforts to not only reduce attrition but also to ramp up recruiting efforts. We're beginning to see positive results from these initiatives. Currently, our attrition levels are back to more normal, possibly slightly below normal, which is encouraging. We are optimistic about our capacity to attract high-quality advisors. The trend we observed a couple of years ago has definitely changed, and we will keep focusing on this area. Our main focus is on experienced advisors, with less emphasis on college recruits.

Yes, we are in the process of recruiting a diverse range of talent. Over the past year and a half, we've assembled some of the largest teams in the country, comprised of individuals who previously would not have considered Wells Fargo due to past issues. They chose to join us because of our capabilities rather than our compensation offers. Additionally, we're expanding staffing in our bank branches, which mainly involves entry-level positions filled by individuals transitioning from other banking roles. Overall, the growth trajectory of our financial advisor population is significantly different today compared to a few years ago.

Okay, that's helpful. I have a completely different question. I want to revisit net interest income. Given that fewer rate cuts are beneficial for you, this should support net interest income now. However, if we see rate cuts and eventually in 2025, does that imply that the lowest point for net interest income could be delayed?

We will see where it exactly bottoms out. The pace of rate cuts is part of the equation, but we also need to consider the broader trends we've discussed. It’s important to understand how depositors will react. We try to develop a range of potential outcomes based on what's happening with rates, quantitative tightening, and the overall economy, all of which will affect deposit levels. We'll have to see how that unfolds. However, I want to reiterate that we feel more optimistic about our current situation than we did in January, though there are still many variables to consider for the remainder of the year.

All right. Thank you, everyone. Appreciate it. We'll talk to you next quarter.