Q3 2020 Wells Fargo & Co Earnings Call
Good morning, My name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Wells Fargo third quarter earnings Conference call. All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Please note that today's call is being recorded I would now like to turn the call over to John Campbell Director of Investor Relations Sir.
You may begin the conference.
Thank you Regina good morning, everyone.
Thank you for joining our call today, where our CEO, Charlie sharp and our CFO, John Shrewsberry will discuss third quarter results and answer your question.
The call is being recorded.
Before we get started I would like to remind you that our third quarter earnings release and quarterly supplement are available on our website at Wells Fargo Dot 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 could differ materially from expectations are detailed in our SEC filings, including the form 8-K filed today containing our earnings release and quarterly supplement.
Information about any non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can be also be found in our SEC filings in the earnings release and the quarterly supplement available on our website.
I will now turn the call over to Charlie Charlie.
Thanks, John and good morning, everyone I'll make some brief comments about our third quarter results provide some commentary on the operating environment and our direction. I'll then turn the call over to John to review third quarter results in more detail. Let me start by acknowledging that this will be my last earnings call, John who announced his retirement in July Chongqing.
I served as an excellent financial and strategic leader for our company and it's been incredibly helpful to me in my first year at Wells John. Thank you very much for all you've done you will be missed.
As you know make sense of the CMO will be joining wells Fargo. This week as CFO, Mike has more than 20 years of leadership experience in banking and finance and most recently served as the CFO of being why Bella and I'm looking forward to Mike hitting the ground running.
I'm going to start by making some comments on the market's economy, an operating environment that impacted us this quarter.
Most markets and liquidity trends are strong and continue to improve in the quarter. Despite modest credit spread widening that followed volatility in the equity markets market spreads have continued their steady improvement since the peak.
Dislocation and remain significantly tighter than the levels observed in March.
Corporate new issuance volume remains elevated h. fuel a bid ask a measure of the cost to transfer risk and daily volatility have improved and are now below pre crisis levels and the feds pledge of unlimited support has improved risk appetite tightened spreads and deepen market liquidity.
The economy has materially improved due to the gradual reopening, but also the significant monetary and fiscal stimulus as well as the significant accommodations made by financial institutions and other businesses labor.
Labor markets clearly reflect momentum with the third quarter average jobless rate improving to 8.8% after posting a 30% rate during the second quarter.
However, there is still a long way to go and there remains significant risk to the recovery.
Pace of job growth and the rebound in consumer spending have slowed and the diminished hey, sebree opening and the end of some stimulus programs are presenting headwinds the power.
The powerful rebound in the third quarter still leaves the economy, well below its pre coated peek, including restaurant sales, 50% lower real GDP, 4%, lower and unemployment, 7% below pre cold bid levels clearly the recoveries in process and while the gains we've seen this quarter are important the path to full.
Recovery for all remains uncertain.
Let me now turn to our performance this quarter.
We reported net income after tax the $2 billion or 42 cents a share revenues benefited from very strong mortgage banking and most other fee related items also improved over the prior quarter with the exception of trading which while down from the exceptionally strong second quarter still produced strong results and.
<unk> declined reflecting the impact of the lower interest rate environment, and lower loan balances, primarily driven by weaker aggregate demand across our commercial client base.
Expenses were elevated and impacted by two significant items $961 billion in customer rules and the $718 million restructuring charge charge offs declined from the second quarter and our allowance was largely unchanged.
Credit performance across almost all long products was stronger than we would have anticipated a quarter ago. However, it's certainly too early to draw conclusions yet the.
The actions from the fed or government international students I referred to earlier really help consumers companies of all sizes, but much of this is ending and the told the risks of coal that are behind us. These individuals and companies are still at risk without more support.
Having said that the fact that the fact that we are in a better place than expected as a good thing and that shouldn't be lost.
Our top priority continues to be the implementation of our risk control and regulatory work. So we're.
We're also taking targeted actions to improve the experience for our customers clients communities and employees I will discuss this later.
We continue to add talent to the senior management team in key roles to strengthen the foundation of the company. In addition to Mike joining CFO eighth or Williams is joining wells Fargo. This month to lead our strategy digital innovations group and will report to me.
The lead corporate strategic planning defined and manage digital platform standards and capabilities and manage innovation priorities opportunities and company wide efforts to drive transformation. We added other senior leaders, including a new head of home lending and several key risk leaders as part of our enhanced risk model to further strengthen the independent over.
<unk> of all risk taking activities and provide a more comprehensive view of risk across the company in August we announced that Mark Chancing was elected to the company's board of directors Mark has more than 30 years of banking and financial services experience with impressive combination of business operational and finance experience.
He serves on the boards audit Committee and risk Committee in the third.
In the third quarter. We also launched a couple of your access banking, a new low cost convenient bank account with no overdraft fees clear access is off to a strong start with over 100000 accounts signed up so far and is proving very popular with people under 25, a big part of its intended target population.
This is part of our broader efforts to simplify our products and services and create clear easy to use and better experiences for our customers as part of our simplification efforts, we will be reducing the number of different consumer checking accounts, we offer making it easier for both our customers and our bankers, while also reducing expenses associated with supporting.
Legacy products.
We continue to have over 200000 employees working from home and we don't anticipate this changing until at least December just under 20% of our branches remain temporarily closed, but weve opened more of our branch lobbies to enable our customers to come in and have conversations with our bankers instead of just using our drive through for transactions.
And our color and ATM transactions increased 8% from.
The second quarter.
Wells Fargo was recently recognized as leaving the U.S. financial services industry and COVID-19 safety. According to nationwide study. This is great recognition for the work of all those wells who've worked tirelessly to keep our employees and customers as safe as possible.
We continue to make significant accommodations for our customers. Since March we have helped more than 3.2 million consumers and small business customers by deferring payments and waving fees. The trailing seven day average of new daily payment deferrals granted as of September Thirtyth has declined 97% from their peak in early April Debbie.
Debit card spend has remained strong since returning to pre cobot levels in May and then the last week of September was up approximately 10% from the same week a year ago.
Consumer credit spend improved throughout the third quarter, but still.
Is down approximately 4% in the last week of September compared to a year ago, an improvement from the beginning.
An improvement from being down approximately 10% from a year ago.
As of the end of June.
This reflects steady improvement across a variety of categories, but despite a rebound hardgoods segments like travel entertainment and fuel remained significantly lower year on year commercial card spend remains signal.
Significantly lower throughout the quarter and was still down approximately 30% in the last full week of September compared to the same week a year ago did you digital usage trends continued to be strong as an example, mobile deposit dollar volume.
Is a record high in the third quarter and was up 110% compared to a year ago.
Let me take a moment to expand on a conversation I started last quarter on expenses. We believe that our franchise is capable of earning far more of them were earning today. We continue to believe there is nothing structural in our business to stop us from having a competitive the efficiency ratio, though we are far from it today prior to 2016.
Wells Fargo had an efficiency ratio that was far more competitive with our peers. As you know we've had to make significant investments in people and technology to address prior under investment and risk controls and also to the outsized litigation and customer remediation expenses. This accounts for part of our elevated expense.
Thanks, We also believe that we have significant opportunity to take targeted actions that are focused on improving the experience for our customers clients communities and employees. These actions should also improve operational and financial performance. We've also lagged behind our competitors and revenue performance and we also.
I believe we've got significant opportunities to make substantial improvements here as well to be clear our focus starts with running the company more effectively and efficiently. This includes reducing bureaucracy simplifying our products processes and our organization, reducing redundancy in manual work and migrating customers and employees to.
Digital solutions all of this will also improve our control environment lower expenses will be a byproduct of doing these things, we're taking an organized and structured approach to reviewing this across the entire company. We've established dedicated teams in each of our lines of businesses and functions, we're viewing near term medium term and long.
Turn actions, we're already working on the near term actions, including streamlining management ranks through spans and layers in other business improvements again. These are driven at making it easier for us to serve our customers and each other.
These actions were the primary driver of the $718 million restructuring charge. We took this quarter. These actions should reduce gross run rate expenses by over $1 billion annually.
We also identified many medium and longer term actions that will take some time to fully implement these include simplifying products and many of our businesses optimizing operational and client service delivery and continuing to downsize, our corporate real estate portfolio I understood.
I understand that many of you would like more specifics on our plans. The reviews were conducting across the entire company continue and we are in the midst of the 2021 planning cycle, we need to be thorough and our work and it's important that we understand three pieces before providing specifics to you the magnitude and timing of the initiatives Ive just discuss.
Yes.
Where we think we need to invest to drive improved operational and financial performance and most importantly, understanding the investments necessary to complete the build out of our risk control infrastructure, which.
Which will ultimately satisfy our regulatory commitments I cannot stress the importance of this work enough.
We cannot and will not do anything to jeopardize. This work. It is also important that might have a chance to review our plans, which she will do immediately all that said we should be in a position to provide more specificity regarding 2021 expense expectations on our call next quarter. While there is much work to do and it will.
Take time, our ultimate goal is to build a best in class business and hope to show progress along the way. This includes both competitive level of expenses and competitive revenue performance. Finally, I want to thank all of our employees for their continued hard work dedication to making wells Fargo better I will.
I'll now turn the call over to John.
Thanks, Charlie and good morning, everyone.
We earned $2 billion in the third quarter up $4.4 billion from the second quarter driven by lower provision expense. We grew revenue, but our expenses remains too high I'll be dropped I'll be describing the drivers of our results in more detail throughout the call. So let me just summarize a few items that impacted our third quarter results that we included on page.
Page two.
As Charlie highlighted we had $718 million restructuring charge predominantly driven by severance expense, which drove the increase in non interest expense in the third quarter and is expected to reduce our gross run rate expenses by over a $1 billion annually.
We had $961 million of customer remediation accruals for a variety of matters. The increase in this accrual related mostly to previously disclosed matters and reflected an expansion.
The customer population, the time period and or the amount of reimbursement as part of our ongoing analysis of doing the right thing for our customers, while resolving outstanding matters as quickly as possible.
We also had $452 million of non interest income related to a change in the accounting measurement model.
Non marketable equity securities from our affiliated venture capital partnership as you know, we typically have gains or losses from equity securities driven by market valuations, which we had again in the third quarter.
Active income tax rate for the third quarter was near our expectations and we currently expect our effective income tax rate for the fourth quarter to be less than 10%, primarily as a result of expected tax credits.
Turning to page three our capital liquidity continues to be strong with our CPT, one level $28.3 billion above the regulatory minimum and our LCR 34 percentage points above the regulatory minimum.
At the end of the third quarter, our primary unencumbered sources of liquidity totaled approximately $494 billion.
Turning to loans on page four.
Both average and period end loans declined from the second quarter with growth in consumer loans more than offset by declines in commercial loans I'll explain the drivers of commercial and consumer period end loan balances in more detail starting with commercial loans on page five.
She and I loans declined to $29.2 billion or 8% from the second quarter, driven by higher pay downs, reflecting continued liquidity and strengthen the capital markets and lower.
And lower loan demand, including revolving line utilization declining to pre kogut utilization levels, particularly in our middle market business.
Commercial real estate loans decreased $1.2 billion from the second quarter, reflecting weaker demand in commercial real estate mortgage which was partially offset by growth in commercial real estate construction in categories that have not been negatively impacted by the pandemic.
This includes multifamily projects and industrial facilities, including data centers.
Consumer loans increased $15.8 billion from the second quarter. This increase was driven by the repurchase of $21.9 billion of first mortgage loans from GE.
From Ginnie Mae securitization pools, we had a high level of these early pool buyouts in the quarter due to covert related payment deferrals.
We also reclassified $9 billion, a first mortgage loans from held for sale to held for investment.
But card loans were relatively stable from the second quarter as consumer spending increased after declining over $2 billion for two consecutive quarters. However balances were down $3.6 billion from a year ago, reflecting the economic slowdown associated with Covance team.
Auto loans declined $358 million in the second quarter.
And originations declined 5%, we continued to take certain actions to mitigate future loss exposure, while our spreads on new originations continue to improve.
Other revolving credit and installment loans increased $812 million from the second quarter as higher security based lending.
This partially offset by lower personal loans and lines and lower student loans during the third quarter, we notified our customers of our exit from the student loan business as part of our ongoing process pruning certain businesses as we assess our strategic priorities.
Turning to deposits on page seven we continue to have lower deposit growth in the industry due to actions we've taken to manage under the asset cap. However, even after these actions average deposits grew $107.6 billion or 8% from a year ago and were up $12.3 billion from the second quarter.
The linked quarter growth was driven by non interest bearing deposits, which were up 8%.
Interest bearing deposits declined 2%.
Period end deposits increased $74.7 billion from a year ago, but declined $27.5 billion for the second quarter. This decline was driven by actions we've taken to reduce non operational wholesale banking deposits as well as pricing and other actions in our consumer businesses.
Numerous small business banking deposits grew $9.9 billion from the second quarter, reflecting continued covered related impacts including customers preferences for liquidity loan payment deferrals and stimulus checks.
Average deposit costs declined to nine basis points down 62 basis points from a year ago and eight basis points from the second quarter.
Net interest income declined $512 million or 5% from the second quarter, primarily due to the low interest rate environment, which resulted in balance sheet repricing. This earning asset yields continued to decline faster than funding liabilities.
Balance sheet mix shifts into lower yielding assets, including the impact of lower commercial loan demand, which resulted in higher cash balances and a one.
At $120 million of higher MBS premium amortization due to higher prepayment rates.
These declines were partially offset by higher variable sources of income and one additional day in the quarter.
First nine months of 2020, our net interest income was $30.6 billion with the completion of the third quarter. We now expect full year 2020 that interest income to be approximately $40 billion, which is lower than our previous guidance due to lower commercial loan balances.
Higher MBS premium amortization.
Turning to page nine non interest income increased $1.5 billion or 19% from the second quarter with growth in many fee related businesses.
Well, we've continued to waive certain fees for customers impacted by the pandemic deposit related fees were up $157 million from the second quarter, driven by higher customer transaction volume Trust.
Trust and investment fees increased $163 million from the second quarter.
Primarily driven by higher retail brokerage advisory fees, partially offset by lower investment banking fees with deal counts down from record second quarter levels.
Card fees increased $115 million from the second quarter with debit card transaction volume up 12% and credit card purchase volume up 22%.
Mortgage banking fees increased $1.3 billion for the second quarter.
The 2020 mortgage origination market should be the largest on record and capacity constraints continue to increase margins total residential held for sale mortgage originations increased 12% from the second quarter to $48 billion in our production margin increased 216 basis points up 12 basis points from the second quarter and up now.
85 basis points from a year ago. We currently expect fourth quarter origination volume to be similar to third quarter levels.
Despite typical seasonal declines and fourth quarter production margins should remain strong.
Mortgage servicing income increased $2 billion in the second quarter due to $296 million of favorable net MSR hedging results in the third quarter and the negative valuation adjustment in our MSR model as a result of higher prepayment assumptions and higher expected servicing costs in the second quarter that didnt.
That did not repeat.
Net gains from trading activities declined $446 million from a record second quarter, primarily due to lower fixed income trading results, partially offset by higher equity trading results.
Turning to expenses on page 10.
Our expenses increased to $678 million from the second quarter, primarily driven by the $718 million restructuring charge that I highlighted earlier on the call.
Charlie highlighted in his comments the details we have on slide 11 on the progress, we're making to reduce expenses and build a stronger wells Fargo.
Any ideas have been generated with the fresh perspective from leaders throughout the organization.
This renewed focus is critical to our future success, not only improving our efficiency ratio, but also enabling us to become more streamlined and agile and better serve our customers. While we continue to invest in our business and our regulatory commitments.
Turning to our business segments, starting on page 12, we continue to make refinements to the composition of our operating segments and allocation methodologies. Additionally, we're still in the process of transition in key leadership positions, including Mike Center, the CMO, who will be joining wells Fargo later.
Later this week, we now expect to update our operating segment disclosures, including comparative financial results in the fourth quarter 2020, and provide full year 2020 results under the new reporting structure.
On page 13, we provided our community banking metrics, we had thought.
We had 32 million digital active customers up 6% from a year ago and 3% in the second quarter digital Loggins declined from record second quarter levels, but were up 11% from a year ago. The number of checks deposited using a mobile device reached another record high in the third quarter and increased 36% from a year ago.
With approximately 18% of our branches temporarily closed due to cope with the team and more customers using our digital channels teller and eight or teller ATM transactions declined 22% from a year ago, but increased 8% from the second quarter as the economy began to reopen we reopened more of our branches.
Turning to page 14, wholesale banking reported net income of $1.5 billion up $3.6 billion from the second quarter, driven by lower provision for credit losses revenue declined $969 million from the second quarter, reflecting lower net gains from trading activities ended.
And investment banking fees, both of which were at record levels in the second quarter.
Net interest income declined from the second quarter, primarily due to lower loan and deposit balances and lower fixed income trading assets average.
Average loan balances declined 5% from the second quarter revolving loan utilization in September of 36% declined to 280 basis points from June and unfunded lending commitments increased 2% from the prior quarter.
Wealth and investment management earned $463 million in the third quarter up $283 million from the second quarter, primarily driven by lower provisions for credit losses, and higher asset base fees benefiting from improved market performance.
A decline in earnings from a year ago was driven by the $1.1 billion gain on the sale of our institutional retirement and trust business in the third quarter of 2019.
When the average deposits increased $4 billion from the second quarter and were up.
And were up $33 billion or 23% from a year ago, driven by higher cash allocation in brokerage client accounts when deposit costs in the third quarter in the single digits and have declined over 50 basis points from a year ago.
Yeah.
Turning to credit results on page 16, our net charge off rate declined 17 basis points from the second quarter to 29 basis points, which was better than we anticipated a quarter ago, given the challenging economic environment.
Losses improved across our commercial and consumer portfolios.
However, customer accommodations, we provided since we started the pandemic could delay the recognition of net charge offs delinquencies and non accrual status. So it's too early to draw any conclusions about future losses based on credit performance in the third quarter.
Commercial criticized assets declined 2% from the second quarter with broad based declines.
In CNS, partially offset by an increase in commercial real estate loans non accrual loans increased $417 million from the second quarter, driven by higher consumer real estate auto and commercial real estate non accruals.
On page 17, we provide more detail on our c. and I and lease financing portfolio by industry, including the declines in loans outstanding and total commitments from the second quarter.
So you know I at least financing non accruals were stable from the second quarter as declines in oil and gas in the retail world.
Were largely offset by increases in other industries, including healthcare and pharmaceutical and transportation services.
No 39% of non accruals were in oil and gas down from 47% in the second quarter.
Turning to our commercial real estate portfolio on page 18, Mercer real estate non accruals increased $126 million from the second quarter with declines in hotel motel and agriculture more than offset by increases in other categories with the largest increase in office buildings criticized.
Criticized assets were up $2.3 billion or 22% from the second quarter.
With 92% with the increase driven by hotel motel shopping center and retail sectors.
The percentage of our consumer loan portfolio that remained at a coded related payment deferral as the as of the end of the third quarter declines and as we show on page 19, we had declines across our consumer portfolios. These calculations exclude first mortgage loans that are guaranteed are insured by the government, which we believe have minimal credit risk.
On page 20, we provide detail on our allowance for credit losses for loans.
Lets coverage for total loans was 2.22% in the third quarter with stability across most loan classes, an increase and an increase for credit card loans are up.
Our allowance of $20.5 billion was stable from the second quarter, reflecting an improving improving economic environment and solid credit performance in the third quarter, but with continued uncertainty due to COVID-19 inch.
In determining our allowance, we considered current economic conditions, which improves compared with prior expectations as unemployment levels decrease during the third quarter.
Also considered that recent credit performance reflected the support of fiscal stimulus lender accommodations and borrowers ability to access liquidity. These fat.
These factors drove lower loss expectations and our quantitative models. However.
However, there is increased uncertainty in economic forecasts that vary widely in future credit performance may deteriorate stimulus effects that benefited recent credit performance come to an end.
We increased our qualitative reserves, reflecting a variety of factors, including our exposure to significantly impacted industries limited transaction activity in wide variability in market valuations for property types in our commercial real estate portfolio and the elevated default risk for borrowers as payment deferral programs and while the.
While the timing of the end of the pandemic and the eventual path to an economic recovery remains uncertain. We believe that our allowance captures the expected loss content in our portfolio as of the end of the quarter.
Turning to page 21.
As I highlighted earlier, our CE tier one ratio remained well above our regulatory minimum increasing to 11.4% in the third quarter.
As you can see our standardized and advanced approach ratios are now in very close proximity. We currently expect internal loan portfolio credit ratings, which were also contemplated in the development of our wireless will result in higher risk weighted assets under the advanced approach under the standardized approach in the coming quarters, which would reduce our CPT one ratio.
And other R.W.A. based capital ratios that said, we expect to maintain strong capital ratios exceed both regulatory requirements and internal targets. After considering this expected trend in risk weighted assets.
In summary, while our results in the third quarter improved from the second quarter. They were still down significantly from a year ago, reflecting the impact of the economic downturn, even though we can't predict the path to a full economic recovery. We are focused on improving business performance by reducing our expenses, while meeting our regulatory commitments and appropriately investing in our business.
We will now take your questions.
At this time, if you'd like to ask a question simply press star one on your telephone keypad. Our first question will come from the line of Betsy Graseck with Morgan Stanley.
Hi, good morning Betsy.
Good.
Good morning, a couple of questions. One is on the billion dollar improvement and expenses that you outlined earlier in your prepared remarks.
Realize you know that you're talking about a lot of investments that you need to make as well, but I'm. Just wondering is this billion dollars expected to come through in that expense reductions as we look out over the next year.
Hey, Betsy it's Charlie Thanks for the question.
I would say.
I referred in.
Remarks is its gross reduction.
It's it's real it'll be there, we'll see it next year, but.
We're still continuing to go through our plans for next year and we're looking at all of the investments that are necessary both on the control side as well as the investment side.
And so it's too early to be definitive about what the net numbers look like at this point.
But as I said last quarter.
We want to show progress and progress is a combination of taking actions on a gross side, but also showing you something on the net side, but.
Uh huh.
So I think it's the right thing at this point is to give you much clearer guidance on next quarter's call. After we finish our budget work and after Mike gets to.
Review the work himself got it okay I get that and then just separately Charlie you were mentioning how you know there's opportunities to get more efficient there is also opportunities too.
Get you know I don't know quote on quote unquote your share of the revenue could you I know, it's early but can you give us a sense as to what you're thinking about when you.
Hi, like that where do you see opportunities for wells on the revenue side.
Sure I mean, I would say I would say.
I would say when we look at our bet our business put.
Put the trajectory of Eni to the side for a second because of the low rate environment, just talking about building the franchise.
And the opportunities that present itself I think when you look at.
I'll just go business by business quickly you look at our consumer and small business banking franchise.
We've been on the defensive now for a very long time appropriately so given the issues and problems that we had.
A tremendous amount of work has been done by all the folks.
In those businesses.
Our franchise is still extraordinarily strong and you see it by the way even in just the deposit growth that we've had in that segment.
Which says an awful lot about the.
About what our customers think of us.
But while we have been investing in some of the digital capabilities, which you do.
You do see in the marketplace tremendous opportunities to grow with the affluent customer base at the other end we've rolled out a a product for those that are far less affluent which is very competitive and getting real traction.
And sorry, just I think in the consumer and small business space the opportunities are.
Our significant on.
The consumer lending space.
Mortgage business the demand is.
Is greater than our ability to process at this point still and that's still where we sit today.
We have opportunities and the card space to leverage the customer base that we have staying with our within our risk framework the way weve defined it but just doing a better job at delivering card and other payments products.
The commercial bank I think is an extraordinary franchise.
And.
Both things that we do on a standalone basis, there as well as things we do in partnership with products. We have in the corporate investment banker still huge huge opportunities for us.
In our.
You know, our wealth and investment management space the wealth business.
[music].
We are one of the few that have this.
This sizable franchise in a space that we love.
We've made progress at having.
Having the business work together across our private bank and across our brokerage business.
But we're just getting started there and I think the opportunities even with the very strong performance. We've had this quarter are still extremely strong and then lastly, the corporate investment banking space.
And just I would have said as an outsider that wells had been very very smart at building the business and where it has traditional strength and serving customers and that's the path that will need to be on so when I look at all these businesses I feel very good about our ability to grow the franchise.
And a question now of timing in prioritization.
Okay anything in particular, you think about maybe fading to make room for growth given the asset cap is kind of getting in the way of growth on the balance sheet at least.
Yes, I mean, I think so I mean, we're very actively looking at not not.
Below those five businesses that I. Just described we are very actively looking at all of the portfolios and all the businesses below that.
And we're going to continue to exit some things, which arent core to.
The U.S. banking franchise that we are not not at U.S., only but supporting the core customer base that we have and so I would expect over the next couple of quarters, we will create some room on the balance sheet by exiting some things that aren't core.
Okay Super Thanks, Thanks, Charlie because I do want to just.
I just want to be clear, we're exiting them because they arent core to serving our core customer base on the consumer and large corporate side, we're not we're not exiting them because of the exit cap.
Hi, good it'll help.
Our next question will come from the line of Matt O'connor with Deutsche Bank.
Hi, good morning.
That was a really good kind of overview of how you're thinking about the businesses.
From a big picture perspective.
No I think a lot of investors are looking for kind of the big rollout of the strategy that puts.
Put some numbers on and more meat behind kind of what you just said and.
Obviously covert delaying that I would have from obviously, you're really focused on the regulatory.
Issues, but is that something that you do plan to do and is the timing of kind of getting aviat to cap.
Driving.
Something like that say like virtual investor day or or something similar.
Yes, well I think I think you said it very well mannered appreciate what you said, which is that there's no doubt that in terms of.
[laughter].
The way, we'd be thinking about the trajectory of the business and what the opportunities for us over the shorter and early medium term are different today that were in this current environment than not and so it's kind of hard to have a meaningful conversation that looks well beyond that when were.
When we're far from from through this.
And so we are very focused on the things that we need to do in this environment to improve our performance, albeit with an eye towards.
Making sure that we're building the company for the long term.
Regulatory work as you mentioned again like I said it in my remarks, I can't stress that enough. It's a gating factor for us to be able to take advantage of all the opportunities that we have in the franchise, we're putting a tremendous amount of time and attention and effort towards us.
And and understanding exactly what those resources look like and how that impacts the company.
Is the work that we're that we continue to go through and as I said by the time, we get to the end of next quarter. We'll give you a look you know with a clear look as to what we think that means for.
2021.
And then listen the asset cap.
I wish there was more to say about it.
But.
We're focused on controlling what we can control, which is doing the work that's been asked of us which is totally appropriate.
We're in the process of doing that and there's no doubt that while the asset cap exists that we do have a limitation that others don't have others have other limitations with different ratios and what not that is one that we have and so it is fair to say, we will not be able to extract the full potential out of the franchise and.
Well after the asset cap is gone doesn't mean that we don't have the opportunities to grow from where we are today and we can talk a little bit about that if you want.
But that certainly does factor into our thinking about what what the trajectory of the company looks like at the time frames.
And then just to be clear in terms of how presenting kind of thats call. It wildly off the cap is still there and kind of the post after cap.
So that's something that.
Is that something that you are going to come out to investors.
There are puts some targets out there and again for more meat behind.
The strategic update or that I will get the expense outlook and 21.
And a little bit more card piece now how do you think about God given guidance and so took outlook.
I would expect that we did get a that we'd be giving you not just the expense outlook, but an update on how we're thinking about the different businesses and we talk about the things that belong and don't belong.
How that fits and then we're also going to be giving you at.
At the end of <unk>.
The quarter when we report not just the quarter, but the full year results based upon the segment looks which will lead pretty clear where we stand.
Versus our competition, then we'll be able to talk through what those differences are and how we think about that.
They also reflect some strategic decisions that have already been made it allows you to look at the businesses on to a heads up basis versus competitors. The way. The current leaders are intending to run them going forward. So it was a lot of information than that.
And then just lastly, if I could squeeze in on the on the cap I think February is going to be three years.
With.
That's about to me like how long I think it through a link on on like I don't really know but of course, you know three chairs three years.
Obviously band like a lot of change a lot of effort.
And I know exactly how much that you can share there is only so much that you know, but like what should we be looking for from the outside.
Cumulatively it does seem like there's been a lot of effort and hopefully accelerate the path here, but it seems like it has been a lot of important milestones at least from an external point of view.
So what can we look for.
If anything.
I think what you can look at is.
You can look at the people that we have in roles today that have dealt with these issues before.
In the organization today, Doesnt sack look very different.
Then it looked a year ago, or even six or nine months ago and as I've said when you look at the fed consent order.
It's pretty straightforward in terms of what they're asking for.
The environment that they're asking for is the same thing that they've asked all the other big banks force or getting the experience inside the company.
To actually understand actually understands exactly what is required of us I think is extraordinarily important.
And that team is actively working through.
What's going to be delivered again, I I wish I could say more Matt. It's it's as I said, it's ultimately the regulators on all of our issues are going to be the ones to determine when it's done to their satisfaction.
But again I can tell you. There is no question in my mind that we have a first class team in place now working on it that's experienced.
Many that have dealt with these issues before it.
Has the sense of urgency in the company, which I think is different than what we had in the past the amount of time and resources that the senior team to spending on this is extraordinary you'd have you'd be shocked at the amount of time, because we know we need to do what's what's what's what's required.
[music].
And beyond that again I can't speak for the regulators so.
That's right thing.
Okay. Thanks for taking my questions.
Sure.
Your next question comes from the line of can you just did with Jefferies.
Okay.
Hey, Thanks, Good morning, guys, Hey, Ed John just on your and I point I'm understanding that.
We're still kind of seeing this decline in loans and the premium ma'am.
Does the fourth quarter get to a stabilization point within AI as you look out into next year and what would be the drivers to kind of put that bottom in as you think about the mix of earning assets and what do you expect with deposit growth. Thanks.
Yes so.
So the pieces of it our deposit pricing on the one hand.
And that's come down meaningfully as a little bit more to go but will likely bottom out.
In the low single digits versus the high single digits, where it is today.
On the on the asset side, yeah, the softening in secret I loans in particular has been a contributor to two things underperforming even recent estimates and the question of where we go there.
Both the industry and Wells Fargo will will be I think that at the margin the swing factor in what happens for Eni and infinity over the course of the next year or so.
And if we could get a little bit of Steepening that would be very helpful.
The way, we're sort of looking at it.
Yes, it's possible that we end up flat.
Flat to down low single digit percentages in NIM, knowing what we know today as Charlie mentioned the forecasting process isn't done for next year.
And so there will be more guidance on that as that as that comes into into clarity, but those are probably the big drivers right. Now also on the security side, you mentioned premium and so we've got we've got mortgage securities.
Prepaying rapidly, replacing 2% yields with.
Call. It 140 basis point yields in the in that in the current yield.
Which will bring down the overall book averaged a little bit too. So that's that's in our forecast, but it's it's a little bit different than than the.
Continuation that would happen in Q3.
We expect that premium amortization to continue right into next year.
Right John can I, just ask you to clarify.
You said flat to down NIM, but did you mean NII dollars or can you just got to re go through that again, just so we all heard it right yes.
Yes, I'm sorry didn't dollars.
Okay.
And then on the.
Can you help us understand what a steepener means in terms of.
Mike what is a 10 year delta due to your net interest income and to your point about just about helpful. Steepener, If we got it on.
On an all things equal basis.
Yes, well, it's it depends what we choose to do with it in terms of how much we redeploy but if you could get to if you could get to 10 year.
Yes up towards 100 basis points, something like that we're talking about about.
Hello.
Billion dollars or more of a of net interest income again it depends on.
How quickly we redeploy into that what happens to mortgage deals at the same time, but we are.
But we are sensitive to long into the curve.
Right understood. Thanks, a lot John.
Your next question comes from the line Erika Najarian with Bank of America.
Hi, good morning.
Feedback from that morning.
Back from the Investor community.
Yes.
Essentially indicates that they understand that it's going to take time to have thoughtful plan, especially on expenses I think whats surprising the market today is the base upon which we are thinking about potential future gross reductions is a little bit higher than expected. So I guess my first question is you know.
I take out the restructuring targets after the third quarter run rate that would imply 14, and a half billion with elevated operating losses, and suggesting an annual basis 58 billion is that the right expense base from which we should think about it.
Feature gross reductions and also investment.
Yes, I know I would.
Our own math.
We would also consider the a. elevated operating losses too.
To be more infrequent and.
Part of the run rate, so I get to a lower number on my own.
The numbers are the reported numbers are what they are.
And it should be accounted for it but as we're thinking about about what's run rate and what's not the elevated levels of operating losses, even though they have occurred now for a couple of quarters in the row are not anticipated at this level.
And and restructuring charges I'm certain there will be more by the way because it will be evidenced that the company is making progress in its plans but.
But I wouldn't consider that to be run rate out of there. So that would get you to a lower number.
Got it okay.
With that Guy.
Okay. Okay.
Just a follow up with that actually so.
I think you'd previously mentioned at a more normal level would be 600 million annually and so if I take that elevated level.
Then the basis upon which we would then say okay. This is the base and then there's further improvement from here would be 54 billion clearly no different now in terms of your future earnings power that the right way to think about it.
That's how I think about it.
Yes.
That 600 million still seems like a good number I think in this quarter, we have a $150 million worth of what we considered to be run rate operating losses fraud robbery of it.
Thanks standard things that have been in place for a long time and thats above that is more episodic and this quarter had much more to do with like the closure of legacy types of issues.
Got it.
Very very helpful and just as a follow up question comes line of questioning on all three of you our Mega cap bank peers, essentially indicated that net interest income.
Has either hit a bottom in the third quarter were hit a bottom in the fourth quarter, you know assuming no change in the outlook for rates.
And obviously no change in terms of the asset cap is that a statement that you're also confident in saying on Eni bottoming.
No I mentioned I mentioned, it could get a little bit softer next year remember that we're operating with a look at asset cap. It doesn't allow us to expand the size of the balance sheet and earn a little bit of net net incremental net interest income on.
On these extra deposit balances that were all gathering and so at the margin that can be a difference maker. There other things that go into what our level of Eni is but.
At the margin that that's a constraint that we have that others don't.
Got it thank you for clarifying.
Our next question comes from the line of John Pancari with Evercore ISI.
Morning.
Back to the back to the extent the discussion on the 1 billion gross expense run rate reduction can you maybe give us a little bit more detail around the timing of the realization of that couldn't be more front end loaded.
In terms of the annual impact.
Yes. So it is a gross number but the impact will be immediate in the run rate because weve accelerated.
The the costs associated with the actions and and those expenses will drop out.
Okay. So it's more immediate impact there, okay and then the second.
Separately in terms of the additional detail.
On the.
On the expense those the longer term expenses next quarter with fourth quarter would you give us more details.
Could we get more of the larger expense opportunity detail in terms of potentially the 10 billion that was flagged before and maybe even an expense I mean efficiency target beyond just wanted to get an idea of what type of metric shortly that you might be in a position to give us. Thanks.
Yes, I think it was well will between now and then we'll figure out exactly what we're going to give you what I said was that we will.
Give you a clear outlook as to what to expect for expenses.
If we're 2021 at the end of the quarter.
We also said that you'll be seeing.
The disclosure of our segments broken out differently and.
Much more comparable to what others.
Support and so you'll be able to see the gaps between our efficiency ratio by business and others and.
And just to be clear what I said at the end of last quarter was all we did is we did the math of the people we compete against and said what's their efficiency ratio.
Looking at business mix and whats of ours and that's the difference.
And so I assume you all do those calculations as well work knowledge ing it and.
And those are the conversations that we have internally to say what is there any reason why our expense they shouldn't look different so.
You'll actually so you'll see what those gaps are and you will certainly be the vision to talk about the types of things.
That we will be doing to close the gap some of which will be in progress and others, which will be to come.
Okay. Thank you Thats helpful. If I could just ask one more thing on the loan growth front I know you mentioned that.
And I still.
We're seeing the pressure there and that is a big factor in terms of your spread income outlook can you just give us some color around what you're seeing in terms of commercial demand and could be see some improvement and see an ideal balance is or at least stabilization here.
Sure. So there's a handful of things going on at the upper end for for corporate and institutional borrowers were seeing continued utilization of the lines that they have.
But not a lot of incremental demand for for for more credit in the middle market. There's a lot of different stories, but they they they can be summarized as saying that the utilization of existing facilities is down meaningfully.
Below pre coded levels, obviously, we all have the spike in the first part of the year that has abated, but in the middle market and including asset base lending, we're seeing lower inventory levels held by customers, who would use our financing to to fund that inventories. Some of those may be coming back as inventories get rebuilt some of them may not but.
So.
At the margin.
That that is a that is pulling down balances that also I'd say on the high end visit with the capital markets as wide open as they are both for high grade credit as well as for as for a more levered credit.
That is replacing the utilization of bank lines by funding those things in the capital markets.
And that's the story.
And this is another state the obvious right, which is that ultimately.
The path of the recovery is going to determine.
The levels of of demand that are out there and you know you can no well we were trying to try to be very careful in our remarks about.
When it comes to credit saying.
That it's too early.
To draw any conclusions at the same time as you look forward.
As you get into next year.
There will be a vaccine that there will be therapeutics.
The World will continue to open.
And everyone is learning how to do it safely even in today's environment and ultimately that's what's going to drive business activity and demand and that happens will be the beneficiary.
Got it okay. Thanks, Charlie Thanks, Sean.
<unk>.
Your next question comes from the line of Saul Martinez with GBM.
Okay. So okay. Good morning, Hey, good morning first of all good luck.
On your future endeavors, John and I'm, sorry to to not have you on these calls going forward.
But I guess first of all I want to.
Sorry to beat a dead horse with this question, but I just want to make sure.
Have a good handle for what we should expect so.
So year end results, we'll get the outlook for expenses in 2021 in addition to.
Enhance segment disclosure, which will allow us to to move I guess more effective compare you to to your peers.
On a segment basis, and I guess, what would still little bit unclear to me is what if at all is the plan to go beyond that and give maybe for more far reaching goals.
You know as you kind of continue to go through your strategic review should we expect to see longer term financial targets and and expense reduction plans and and maybe long term expense targets is that still the plan and it will be determined at a future date. When you when you are able to.
Feel comfortable giving those targets or is that just kind of on hold for now.
Well I think three things so I'll have to look by the way I completely appreciate the line of questioning and so the fact that it's.
It's been asked a bunch.
I completely understand why.
We have a couple of things that we need to get through we need to finish.
All of our internal work.
I understand what it takes.
[music].
Yes.
Actually.
Bill the actions around becoming more effective and efficient running the company at the same time, we're continuing to invest to.
To build up the company and to do the regulatory and risk work that has to get done.
Theres no doubt that the environment that we're in today.
Gives us pause.
In terms of committing to anything on a longer term basis. Because then we'll show you a number and then you so whats the timing and obviously, it's very highly dependent.
On what the world looks like.
Because of coated.
The asset cap.
'cause it obviously does impact our ability to.
Grow the balance sheet, we offset some of the reduction would ultimately impacts the efficiency ratio.
And so as we get more clarity around what those things look like.
We will provide more detail, it's just not clear when the right time to do that is but we tell you everything right know when we know it.
Right.
One more thing to FX. So so what you will see at the end of the year is that the results there.
As they reflect 2020 will also show some the results of some strategic decisions that have already been made so that'll be helpful. At the margin.
Got it okay no that's helpful.
I want to go back to Eric is my questioning on how to think about sort of a more.
More normalized space the expenses currently and and I think a lot of us have been kind of normalizing your losses to the <unk>.
$600 million hundreds quarter.
Yes, I mean I guess my question. There is like why is that the right number you haven't been anywhere near that number for a quarter ago seems like five years, and and I guess, you know I get to the normal amount of fraud and whatnot, but it's it's been much much higher than the off road.
Very long time heck, even before the.
The sales issues and I guess, so so is that really the right number and I guess, a maybe a more important question is.
When do you feel like you'll have some of these customer.
Are these litigation accrual that had been pretty elevated in three of the last four quarters kind of run their course and.
Come back down.
Yeah, So I guess I'll start and John you can.
Then I would say when you when we look at the.
Customer remediation accruals for both this quarter and last quarter they.
They are very.
But they're very discreet items.
Where we went through all of the.
The items that we have in our customer remediation Q.
Of which.
Everything material is.
Relates to prior practices that have been around for a period of time.
We're working really hard to put these behind us and put these behind us means.
Determine exactly what we're going to do for remediation work with our regulators where were necessary to make sure that they.
I understand what that means.
And what we did over the past couple of quarters is to try and go through the entire inventory to ensure that we were.
Current unrealistic.
About what our actions are and what we're going to do to movies on and so weve.
We've done that I wish it would have taken one quarter as opposed to two but it took too.
And not that there won't be anything going forward, but.
We don't see anything that looks at all the time.
The reality of the types of things that we've done and so we think it's.
Those things are are booked it's in a good place and we're just.
Doing the work to implement them now.
And then that in recent years, there have been missed kind of range of litigation, but there's been two big pieces of litigation that has contributed to this in a way that's not expected to recur one being that the.
At that point 10 year old RMBS settlement, where we were among the last to people to be to be brought into the settlement process and that of course that.
The.
The sales practices related litigation that was settled.
Earlier, this year and that similarly is not expected to recur so.
I get your point, which is its been elevated for a long time, but when you when you disaggregate it and look at what is the run rate in the business that we mentioned that.
Up to roughly $600 million a year versus what things are specifically related to what I would describe as legacy issues that is where the line gets drawn.
The proof will be demonstrating.
Yes, yeah, the printing a few quarters 600 million or below any helpful. Yeah, yeah, well, it's been a while since you've been in there and you've been talking about that number for a while so.
Actually it was the second the second quarter of 2020, it was $464 million. So that's an example.
Okay got it but I just.
Hi, just yet and I just find it.
Hi, guys just final one just clarity.
When you say flat to down US full year 21 versus 20 is today is that because it seems hard to be flat.
Given kind of your run rate you exit 2000.
Definitely it depends on what happens with loan growth. That's a good point, but that is the full year versus the first full year. Okay. Okay. Thank.
Okay.
Your next question comes from the line of Steven Chubak with Wolfe Research.
Hi, good morning.
So I wanted to start off on John with just a question on liquidity management, we've heard different messages from your peers regarding appetite to redeploy excess liquidity into MBS and help mitigate some eni pressures you're currently running with arguably the largest excess liquidity pool of all the money Center banks, Tim was hoping you could frame the potential Ben.
The fed from re mixing into higher yielding securities and is any of that contemplated in Vienna I'd guidance that you provided for next year.
Yeah, what's what's contemplated is a continuation of roughly the same level of.
I have read of deployment, which is requires redeployment given the rate at which things are prepaying.
So there's a question about how long you want to get in a sub 1% 10 year environment with mortgage yields at these levels in the event of a backup it's a it's a problem to capital problem, It's an earnings problem.
Versus the trade off of what happens if rates stay low for a very long time or frankly go lower from here or even go negative and what that means from an earnings power perspective and so.
Those discussions those trade offs.
Our measured.
And we visited each time each time, we have a an alco discussion given what the forward look is for for what what could happen to rates and deposit flows and and loan demand and other things. So we we have liquidity available for loan demand we have.
We have we certainly could redeploy tens of billions of dollars into MBS are probably even more into similar duration treasuries, there's some liquidity difference and that characteristics there.
But I think as you heard from at least one of our our competitors you know really loading up at these levels and we are locking into both duration and or negative convexity doesn't seem like a great trade off and so that we're we're faced with those same choices and right now were essentially redeploy.
Turning to stay at about the same level.
With that said so in terms of how we think about the opportunity and also how it factors into the asset cap. So just to be trying to be clear about local I've tried to say before which is.
We have enough that we have to live with but we do have.
Some room to operate as we sit here today because of the liquidity that we have.
Because of where the balance sheet is actually running today.
Because of other actions that we've taken and as we think about.
Exiting some things that can create some balance sheet room for us and so while we don't have the same capacity that others have.
We do have capacity to.
To deploy more of our capital towards loans than we currently deployed.
That's right that's right thing thinking about for that color and then maybe just a question for you Charlie on to the expense outlook I'm going to try to take a different tack here given that one of the biggest sources of push back that we've we hear from investors is that while the opportunity to drive expenses, lower it's quite clear and evident and the risk is that right.
Good nutrition is difficult to handicap and could be greater than anticipated, especially given how significant the revenue attrition has been since the last investor day update recognizing you were not in the seat at that time, but just curious as you begin executing on the cost plans and head count reductions and what efforts you're taking to help limit revenue attrition.
And your confidence level that you can achieve efficiency gains while protecting revenues.
Sure I guess I answered a couple of ways first of all we when we take a look at.
No just what's.
What's happened to the franchise in terms of attrition.
There I mean, the reality of who we are is we are more of a truck.
Traditional consumer and the commercial bank and some of the other large competitors we compete with.
And so the reduction in Eni in those businesses has has an outsized impact on us relative to the others because of the business mix.
And so that revenue decline is not franchise loss in terms of what it.
What it means to customer relationships.
When we look at.
The the.
The individual businesses.
And how.
They are performing from a customer franchise in our consumer business in our middle market business and our wealth business.
As well as large corporate business.
I actually look at and say its been extraordinarily strong given all this company has been through.
When we think about the actions that we're going to take.
First of all for things that we are going to exit it.
It doesn't either fit with what we do have the right return characteristics.
And so I'd say those records set of decisions, which.
When we go through them you see with the areal look and see if that makes sense given to wells Fargo is and then the other actions that we're taking are all about improving the franchise.
We're not and so just to be clear and I tried to say this in my remarks, we're not going around saying, we have to cut X billions of dollars and everyone lineup and just do it. It is about what do we have to do to run a better company. So that we can be more efficient internally getting worked on and deliver a better quality product for our customers business by business.
This is a gigantic amount of redundancy in multiple platforms.
Across common products common processes.
Those are the types of things that are going to drive the efficiency of the company, but it will make us a better on company and so.
We have an extremely heightened antenna when it comes to anything which impacts the risk work or could hurt the value the franchise.
And in fact, as I said, the conversations around doing everything to help the value of the franchise.
That's great. Thanks for all the color and John Best of luck with your future endeavors. Thank you bye.
Thank you very much.
Thanks. Your next question comes from the line of that in Asia with JP Morgan.
Hi.
Thanks for taking my questions shortly John.
Couple of couple that we just stopped with one clarification, Charlie you talked about the fact that of the operating losses have been trying to.
Welcome this for the last couple of quarters.
I want to.
Check in on one thing the reimbursements, you're trying to make sure that.
Where you needed to expand the horizon into the customer's time period et cetera.
Given that we're concerned about the run rate of this number going forward.
Has that been signed off by regulators or is there still that process to come. So there's some potential that that could change because of the regulatory Uh huh.
Well to it.
Yeah, but without.
Being specific about whether something signed off on by regulators I'd say that we have a belief.
Lee faced by the business leadership, and and everybody around that that we've arrived at the right numbers that makes sense for customers but.
But these issues behind them behind the wells Fargo, and and shouldn't be met with any disagreement.
Okay.
Okay.
Let me shift gears.
Just.
Quick one Treasury management can you talk about fee revenues. This time in the slide deck normally talk about total revenues and he is can you give us what the total revenue different treasury management.
I know that's an important business for you.
Yes, it is and it gets split between the two.
Between the commercial business in the corporate business I know that we're the way we're describing it I think is is is.
As you know there is a trade off between Eni for earnings credit rate and fee revenue.
So the way we've described it in the deck is sort of is all the specifics for putting on it right. Now we can we can talk about breaking it out a little bit more now that were into it.
In a in a rate and.
In a rate environment, where we don't have to pay customers through treasury management fees for for putting a non interest bearing deposits with us.
But I don't have any more clarity for you right now.
Okay, one last thing.
One last thing Charlie in terms of the businesses that you're talking about you know the operations wealth management operating margin was only 16% this quarter pretty low given what do you.
Folks have also delivered on the bus any color any clarity on.
What's keeping it so low is there potential to improve that to any business changes.
But theres certainly a possibility of it I mean, it's a question of what we're generating in loan spread and and loan yields in that business have come down I think there is a belief by the new leadership in that business. It is a much bigger opportunity first securities based lending among other types of lending.
Our wealth customers that we haven't really tapped in the past, so thats, probably going to be margin enhancing.
On the core FFO.
Fee generation business, the margin isn't likely to change very much given the relatively linear connection between revenue and expense.
Thank you.
[music].
Your next question comes from the line of Gerard Cassidy with RBC.
Good morning, joining good morning, Charlie.
Morning.
Hi, John.
John can you share with us.
On the premium amortization you guys, obviously have seen this in the past and in past cycles can you.
Can you and I know you said, it's going to continue to be a force on the margin going into 21 if.
If interest rates stay at this level.
When do you think it will start to meaningfully coming down from the current level and second.
What kind of impact is the fed been having on keeping the yields down in this market with their active buying which actively buying the mortgage backed securities.
Yeah, so a meaningful impact is to.
Just a quick answer to the second half. Your question, we I would expect the the pace of premium amortization to stay in place throughout 2021.
You know mortgage securities in part because of the fed and in part because of.
The industry's ability to sort of shift and and even speed up tick frictions out of the of the refinancing process, which speeds up prepayments I think were operating at about 35 CPR right now.
That isn't going away, whether its virtual inspections virtual tours paperless closings or at least electronic closings et cetera, it's made it easier and easier for people to refine and.
And and that's going to keep speeding things up we think weve accounted for that and the way that we measure that risk in different parts of our business but.
But I don't I don't think it's going away and eventually we'll have burned out of.
The in the Moneyness of the stock of mortgage securities, but there's still a long way to go I think you mentioned that our expectation for our Q4.
Very near term, but our Q4 it looks a lot like Q3 in terms of volume and margin and and I think as as Charlie mentioned, we're operating at capacity and.
And so as much of the industry.
Very good and pivoting to you Charlie I knew.
I knew the cap is not what I am asking about with this question, but you did point out that you guys are spending too.
And this amount of time of getting everything right with the regulators if you're comfortable can you give us a timeline of when you send in the documents when did the regulators start to see the work that you've done so.
Human study underway, but we could kind of then figure out maybe the regulators could give us outside of just the decision that you guys are probably the penalty box and so the races.
I think again I think thats a it's it's a hard question to answer what I'll say is.
So the regulators are alongside US every single day.
They see exactly what we're doing they see how we're organized they see.
Whether we got the right sense of urgency. So they don't just sit in their offices and wait for us to send them something and then they study at react there they are side by side with us.
And we have extremely active dialogue with them as all the big banks do.
[music].
And for US that's a good thing because we want them to see.
What we're doing how we're doing it and how it's different than we tackle these issues in the past my experience has been when we asked them something very specific or whether we when we give them something and submit them something to them. They are they're thorough but they're very they're very timely and their response, how that actually plays.
Now with a you know a consent order.
Again, I I, just I don't know it is.
What we're focused on is doing the work having them see the progress.
And hopefully the work will be done to our satisfaction and their satisfaction.
And we get and we'll move forward at the right time.
Great. Thank you for the insights appreciate it.
Sure.
Our final question will come from the line of John Mcdonald with Autonomous research.
Hey, guys couple a couple of quick clean ups here wrapping up.
John just on the C. T. One how much does that change impacts eat you won the heart of the way the new measurement any idea just kind of framework for how much that hits yes.
Yes, well you can see in the deck, what the comparisons have been for the last lets measurement points I mean today, they're basically on top of each other the question is what happens to our Wu way as as as internal risk ratings change with the passage of time, and so we expect to be well above our of our minimum.
As our own targets et cetera, it's not really an issue, but if it if it pops around by.
Tens of basis points or something just want people to know that that's that's just the that's the regulatory framework that were operating and there's nothing new or different about the credit risks in these loans, it's accounted for in our allowance and but this we've always been we've been a standardized constrain bank since we.
Since this regulatory regime came into place and and now that might change for a period of time as we as we work through the pandemic, but I don't anticipate it being.
That meaningful and it's the same dollars of capital protecting that same book of loans.
Okay. Okay got it and then just one more on the Eni for the fourth quarter is your guidance, implying that Eni is relatively flat to the third quarter.
It's flattish I don't think we have specific guidance, but I wouldn't expect it to move around that much in the quarter.
Okay and then if you operated at the fourth quarter annualized if we annualize that and next year and compared that to the.
40 billion for this year, you know that be down mid single digits.
So just I got a couple of questions if people asking how would it be flat year over year like you'd have to have loan growth right for it to be flat and you have an asset cap.
Yeah, you have to have loan growth or a steepening and redeployment of a handful of things would have to go right for it to be flat. So that's why I think thats a reasonable range of expectation in a flat to down mid single digits, and we'll give more clarity on that as the budget process is complete and we get closer to the beginning of year.
But those are the drivers.
Okay and then the last thing just for Charlie Dod tied just to kind of clarify on what you're hoping to do on communications in the timeline. So in January you'll give us some expense guidance for 21 once you've gotten to think through that some more so we'll get an expense guide for next year in January.
But in terms of kind of the further details like longer term aspirations for our OE in efficiency and long term cost potential is that going to be later on and that depends if you could just clarify what the timeframe is our for Roadmaps that'd be great.
No I think it depends on whether.
Whether how much how much work we've done over the multi year period.
In having bottoms up supportable plans that we have the confidence to.
To share.
Mm.
Where we are in coated and ultimately.
Thinking about the interest rate environment as well because clearly as we think about our efficiency ratio.
Yeah revenue [laughter] either these days has had some very meaningful impact.
But as we do our work on expenses.
The work I guys as well.
We're taking actions you see that in the charge this quarter and these are the the the the reserves that we provided for these actions will be taken this year and so you'll see the positive impact.
Next year.
And so the actions that we're building a very real it's a question of when.
It all comes together in terms of understanding the regulatory piece the necessary investment piece and the expense cuts.
So.
Again, I think we just have to take it one quarter at a time and understand that people want to see progress on a net basis.
Got it okay. Thanks.
I'll now turn the conference back over for any further remarks.
All right everyone. Thank you very much for the time, we appreciate it and we'll talk to you next quarter.
Ladies and gentlemen that will conclude todays call. Thank you all for joining and you may now disconnect.
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