Q4 2020 Wells Fargo & Co Earnings Call

Good morning, My name is Catherine and I'll be your conference operator today at this time I'd like to welcome everyone to the Wells Fargo fourth quarter 2020 earnings conference call all.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star and then the number one on your telephone keypad.

He 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 Catherine good morning, everyone. Thank you for joining our call today, where our CEO, Charlie Scharf, and our CFO, Mike Sena Masimo will discuss fourth quarter results and answer your questions.

Call is being recorded.

Before we get started I would like to remind you that our fourth quarter earnings materials, including the release financial supplement and presentation deck are available on our website and wells Fargo Dotcom.

I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the form 8-K filed today containing our earnings materials.

Information about any non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can also be found in our SEC filings and the earnings materials available on our website.

I will now I'll turn the call over to Charlie Scharf.

Okay.

Thank you John and good morning to everyone I'll make some brief comments about the operating environment, our fourth quarter results and I'll discuss our priorities.

And then turn the call over to Mike to review fourth quarter results and more detailed before we both take your questions and I'm, just startup and making some brief comments about the economy based on what we're seeing the benefits from both fiscal and monetary stimulus to continue to provide important support for many and the additional 900 billion stimulus is an important step and helping those.

Who were still indeed.

There was solid economic growth and the fourth quarter, we continued to see and uneven recovery and increases and Covid cases towards the end of the quarters negatively impacting the path to recovery overall, our customers continue to be and much stronger position than we would've anticipated. When this crisis began but unemployment levels remain high.

Inventory levels remain lower than pre pandemic levels and confidence to invest is dependent on and affects the bridge until broad based vaccination can be accomplished given this we expect 2021 and we'll get off to a slow start but there is great potential and the second half of the year for a strong 2021.

If there is another significant stimulus package.

Before turning to our performance this quarter, let me discuss our new business segments. One of my early observations when I joined the company was that we were not managing the company at the level of granularity and necessary. As a result, we have made significant changes to the management structure, most notably having more of our businesses reported directly to me that change also drove us.

To completely alter our internal reporting to provide us with more transparency into our performance and underlying business drivers and give us the data necessary for us to create plans to improve our performance. This is how we now manage the company with reporting and reviews conducted at a business level at which decisions are made a big.

Change from what had been the practice.

As you can now see we've also made meaningful changes to our external reporting with the goal of giving our investors a clear understanding of our results as well and has the ability to compare our businesses on a more like for like basis to competitors and track our performance as we do internally.

What you see now is what we've been reviewing internally, our strengths and weaknesses should be clearer to you than ever but the potential for improvement should also be clear. The changes go well beyond. The addition of business segments, We've reevaluated capital allocation, how we do funds transfer pricing as well as our internal expense and revenue allocations.

We have also added more detailed revenue and performance metric disclosures to help you have more transparency into our results. We think these disclosures are an important step forward and showing you the size and scope of our businesses as well as forming the basis for how we talk about them going forward.

We hope you find it helpful. As you evaluate our results and our potential.

I'm going to let Mike take you through the results of the fourth quarter and detail, but they continued to be affected by the ongoing impact of COVID-19 as well as our actions to improve performance and put our past issues behind us while rates have begun to move upward the overall level and shape of the yield curve continued to be a significant drag.

On our net interest income and for now we have limited flexibility to offset these headwinds with balance sheet growth given our constraints of operating under an asset cap.

In terms of major business trends corporate loan demand remained soft driven by continued strong capital markets conditions, and and improving but still uncertain economic backdrop credit continues to perform well as both consumers and companies have benefited from accommodations ongoing fiscal and monetary stimulus and and improving economic.

<unk> actual charge off rates are at multiyear lows, but again, the ultimate timing and magnitude of losses depend on the broader recovery on consumer spending we're seeing a continuation of the trend observed in the second half of the year debit spend is up double digits, while credit volumes have largely stabilized at flat to down.

And low single digits compared to the prior year recently, we've seen the impact of the new stimulus with roughly half of the dollars that were deposited into accounts being spent.

All in all our returns remained significantly below where they should be what this organization is capable of but we are taking significant actions.

Our agenda is clear and we're making progress, but it will take some time our focus is as follows.

Number one building the right management team and number two making progress on our risks and control buildout and satisfying our regulatory obligations and number three.

Put our significant historical issues, including legal and customer remediation behind us.

And number four and reviewing our business exit activities that are non core and focus our efforts on building our core scaled businesses and capitalizing on the power of and integrated Wells Fargo.

And lastly, identifying.

And beginning to implement changes to make us a better run and more efficient company.

I will briefly cover each of these.

First on the management team.

You've transformed the team by value by elevating strong internal talent, while bringing in people with the experience and skills necessary for our success, our operating committee, which are the 18 senior most members of the company responsible for running it is an entirely new management team over two thirds are new to the company.

Or their role of the 17 members.

Other than myself I've hired nine leaders from outside the company.

For others are and different roles and four were relatively new to the company. When I joined each member has expertise and experience and their area of responsibility and brings a diverse set of skills backgrounds, tenures and and perspectives towards discussions and decisions are broader group of senior leaders is also a new team nearly half.

Of our top 150 leaders are new to their role from the start of 'twenty and 'twenty, including over 40, who were new to the organization.

Bob.

Regarding our risk and control build out in 'twenty, and 'twenty, we announced and enhanced corporate risk organizational structure to provide greater oversight of all risk taking activities and a more comprehensive view of risk across the company. We've made a number of important hires throughout the year and just the fourth quarter, our new Chief compliance officer and new true.

Risk officers and consumer and small business banking commercial banking and wealth management have joined the company. These and the many other leaders that joined the company and 2020, who have done similar work at other institutions have been critical to the early progress we are making as we announced last week the OCC terminated a 2015.

Consent order related to the company's bank secrecy Act anti money laundering compliance program. This is just one accomplishment for us, but it's evidence of the progress, we're making and our ability to build the right risk and control infrastructure and remediate our legacy issues. However, this is a multiyear journey progress may not be a straight.

Line, we still have significant work to do but we are diligently doing what's necessary issue by issue and will continue to be our top priority to dedicate all necessary resources and make meaningful progress on this critical work.

In addition to the continued investment we're making to build out the risk and control infrastructure. We're also moving with urgency and much more than had been done before I arrived to put our substantial legacy issues behind US. This includes working through our legal and customer remediation matters, which are almost entirely tied to our historical issues doing this work with <unk>.

Committed to treating customers fairly to provide some context. This work is complex and oftentimes involves going back many many years and looking across multiple platforms and systems. We've also had new leaders come and this year and as a team we've been diligently and diligently working through issue by issue.

It requires this level of rigor.

We've made significant progress over the course of 'twenty and 'twenty and it's absolutely critical that we get this work done. So we can do what is right for customers and move our organization forward.

Over the past year I've discussed our businesses with an eye towards assessing strategic fit to the company assessing risk return profiles and creating a roadmap for improved operational and financial performance. Our goal is to be the preeminent provider.

Of core financial services in the U S and and doing so seek to reward all stakeholders, including investors employees customers and the communities, where we do business with.

We believe our business model as a fully integrated U S bank with significant scale and breadth of capabilities positions us to achieve our goal and that we are only and that.

And that we are one of only a few who have this position, but we do compete with thousands and our strategy is about becoming even crisper about our target market and taking actions necessary to leverage our strong competitive position, we are clear on who.

We are.

Our core target market as U S consumers and businesses of all sizes, we do have capabilities outside the U S. But these activities are predominantly to support our core U S customers with their global needs or our and domains, where we have scale and expertise to compete locally we provide the same capabilities for both consumers and companies.

Of all sizes, though the words, we use to describe what we do is sometimes different we are a trusted advisor and provide core banking services, including deposits capital payments and investments capital includes both private and public access to debt and equity are scale and sophistication allows us to have a differentiated physical <unk>.

And technology platform you can compete with.

This.

This important the importance of scale is clear and we will continue to increase.

We have the right business at Wells Fargo to achieve our goal our individual businesses are strong and valuable we have excellent individual franchises that compare favorably to all competitors large and small we have the products and services people and scale to be a leader and each.

And each has opportunities to serve customers more broadly and improve its own financial profile I wouldn't confuse our recent underperformance with our great franchise value and how our business fits together to put us and a great competitive position.

And there is then there is the great power of and integrated Wells Fargo, while our businesses are strong individually.

And even more powerful and working together so.

So we talk about separate lines of business, we operate as one company and our communities our branches serve our consumers and small businesses as well as commercial banking and corporate clients our ability to support our local communities is based on that breath locally, but also by the support and resources of Wells Fargo nationally at times are.

Lines of business has served as artificial boundaries for us delivering the very best for our customers and clients were breaking down those barriers to more effectively serve our customers and each should add to our profitability and returns.

We have opportunities across our entire franchise, but just a few examples include surfing low to moderate income as well as more affluent consumers consistently across our platform payments and investment banking for our commercial clients. We've completed the review of our businesses and are taking action for those that aren't core to our mission and the per.

Past few months, we've announced sales or intention to exit the student loan business International wealth management, and direct equipment Finance and Canada. We're also and the process of exploring options for asset management Corporate Trust and our rail portfolio as I said, we're focusing all of our efforts on our <unk>.

Core scaled businesses and these other activities, which may be good businesses are not consistent with the core strategic priorities I just outlined.

And we're taking actions to run a better company, which is far more efficient I've acknowledged many times that our returns are below where they should be and what this company can deliver I pointed out that our efficiency. Our efficiency ratio is not competitive you can now see this by line of business as well and it is an important data point to guide us to.

Drive efficiency and simplicity and how we manage the company as we do this we will reduce complexity and risk and our expenses should decrease even as we continue to reinvest and building our infrastructure and growing the company as we look at financial goals today, we're targeting our overall expense level and return on tangible.

Common equity and just to be clear, we will spend whatever is necessary to complete our risk and regulatory build out.

And we had started to take significant actions, Mike will share the details of our initiatives and our expense outlook.

I would like but I would like to emphasize that we will continue to be cautious about putting firm timeframes around our goals, we're making dramatic changes to put us and are positioned to capture our full potential, but we do have constraints today that impact our ability and the shorter term to realize our earnings and return potential or commit to firm 10.

Commits a firm timelines, we remained subject to and asset cap as part of our consent order with the federal reserve and we must prioritize balance sheet usage more so than if it was not a limitation a significant constraint, especially given the current operating environment and we believe we're making meaningful progress there is substantial work to do.

We're also temporarily limited and our ability to return capital to shareholders due to special restrictions placed on the largest banks by the federal reserve due to the uncertainties around COVID-19 as a as the path to economic recovery becomes clear. These restrictions should be lifted and we will be able to return excess capital to shareholders through a combination of higher.

It ends and share buybacks and the negative impact to our results from Covid is clear and will likely continue until broad based vaccinations allow for a clear and even economic recovery as these headwinds abate our earnings and returns should benefit materially we're.

And we're taking action for things and our control, but we'll remain cautious until there's more clarity around when these constraints will recede that said, we're hopeful that our actions to increase efficiency and the company and the ability to return excess capital to our shareholders creates a clear path to a return on tangible.

Common equity in excess of 10% beyond that the ability to grow our balance sheet higher interest rates and executing on additional efficiency and growth initiatives presents a path to longer term, our OTC of around 15% again, it's hard to put specific timeframes around these goals with any confidence.

Today, but we're confident that our franchise is capable.

I mentioned, we continue to have significant excess capital above our regulatory requirements last month, our reserve authorize the nation's largest banks to pay common stock dividends and make share repurchases and the first quarter that in aggregate do not exceed an amount equal to the average of the firm's net income for the four preceding calendar quarters based on this criteria.

We have the capacity to returned approximately $800 million and the first quarter, assuming the board declared a first quarter dividend consistent with the past two quarters under the federal Reserve's criteria, we expect to have common stock repurchase capacity and the first quarter of approximately $600 million, including repurchases per employee.

Compensation.

Turning capital share to shareholders remains a priority our board of directors has also approved an increase and our authority to repurchase common stock funded by an additional 500 million shares, bringing the total authorized amount to 667 million shares and.

In summary, we're taking meaningful actions and believe we have line of sight to a double digit.

Oh TCE ratio.

And while returning to low double digit ROE TCE would mean and improvement from where we are operating today as I've said before I continue to believe to believe there is no structural reason why we shouldnt be able to generate comparable returns to our peers over the longer term and that continues to be the goal 2020 was certainly a challenging year for all.

But I'm proud of what Wells Fargo and my more than 265000 partners have done to support our customers our country and our communities. We've begun a multiyear process of transforming wells Fargo and I look forward to making more progress in 2021 I want to thank everyone at wells for what they've done through an extremely stiff.

<unk> set of circumstances and I look forward to a better 2021, I will now turn the call over to Mike.

Thank you Charlie and good morning, everyone first I'd like to thank John Shrewsberry for all his partnership over the last few months and wish them success and the future I'm going to review our fourth quarter results and then I'll provide some information on our expectations on a few additional topics 'twenty and 'twenty was a challenging year and I'm proud of the support we provided.

To our customers communities and employees, which we highlight on slide two.

We summarize our consolidated financial results for the fourth quarter on slide three net income for the quarter was 3 billion or <unk> 64 per common share. Our effective income tax rate was three 5%, which was lower than we expected due to discrete tax benefits related to resolving some legacy tax matters, we expect.

Our effective income tax rate for the full year of 2021 to be in the mid single digits.

Our fourth quarter results also included $781 million and restructuring charges similar to the third quarter. These charges included severance expense, but the fourth quarter also included charges for software impairment and costs related to reducing our real estate footprint.

We also had a $757 million reserve release due to the announcement that we are selling our student loan portfolio, which is expected to close and the first half of this year.

Finally, we had $321 million of customer remediation accruals, primarily for a variety of historical matters down $640 million from the third quarter.

Our capital and liquidity remain strong our CET one ratio increased to 11, 6% under the standardized approach and 11, 9% under the advanced approach our liquidity coverage ratio was 133%. We continue to have significant excess capital with $31 billion over the regulatory minimum and we hoped.

To return more to shareholders this year.

Turning to credit quality on slide five our net charge off ratio and the fourth quarter was 26 basis points. The lowest it's been and a number of years and certainly better than what we would have predicted earlier and the year.

And as we've previously mentioned, although our customers seem to be in better shape than we would have forecasted the accommodations. We've provided since the start of the pandemic are also helping delay the recognition of the charge offs, which is reflected in our allowance level.

Nonperforming assets increased 9% from the third quarter.

Commercial non accrual loans increased $381 million, primarily due to a small number of commercial real estate exposures.

While there are still a lot of uncertainty regarding commercial real estate. The performance has been better than expected as our customers are benefiting from low interest rates, which is helping them and preserve liquidity.

It's also important to note that approximately 70% of our commercial non accrual loans were current on interest and principal as of the end of the fourth quarter.

Consumer non accrual over loans increased $325 million on higher consumer real estate and auto non accruals.

Our allowance coverage ratio was unchanged versus the third quarter similar to the third quarter. While observed performance was strong there was still a significant amount of uncertainty reflected and our allowance level at the end of the fourth quarter. Just a reminder, that the reserve release and the fourth quarter was almost entirely due to the announcement that we were selling the student loan portfolio.

As we show on slide six the percentage of our consumer loan portfolio that remained in a COVID-19 related payment deferral as of the end of the fourth quarter decreased 3% to 3% with declines across all the portfolios.

We are no longer offering COVID-19 related deferrals, except for home lending and new deferral requests are down significantly.

Loans that have already exited deferral are performing better than we anticipated with over 90% of the balances current as of the end of the year.

On slide seven we highlight loans and deposits.

Our average loans declined for the second consecutive quarter and were down 6% from a year ago. The decline in commercial loans from the third quarter was driven by lower commercial and industrial loans as demand remained weak and line utilization continued to be very low and mid strong capital markets and soft economic background on.

On the consumer side residential real estate loans declined as prepayment rates remained elevated.

Lower consumer balances also reflected the transfer of student loans to held for sale.

We had strong deposit growth throughout the year with average consumer deposits up 19% from a year ago. However, average deposits and the fourth quarter decreased modestly on a linked quarter basis, driven by intentional run off of certain deposits, primarily and corporate treasury and corporate investment banking, reflecting targeted actions to manage under the asset cap.

Turning to net interest income and slide eight net interest income declined 17% from a year ago as lower interest rates drove a repricing and the balance sheet. The decline also reflected lower loan balances and investment securities as long as higher mortgage backed securities premium amortization net.

Net interest income declined modestly from the third quarter, reflecting lower loan balances and the impact of lower interest rates, which drove balance sheet repricing. These declines were partially offset by higher investment securities and trading assets higher commercial loan fees higher hedge ineffectiveness accounting results and lower mortgage backed security premium amortization as a.

Our net interest margin was flat compared with the third quarter.

Turning to expenses on slide nine noninterest expense was down 5% from a year ago, and three and 3% from the third quarter. The decline from the third quarter was driven by lower operating losses and declines and other non personnel expense, including lower professional and outside service expense, primarily due to efficiency initiatives implemented towards the end of the year.

These declines were partially offset by higher personnel expense driven primarily by the timing of incentive compensation expense.

Our expenses and the fourth quarter also reflected the restructuring charges that I highlighted earlier on the call and as a reminder, we typically see seasonally higher personnel expense and the first quarter.

Turning to our business segments, starting with consumer banking and lending on slide 10, net income increased versus both third quarter 2020, and fourth quarter of 2019 as lower revenue was more than offset by lower expenses and a decline and the provision for credit losses.

Home lending revenue of approximately $2 billion declined 21% from the third quarter of servicing income declined driven by MSR valuation adjustments, reflecting higher prepayments and increased servicing costs.

Net interest income was down due to a decline and loan balances and lower interest rates and revenue also declined as lower mortgage originations were only partially offset by higher spreads.

The fourth quarter of 2019 home lending revenue was up slightly as higher net gains on mortgage originations were partially offset by lower net interest income due to lower balances loan balances and interest rates, a decrease and gains on the sale of loan portfolios and lower servicing income.

Credit card revenue increased 2% from the third quarter, driven by lower deferrals and seasonally higher spend average balances grew modestly from the third quarter, but were down 9% from a year ago as COVID-19 related headwinds persisted.

Average deposits grew 18% from a year ago, reflecting COVID-19 related impacts, including government and government stimulus programs.

This deposit growth represents long term opportunities as we work to build on these important deposit relationships with new and existing customers.

Turning to some key business drivers on slide 11 mortgage originations declined 10% from a year ago, while retail originations increased 17% correspondent originations declined 33% from a year ago, as we maintain margins and a more competitive market and suspended nonconforming correspondent originations earlier in 2020.

Auto originations declined 22% from a year ago and were down 2% from the third quarter, our underwriting policies remained slightly more conservative than pre COVID-19 levels.

Turning to debit card to bulk transactions and dollar volume increase linked quarter, while purchase volume increased 11% from a year ago transactions were down 2% as customers made fewer purchases, but spend more per transaction. As a reminder, debit card fees are based primarily on transaction volume not dollar volume.

Credit card point of sale and purchase volume has rebounded from second quarter lows and fourth and fourth quarter volume was up 8% from the third quarter and relatively stable from a year ago.

Commercial banking net income was up from the third quarter, driven by decline and the provision for credit losses, but was down versus the fourth quarter 2019 and lower revenue.

Middle market banking revenue declined 4% from the third quarter driven by lower net interest income due to lower loan balances and was down 26% from a year ago, primarily driven by the impact of lower interest rates.

The lower interest rates had on what we earned and deposits and lower loan balances.

Asset based lending and leasing revenue grew 5% from the third quarter, driven by higher loan syndication fees and valuation gains on equity investments, but was down from a year ago due to lower interest rates and loan balances.

Noninterest expenses declined 4% from the third quarter, partially reflecting efforts to increase efficiency and client coverage and streamline the organization.

While overall head count is down and we've hired more bankers and key markets to drive new business growth and our middle market business.

Average loans declined for the third consecutive quarter with revolving credit line utilization at very low levels.

Loan balances started to stabilize late in the fourth quarter, but loan demand remains weak overall, reflecting continued high clip.

Liquidity levels strength in the capital markets and lower inventory levels.

Turning to corporate investment banking on slide 13 banking revenue growth and the third quarter was driven by and 18% increase and investment banking revenue on higher advisory fees and equity origination.

<unk> banking pipeline remains strong a year and.

Commercial real estate revenue grew 15% from the third quarter, driven by higher <unk> volumes and improved gain on sale margins as well as an increase and low income housing tax credit income.

12 month, the 12% growth and revenue from a year ago was primarily driven by our low income housing business, which in the fourth quarter 2019 included lower revenue due to the timing of expected tax benefit recognition.

Markets revenue declined 26% from the third quarter on trading volume and lower trading volumes across fixed income and equities overall 'twenty and 'twenty was a good year with strong performance across fixed income and equities, especially during the first half of the year.

However, our results were impacted in part due to actions, we took to reduce trading related assets in order to manage under the asset cap.

Noninterest expense declined 10% from the third quarter, primarily reflecting the timing of incentive compensation accruals and.

And average deposits declined 20% with average trading assets were down 19% from a year ago, primarily driven by actions, we've taken to proactively manage deposits and other liabilities.

Wealth and investment management net income increased 16% from the third quarter, driven by revenue growth, primarily reflecting higher asset based fees non.

Noninterest expense increased 2% from the third quarter, driven by higher revenue based compensation.

Versus the fourth quarter of 2019, net income increase reflecting the impact of lower interest rates on net interest income, which was more than offset by lower expenses due to onetime charges in 2019.

Average loans increased 5% from a year ago with growth and both securities based lending and non conforming mortgages.

Average deposits grew 22% from a year ago.

And we ended the year with a record client assets of two trillion up 6% from a year ago wells.

Wells Fargo asset management assets under management of $603 billion increased 18% from a year ago due to net flows into money market funds and higher market valuations.

Corporate on Slide 15 includes corporate Treasury and staff functions as well as our investment portfolio and affiliated venture capital and private equity partnerships.

And it also includes certain lines of business that we have determined are no longer consistent with our long term strategic goals or our previously divested in the quarter. This primarily includes our student loan business institutional retirement, <unk> Trust rail and our direct equipment finance business and Canada.

Turning now to our expectations for 2021, starting with net interest income and slide 16.

As a starting point if you were to annualize the fourth quarter's net interest income and you get approximately $36 8 billion.

We currently expect full year 2021, net interest income to be flat to down 4% from this level.

It is important to note that approximately 1% of the potential decline is driven by the announced sale of our student loan portfolio.

Our assumptions to get to the top end of this range include interest rates that generally follow the implicit that are those the implicit in the current forward curve.

It is worth noting that while the recent increase in rates is helpful rates remain below levels at which most of our portfolio was originated and that results and some ongoing downward yield pressure as we reinvest cash.

We also assumed stable total loan balances from the fourth quarter with a modest reduction and the proportion of consumer loan balances consistent with recent trends.

To achieve this we would need some improvement and low demand, which has been soft across the industry for the past couple of quarters. Additionally.

Additionally, mortgage balances will likely continue to see headwinds in 2021, given the elevated level of prepayments.

Which have exceeded portfolio originations and given the expected sale or re securitization of loans previously purchased out of agency mortgage securitizations.

Finally, we assume stable to modestly improving credit spreads across major loan and securities categories.

<unk>, we have seen significant tightening and most credit sensitive assets are now trading through the pre COVID-19 levels of early 2020.

Our net interest income expectations for 2021 are also assume the asset capital remained in place.

Regarding the asset cap, we are focused on getting the work done properly and believe we're making progress.

However, there remains a significant amount of work to do and a series of steps required by the consent order requiring both successful execution and implementation by us and ultimately a determination by the federal reserve as to when the work has been completed to their satisfaction.

Recognizing were early in the year and uncertainties exist. The range. We have provided reflects the potential for pressures on each of these assumptions.

Turning to expenses on slide 17.

And we're focused on building a more efficient company with a streamlined organizational structure and less complexity. So we can better serve our customers. Our efficiency initiatives are designed to approve staffing models reduce bureaucracy, lower and lower reliance on expensive outside resources.

Importantly, we are not seeking efficiencies related to the resources needed to complete our regulatory and control work and will continue to add if necessary. We have rigorous reviews to help ensure that we have the required resources in place to complete this important work.

We are executing on our portfolio of over 250 efficiency initiatives, which we expect to span over the next three to four years they amount to over 8 billion of identified potential gross saves that are concentrated in the five categories that we highlight on the slide.

In addition to these initiatives we have a long list of others that are and the process of being vetted.

While we are focused on becoming more efficient, we will continue to invest and our risk and regulatory work as well as to support business growth and improve our products and services.

We are not foregoing opportunities with good returns to grow revenue, even if they may increase expenses, we are targeting net expense reductions each year and a restructuring charges become clearer we will build our growth plans and as we build our growth plans each year, we will provide further details.

We provide some selected details on our efficiency initiatives on slide 18, and as you can see some of these and issues our companywide, while others are business specific.

As we've streamlined our organizational structure, we've been able to reduce layers of management across businesses and functions, which has increased the average span of control by approximately 10% are flatter organizational structure has also given us the opportunity to reduce support function head count and we apply these savings and the gross growth areas.

We've also had the opportunity to reduce our non branch real estate by using our space more efficiently. We currently have approximately 46 million square feet of real estate, which we expect to reduced by 15% to 20% by the end of 2020 for much of this reduction is due to our underutilization of the space pre COVID-19.

Turning to some of the business specific opportunities.

As of year end 2020, we had 5032 branches, which is down from a peak of over 6600 in 2009, reflecting an acceleration of digital adoption and usage among our customers. We closed 329 branches and 2020 and expect to close approximately 250 more this year. We are also changing our branch staffing.

Model to better reflect the activity that's occurring within the branches, which is less transactional and resulted in and approximately 20% reduction and branch staff and 2020, we will continue to adjust staffing in response to changing customer needs.

We have also identified opportunities and our home lending and auto businesses and the fourth quarter 73 per cent of home lending retail applications were sourced through our online mortgage application tool and we expect to continue to improve our digital capabilities and the origination process, which makes for a better customer experience and is expected to reduce expenses as the economic environment improves and the <unk>.

<unk> become more technology, driven and we expect significant home lending servicing efficiencies over the next four years.

And our auto business, we're investing and our loan origination system and credit decision tools, which we expect will increase decision automation to more than 70 automation to more than 70% by 2022 up from 59% and 2020 enhancing the customer experience while improving controls.

We also have significant opportunities within commercial banking, including changing how we serve our customers and optimizing operations and other back office teams, which is expected to reduce head count and expenses. This includes working to reduce the number of commercial banking lending platforms by over 50% and standardizing and automating customer onboarding, which would reduce costs, but more importantly improve.

And the customer experience.

Turning to our 2021 expense outlook on slide 19, we reported $57 6 billion of noninterest expense and 2020 <unk>.

Included in that were $2 2 billion of customer remediation accruals and $1 5 billion of restructuring charges. So a good starting point for discussion of 'twenty and 'twenty. One expenses is approximately 54 billion if market levels remained strong we expect to see and increase in revenue related compensation of approximately 500.002 million 21, primarily and wealth management.

This impact May increase if markets are core business performance exceeds our expectations.

We expect to realize $3 7 billion of gross expense reductions and 2021. This will be partially offset by incremental spending and a few important areas, including personnel and technology, including investments and risk and regulatory work.

After factoring factoring and incremental spending our net reduction for 2021 is expected to be approximately $1 5 billion with reductions accelerating through the year.

Our full year 2021 expenses, excluding restructuring charges and business exits are expected to be approximately 53 billion with lower annualized expenses towards the end of the year.

And prior expense outlook, we had assumed $600 million of annual operating losses.

Which is still the normal amount of losses, we have for theft and fraud related items. However, we also typically have some level of customer remediation accruals and litigation costs, which are hard to predict but we've assumed approximately $1 billion for total operating losses, and our 'twenty 'twenty one outlook, while we made significant progress on working through our legacy issues, we still have significant outs.

Standing litigation and regulatory issues that can be unpredictable.

The restructuring charges, we took in 2020 reflect what we believe we will be needed for 'twenty 'twenty, one head count reductions, while we haven't included any restructuring charges and our 2020 and outlook. We may have some smaller amounts primarily real estate related and we will evaluate later this year the need for additional severance and restructuring charges for initiatives in 2022.

With a focus on ensuring the payback periods continue to be strong.

We will call out these charges as appropriate as we move through the year.

We made significant progress in 2020, and identifying efficiency opportunities across our businesses and we started executing on these initiatives, resulting in restructuring charges. During the second half of the year. This is just the beginning of a multi year process and our ultimate goal is to improve our efficiency, while continuing to invest and our businesses.

Now on Slide 20, we've finished our business reviews, and we've updated you on our expense expectations now, let's turn to what we as a management team are ultimately focused on improving our returns.

We believe we have a clear line of sight to increase our return on tangible common equity to approximately 10% and the short term. If we continue to reduce expenses and we were able to optimize our capital levels closer to our internal target.

After that we believe we can further improve our returns through a combination of factors, including moderate balance sheet growth. Once the asset cap is lifted and modest increase in interest rates or further and steepening of the curve.

Ongoing progress or incremental efficiency initiatives, a small impact from returns on growth related investments and our businesses and continued execution on our risk regulatory and controls work.

The combination of these factors, we believe would take our return on tangible common equity from <unk>.

Approximate a 10% to approximately 15% over time.

To be clear this is a multiyear process dependent on the path of the economic recovery and requires successful execution on our part, particularly and controlling expenses as well as improved and improved operating environment, but the takeaway is that we believe our business model is capable of producing these returns.

We will now take your questions.

Ladies and gentlemen, as a reminder, at this time and if you'd like to ask a question. Please press star and then the number one on your telephone keypad.

Your first question comes from the line of John Mcdonald with Autonomous research.

Hi, good morning.

Mike.

Could ask about the expense slide on page.

Page 19.

Is the right way to look at it that you said you've identified over $8 billion of gross savings opportunities and you're realizing you expect to realize $3 seven of that eight or so in 'twenty one.

Hey, John Thanks for Thanks for the question Yeah. At this point, that's our that's where we are we've got a little probably a little over 8 billion that we're sort of working on as we speak and we will get three seven and in the year and as I said and the <unk>.

Commentary.

Those savings.

Savings get bigger as you go throughout the year.

So that implies the exit rate.

Other than the 53.

Okay, and if you think about the gross to net you. Realizing one 5 billion of net saves for like $3 7 million of gross.

40% of the <unk>.

$3 seven year, achieving that ratio of gross to net and could that improve and the out years.

Based on what your investment spend forecast is.

You have to sort of think about it that you don't get the benefit all day, one and these things sort of take get executed throughout the year. So.

And so that ratio of 8% to three seven and you can't really look at it or I'm sorry, the ratio of eight to the sort of net that youre seeing you sort of have to look at that over a couple year period as you get the full annualized benefits of all the saves coming into the P&L.

Hey, John This is Charlie how are you doing I would also add to that Paul in that and the $1 6 billion of investments.

And that's broken out on slide 19 that does include a significant continued to increase and.

Expenses related to the risks and infrastructure build out that we have.

And so as we continue to move forward and Theres, a point at which you know that.

The increase certainly slows.

Gotcha, Okay. Thank you.

Your next question comes from the line of Betsy <unk> with Morgan Stanley.

Hi, good morning.

Good morning.

Couple of questions. One trial you walked through the businesses that you have sold or are you know and the process of contemplating selling.

Should we take that to mean that that's the full extent of what you're looking to do with the business model at this stage and that there is.

Anything else beyond those areas are not being contemplated for sale or.

Maybe just give some color on that and then how you identified what to keep like what was the bar for sale versus retain.

Sure Yeah, I think the answer is yes, you should look at this as the complete list with a one aside that all companies should always re look at this on a regular basis to make sure that whatever assumptions you made are accurate.

But we've gone through and exhaustive review of everything that we do business by business.

At a.

At a level of detail well beyond the level that we reported publicly we've come up with these activities, we thought about a whole bunch of other things.

And so this is the list that we're actively working on and we feel very good about everything else as we think about.

The lens that we used it starts with.

We look at the core customer base that we want to serve and is it part of our capabilities that we have.

And either targeted towards that customer base or are they part of a package that's logically offered to customers as one.

And also look at risk returns I would just make a comment on risk returns because I've heard a little people talking about this a little bit. It's we're not looking at the risk return of a given quarter. We're looking at the risk return over a much longer lifecycle of these businesses.

And so you add that together and the businesses that we're exiting.

They are perfectly good businesses and the things that we're thinking about there's certainly.

The question is are they best.

Housed within Wells Fargo.

And so we think the answer is probably best how someplace else there Jim.

Current ways to get there and different arrangements that we can have with folks in terms of what that means.

But again I do feel very good at this point that we've looked across the enterprise.

And then you've outlined where there's been a pullback and that loan balances are earning assets because of these exits, but what do you do with that opportunity. There I mean, there's a lot of discussion as you well know about the asset cap and.

And it's hard to know when you get out of it but are you creating room for your core business is to grow into that space or how are you thinking about that.

Yeah, So I guess I would start with.

We did not approach this exercise with.

We have to sell businesses to create room under the asset cap and it was really.

The view was driven by what do we think actually belongs within wells Fargo for the long term to the extent that it helps us with the asset cap, that's certainly a benefit.

But that was not the lens with which we view. This when you look at what we've done.

The education finance business.

It was roughly 10 billion or so and assets and over the things that we've announced that is the most significant piece.

And so sure there is no.

<unk>.

And over time creates the ability for us to redeploy that capacity elsewhere.

Okay, and then just lastly on the tax rate I think you mentioned this year, it's going to be single digits can you speak to.

What's driving that and what your sustainable tax rate is and also is there a difference throughout the year like how that tax rate and it.

Single digits throughout or is it just starts super low and then it goes up to normalize by Fortune and help us think true the seasonality there.

Hey, Betsy it's Mike Yeah.

It bumps around a little bit based on.

Earnings and what's in the quarter, but I think the simple way to think about why why it's lower than kind of the past is and we've got a significant amount of investments that are multiyear investments and whether its low income housing.

Other renewable energy that create tax credits.

And those tax credits are what's driving what's offsetting sort of a normal statutory.

Tax rate that that we'd have it's no more complicated than that.

And so as <unk> seen over the last couple of years those have increased.

A bit over time, and so as we sort of look for look at 2021, and that's the big driver.

So that's all in ability.

Yeah go ahead, sorry, and that was going to.

So the dollar impact of those as it was up a little bit but it obviously has a much bigger impact on the rate when you're earning less.

Right.

So I mean as you werent more obviously your tax rate will bleed higher but for good reason.

Correct correct.

Okay. Thanks.

Thanks.

Your next question comes from the line of Ken <unk> with Jefferies.

Hey, Thanks, good morning, guys.

Coming back to your slide 20, just wondering I know that that it's a pass and its a hypothetical and that long term ROE is a long ways away, but on that interim stopping the 10% and do you have a way of helping us think about what type of timeframe might be possible to get even get to that middle step that 10%.

Yes, I think.

And how are you.

So I think the way we're trying to describe it is that is where we have clear line of sight. So.

And when we look at the impact of expenses. These are actions that we are actively taking.

But we're also.

In order to get to 10% without any changes to the revenue equation at this point.

We also have optimized capital levels, which means that the fed.

And I'd have to relax restrictions and so the reason why we're not talking about a timeframe business because we don't know when that will happen.

But the amount of excess capital that we have as you know is extraordinarily significant and we're also and the position of not being able to use it.

Because we have the balance sheet limit.

And so.

So the timing is dependent on that but again and our minds very clear line of sight when that occurs.

To be able to get there and a.

A relatively short timeframe.

And then on the longer term piece, which you didn't ask about again, there too I think.

There are some words on the right hand side.

But again I would not describe this as any.

As just something that we're dreaming about.

When we look at what is possible with modest balance sheet growth.

And relative you know really moderate increases in the rate curve steepening and efficiencies that we believe we can get we really do believe that that is what we will achieve its just we're just not in a position to per timing around it because we don't control the timing on most of those items.

Understood Anthony but.

And those things become clearer, we should be in a position to be clear with you about timing.

Yep and an eye on.

And a follow up to the capital and then the potential business sales, how do we get a sense of what earnings might potentially go away with those business sales and then if you were to get gains on those business sales is that capital also kind of contemplated and these ROA and ROE improvements or would that be.

Extra ore or incremental juice too.

At that point Youre able to do something with the capital generated to offset some of the lost earnings.

Yes, I think a couple of things so its Mike and thanks.

Thanks for the question I think.

We'll give you more detail as sort of we announced plans for each of the each of the businesses, but think of the revenue impacted by the four things Charlie.

Sort of outlined is very low single digits and around a few a few percent of revenue.

And we will give you more and more clarity is sort of day.

The plans come into and to.

Our focus with the timing and I think.

You are right as we if we book gains as we sort of divest of items. That's helpful from a capital perspective that can either get redeployed and the business or or through a true.

Bob.

Back capacity.

And this is and this is Charlie let me just had.

Given what we've announced.

Those are announced transaction is not closed.

So it'll take a period of time for these things to close so once you factor and to certainly what will impact 2021.

It's a it's a it's a smaller amount and we're working hard at making sure that when we exit businesses, we get the expenses out and.

And obviously frees up capital that we have.

Invested in those businesses as well as the games and so you put those things together.

And.

And that's why we don't think of the impact of these things as being material to either a plus or minus on what it means for our ratios, but it cleans up the company. It gets us focused on making sure that we're putting resources.

Towards the right things.

And we've just got the company set up properly going forward.

Got it thanks very much guys.

Sure.

Your next question comes from the line of Steven <unk> with Wolfe Research.

Hi, good morning.

So I wanted to start off with a question on the NII guidance.

Some of the assumptions and informing the lower and upper bound of the guidance range for 'twenty, one and maybe more specifically where are you reinvesting today versus the back book yield up a 196 basis points.

Yeah, Hey, Steven Spike.

Look I think as you sort of think about the top top end of the range, we're assuming roughly the implied forward curve, even though that's bumping around day by day week by week here over the last.

A week, so assume we're not assuming.

Much much improvement from where it is relative to the to get to the top of the range. We're assuming loan balances are in total roughly flat we will see some declines we think on the consumer side, particularly in the mortgage book.

As we go into this year, but we will and so we'll need to see a little bit of growth in the commercial and corporate side too.

To get there and then we're assuming spreads are about about where they are relative.

Relative to the other the other asset classes that we would invest in and then a very modest.

Expansion of.

The securities portfolio, but not not very big and so.

Further steepening of the curve kind of increases overall sort of our positive relative to our assumptions I think the biggest.

The biggest sort of downside risk is what happens too.

Two loans loan growth, particularly on the on the commercial and corporate side, but a lot of the activity, we're seeing from stimulus and what.

And the potential could be in terms of the recovery, particularly in the latter part of the year should be constructive for that.

So I think it's not it's not a herculean task to sort of get to the top end of the range, but it does it does it does require a little bit of growth from.

And the loan book from where we are today.

And then maybe just I guess related I'll give you a little sense of how mortgages and mortgage market is sort of doing and the first quarter.

We are we did have the last couple of quarters its been pretty strong for.

For origination and the mortgage origination market and as we sort of see the first couple of weeks of January it's still it's still pretty strong relative to both volume.

And and margin on on that balance so that should be also constructive as we sort of look into Q1.

And that's great color, Mike and just for my follow up on capital.

You mentioned that you are running with significant excess capital and the strategic actions had been outlined should significantly derisk. The overall loan portfolio and just given your strong CCAR track record and the Derisking efforts and now is there room to manage to a lower target versus the tenant and 5% internal objective I know youre running above that it just feels like that.

Might be a little bit too conservative given all the actions that you've taken.

Yes, I mean, that's certainly something we think about a lot Steve in terms of what's the optimal level to run and I think publicly we've said it's around 10% and.

And as you as you noted, we're running well above that that target. So.

And that's something we'll keep in mind, but as you as you know we've been.

Restricted from.

Returning a lot of that back to shareholders at this point and we always start the conversation first with ensuring that we're allocating enough capital to grow the underlying.

Businesses and invest and then with inside the company, but and at this point, we're just restricted from from from returning so hopefully that will change overtime.

And then this is Charlie if I could just add when we think about the conservative capital position and we completely agree with and as we look at our.

Performance over time.

CCAR does that does allow us to rethink about what youre talking about you also have we also think about just the position that we have with our allowance for credit losses.

And so we're seeing what everyone else is seeing which is that the performance is.

Substantially better than we would've thought when we.

Went into this and when a lot of those <unk>.

<unk> reserves were established but.

But we've also when asked that we've.

And we've been very clear in terms of what it takes to.

Start to use that which is we we'd like to see something which we really do believe as more sustained.

And more.

<unk> recovery.

Because so many uncertainties exist.

So everything that we see is extremely positive.

But we think the right thing to do is to be prudent there.

And so overall, the only really the only meaningful reserves that we reversed where because of the student loans, which we had to do.

But that positions us from a just a.

<unk>, a balance sheet perspective, even stronger going into 2021.

That's great very helpful color. Thank you both for taking my questions.

Sure.

Your next question comes from the line of Scott <unk> with Piper Sandler.

Good morning, guys. Thank you for taking the question and.

So I wanted to revert back to that $8 billion plus of.

Potential gross gross savings.

And this slide deck would you say are you guys kind of completely done with the reviews that got you to that 8 billion number or you know to what extent are those ongoing and noticed one of the sub bullets talks about formalizing a program for additional feedback and then I guess the context of the question is in the past you guys have noted that $10 billion number as sort of a.

And it kind of a guide post that would've gotten you towards peer efficiency. So just trying to sort of square and square. The two together if 8 billion is all.

While there is or if there is theres more as time unfolds.

Sure and this is Charlie and thanks for the question.

I think we're actually talking about slightly different things and so let me just.

Try and walk through what I mean by that.

The $10 billion that I referenced on the call was just the very simple math of our efficiency ratio versus our competitors.

To say that that is the difference and efficiency between with which we run the company and they run the company and when we look at.

And.

And at what Wells is we don't believe that there is any meaningful difference why that should be different.

And that doesn't mean that we're going to get to that number in a short period of time, because these efficiencies and take a long time to build in there based upon both expense levels, but also the revenue levels that other people have.

And so that was what the math is but it certainly served as a guidepost for us to sit and say hey, why are others, where they are versus where we are and we didn't look at it just overall, we looked at it by business and again as I mentioned and my comments now you've got the ability to do more direct comparisons by business. So you can see a little bit more of what we've seen.

So the 8 million referenced is what we have.

Eight eight.

Are the list of initiatives that we have that are in progress of moving forward with.

As Mike as the slides mentioned that since the 250 and plus and we're really are a list of 250 initiatives that we go through us and operating committee and each operating committee members and the process of executing on which we believe we will be able to.

Reduce on a gross basis the expense base by $8 billion.

Away from that.

And we're not done.

Still first of all it looks like peeling, an onion back and so once you get a series of efficiency. It helps you look at everything.

Else, that's left as well and so we're confident that there'll be more after that.

And which will help continue this multi year drive to get to what we think is a reasonable efficiency level over a period of time to be comparable with our competitors.

First of all it took them years to get there and so that's why it will take us.

A fair amount of time as well.

We will accomplish a lot of it through expenses.

But we certainly need.

Higher net interest income.

And some growth and our non interest income expenses.

Would certainly be helpful is there so I still think of efficiency is something longer term.

As we focus on just getting the expenses out and focusing on returns our efficiency ratio will naturally become more competitive as opposed to a specific target and a specific year.

Yeah.

Okay, that's good context, and I appreciate that and.

And then separately just as it relates to the asset cap so under the new business line reporting a lot of this becomes a bit more self evident. So I appreciate that but just as you guys look at it on a day to day basis, what is the asset cap doing to your ability to retract and attained customers at this point and I feel like all of this excess liquidity and the form of deposits.

Washington This system over the past nine or 10 months, just been such an embarrassment of money for the industry, but unfortunately, you guys have.

Just a company specific hurdle and having to manage that that dollar amount, so and as it relates to sort of customer interface with existing ones and and potential ones. How is the cap impacting things at this point.

Yes, So let me start and then Mike and <unk>.

Certainly pick up I think first of all and.

And I think we ask the question is a is.

He is a good and interesting one and we need to separate the conversation.

About the asset cap between impact and our financial performance and impact on the franchise.

And Theres no question that the impact on our financial performance is.

As material in this environment right. When you just look at.

Well I think when we look at actions that we've had to take.

And to prioritize balance sheet usage.

In an environment, where certainly early on and there were significant draws and then those proceeded with people's ability to refinance elsewhere.

But deposit inflows.

Sure.

<unk>.

Having to manage to those things.

Certainly has been a cost to us.

And then I will certainly also add to that as we think about additional stimulus.

And we need to create room on the balance sheet to be able to deal with that stimulus be its fiscal or monetary.

And so even versus where our balance sheet was running when we went into the pandemic just because of this environment, we have to manage and lower in addition to the specific actions that we've had to take.

Does of.

The requests that we've had both on the asset and the liability side for management and the balance sheet.

And then we also think about.

And when we went through the crisis.

The ability to add higher yielding assets.

When we were focused on staying below and asset cap is something that we were not able to do.

Others are able to do.

And then you look at our need not just to keep the balance sheet flat, but to have it be incrementally lower to create the capacity versus others and ability to increase it and you add those things together and financially in this environment.

There's no doubt that it is a it is a really meaningful drag on our ability to.

To offset certainly.

NII in terms of the franchise, which is a separate question.

As we've gone through the exercise.

Which we were doing daily and now we don't do as closely daily, but we do do it regularly.

Conversation that we have is all around where can we make changes or.

Create capacity.

Which.

Has the least franchise impact so if you look at what we've done.

We're not limiting our consumer deposits and.

And we've seen very very strong growth there.

We have pulled back on.

Our non conforming correspondent business for a period of time.

We think when we turn that back on.

If were the rate provider at the right price, then we will be and the market for that.

Certainly on our wholesale businesses they have been more impacted.

By actions that we've taken.

I think on the commercial side, we've tried to be very very <unk>.

Smart and I would say, we I mean, the team there Terry and the team to try and be very smart about.

Operational versus non operational where our customers have other choices and.

And they understand the position that we're in and the same thing on the corporate investment banking side. So.

And that's just a very long way of saying I think that we've done a very good job of having as little franchise impact as possible.

Hard to say nothing but.

The places that we've gone are places where people have the <unk>.

<unk> and to understand why we're doing we continue to do the other business with them.

John.

Sure.

And it's something that we continue to obviously be really thoughtful about Mike anything else you'd add.

No I think that I think that's right and I.

And kind of underlying would probably stay on the consumer side is that we're not putting any kind of restrictions there and I think that.

We are seeing.

Almost a 20% increase in deposits and consumer deposits and I think that's a good a good sign of how people feel about us and doing more with us and so I think that's encouraging to see on the consumer business.

Yeah.

All right that's perfect. Thank you very much share your thoughts I. Appreciate you guys taking the questions.

Sure.

Your next question comes from the line of Brian Klein, Enzo with K B W.

Hey, good morning.

Just one quick question.

First one on the reserve I know you said that you don't have the reserve release.

Related to student lending this quarter, but I guess, if you think about the reserve and where it stands as of year and I mean, if we could equate that relative it seems like your reserve for something worth for the base case I mean, if you if we move to base case, where everything returns to kind of a normal.

How much does that imply for potential reserve release relative to what you had at year end.

Well.

Brian I think and you sort of think about the reserve levels.

I think for anybody given the way the accounting standard works Youre not youre not necessarily reserve just for a base case rate reserved for a whole number of scenarios that could potentially play out.

That are far worse, potentially then a base case scenario and so and that's and that's kind of where we are.

Or are we are today.

As you sort of look forward.

I think as we sort of see the path of the recovery I think we're hopeful that all the all the stimulus and support that the governments and putting in and it's many different ways and the potential for more of that should help provide a good bridge.

And two to the other side, but it's true and as Charlie said I think if that's a if that's the case I think we're we.

We feel that we're very conservatively.

Crude for that kind of positive.

Outcome.

But I think and we'll see how it plays out over the over the next couple of quarters.

And I didn't know one thing I'd add I mean, it's just when you wind up.

Quarter over quarter, our allowance to loans is.

As a percentage basis is the same.

And we sit here today, and we say and the performance continues to be better than expected.

Which would suggest we feel even better about the.

The level of reserving.

But again, we're just given the unknowns we think it's.

It's a it's a good position to be in and the prudent thing to do but we certainly feel better off.

Quarter by quarter.

Okay, and then just a separate question on the selected efficiency initiatives that you outlined on slide 18, and can you just kind of walk through which ones are the biggest impact.

The overall expense savings and I know you had five different ones kind of summarized there, but looks like the number one two with regards to potential expense save.

Yeah, I would bring it back to page 17, and the presentation and the right hand side we've dimensions.

Percentage that each of the categories contributes two to the 8 billion, Brian. So I think that will probably give you a good sense of where the most or the most impacts coming from and really the things that we're doing across the company in terms of really streamlining the structure and finding ways to optimize our the biggest.

Single piece, but it impacts many most.

And most groups across the company and then as you sort of look at the other categories.

It is.

There is somewhat comparable relative on a relative basis in terms of their contribution and so you can see what that looks like.

Your next question comes from the line of Matt O'connor with Deutsche Bank.

Hi, guys.

One night and Nitpicky question and one bigger picture.

First of all and nitpicky when.

And then when we look at that path to the 10% short term our OTC.

Using the fourth quarter or is the base and you obviously had a very low tax rate I think it's about 3% and even if we strip out the reserve release is about 25 basis points of charge offs.

So that 10% kind of ROTC and and the short term whenever that is is that kind of dependent on still unusually low tax rate and reserve release or.

Is that really driven by.

The incremental expenses beyond what you've laid out and obviously the capital too.

Yeah.

Yeah no.

It's a good question.

Because we sort of look forward I think the as you think about the different components of.

What you what you walked through.

I think the as we said it for 2021 the tax rate is going to be sort of mid single digits.

And so you get a sense of how we think how sustainable that is for for a little while.

And really the big drivers here, though are going to be driving the expense down.

As.

As we sort of outlined and really getting the annualized benefits of all the stuff, we're doing today and and the stuff that we will have more impact and.

And 2022, and then and then obviously, we've got to get we've got to get the restrictions lifted on.

On the buyback so I wouldn't over I wouldn't over index on sort of the one timers that you see in the quarter because the reserve releases are offset by some of the restructuring charges and other things that you sort of look that are embedded in that 8%.

And Brian.

And sorry, Matt I guess, Charlie the only thing I would add and I'm, sorry, I'm sorry, Matt.

Sorry.

The only thing I would add is just being very critical of that and as Mike said I think there are lots of pluses and minuses, we could go through each of them and we do think it is a reasonable starting point, but the thing I would add is we obviously at this point and have really detailed plans as we look into 2021 by quarter and for the full year.

And do feel very good about that as a starting point.

Okay, and then the bigger picture question and Theres, probably no Super Tactful way to ask this but.

You've assumed at.

We share for the targets and guidance no lifting of the asset cap this year.

And it seemed like that was being telegraphed by some of the media articles and recent months, but I.

I guess, if we do kind of look out a year from now and the asset cap hasnt been lifted would that be disappointing to Charlie and I appreciate that it'll be a little over two years you've been share.

But at the same time it takes time to build a management team and there has been COVID-19, which.

Your firm and the banks in general have done a lot of things for employees offerings for customers and that can be distracting.

So I know, there's some puts and takes but a lot of us on kind of the investor and the sell side.

And obviously look at the asset cap being in place for quite some time and and I'm sure, you're and patient and we're all and patient care.

Would you feel a year from now if it's still here.

Yeah, Matt listen.

It's a very very tactful way.

Asking the question of when we think the asset capital be lifted, which you know that I'm not in a position to answer and.

So I think.

And I think your sentiments.

Ah right about what it takes it takes time it takes a management team.

I think what I'll say, if you look at the remarks that we made in the prepared part of the call. The words are very carefully chosen.

And so.

We do believe that we're making progress.

As I know, even more broadly and I feel great about the team we have and place our understanding of what has to get done for this consent order and for the others.

As I said.

And that I do believe that we're making progress.

But if you look at the words that are required and the consent order there really clear, which is execute and implement that and we've got significant work to do and.

I can't share with you I wish I believe and I understand why you're asking I said this last quarter too I really do.

And I wish I could share with you the specifics of what the plan is I can't do that and ultimately it's up to the FRP anyway. So I really just not and are positioned to put the timeframe around it.

Other than I feel very confident that we know what has to get done and we're moving forward and I wish I could be more specific than that.

Okay. Thank you.

Your next question comes from the line of John <unk> with Evercore ISI.

Good morning.

Good morning, Charlie Charlie sorry to hop right back to be honest the capital one more thing on that I wanted to see if you can let us know I know part of that process is the third party review are you able to let US know if your yet at that stage of the third party review for the consent order that includes the assets.

I really can't.

And we're not in a position because of CSI to be able to talk about.

Where we stand and the progress where we are and.

Along that continuum.

Again, I, just I'll go back and I wish I could say more I go back to the words.

I do believe that we're making progress.

As I said, it's really clear what we have to do.

I think we have people that.

Don't just understand what needs to be done, but are capable of adopting and implementing which is what's required for the third part of your view.

Once the once.

At the point at which the fed ultimately accepts the.

Or just chooses to accept.

And.

That's really all I can say at this point.

No. That's helpful. Alright, Thank you and then separately on the expense front the.

The 8 billion and cost saves does that already reflect the real estate rationalization to 15% to 20% reduction that you mentioned and I know you cite here on the slide around the expense efforts, but I'm not sure does it reflect that whole rationalization, because that's a fairly substantial.

And cut to your real estate footprint.

Yes, the bulk of it is included in.

And the $8 billion number that we gave you.

Okay. Thank you one more thing on that.

Regarding the cadence of the remaining.

$4 3 billion of that 8 billion beyond 'twenty 'twenty, one and I know you indicated be over several years is that still going to be more front end loaded beating could the savings realized in 2020 to be higher than what would be realized in 2023, and how we should think about it.

Well I think we'll give you better guidance on 'twenty and 'twenty two as we get towards the end of the year, but it's something.

That will take a few years to sort of work our way through that list and as and as Charlie said, we're not done there's a long list of other items that are being vetted as we speak to that sort of add to that add to that list so and.

And let me let me just add to it so we're not trying to be coy in any way shape or form. We're trying to do is do what we said we would do which is.

And we said last quarter that we would give you what we thought was our clear line of sight.

Our expenses for 2021.

Which is what we've done.

As we look beyond that.

We do believe there are significant additional gross cost saves to take out but we're also.

And making sure that we've got the ability as we go through the year to understand what continuing investments need to get made.

Which include doing everything that we need to do on the risk and regulatory fronts. So we don't want to give a net number and box ourselves in and then believe we need to spend a different amount on the risk and regulatory stuff, because that's going to be what it ever needs and what it needs to be.

And so what the prepared remarks.

That was the gross saves are significant we expect to.

And what we're targeting is to continue to show net reductions.

Year over year. So we continue on this path to increasing efficiency.

Acknowledging that we're not giving you the specificity beyond 2021 at this point.

Got it that's helpful Alright, Thank you.

Your next question comes from the line of David Long with Raymond James.

Good morning, everyone.

Good morning, Charlie you you mentioned in your prepared remarks that the banks number one focus is building the rate management team, obviously, a lot of changes near the top and and your <unk>.

GAAP operating team for the last 15 months since you've been CEO are there still additional changes needed and that team and any specific positions that you would still like to fill.

Yes, so just.

First of all our number one priority is getting the risk and regulatory work done.

Which will ultimately resolve.

These consent orders that we have the management building the management team is what are the key enablers.

And getting there.

Yes, and I feel great about the.

And the management team that we have I think that this.

This is these rowe.

And there's always an ongoing process, where we're always looking at.

Once one level gets filled everyone's looking to make sure that they've got the rate and members.

The team behind them and there's no question that with all of the talent we brought in from the outside given where we are that enables us to leverage more of the talent inside the company and put them in the right roles. So.

So I don't foresee this.

The pace and.

The dramatic changes that we've made.

I think most of that is done at this point and then it's just continuing to build at.

The lower levels and.

And recognizing that there are always some changes that happen here and there for different reasons.

Got it and I appreciate the color and then the you talked about additional cost still needed to improve the operations and your investments and 2021.

And to get out of all the remaining consent orders.

Where do you still think you need to spend do you have any areas earmarked at this point.

Yes, so when we look at that.

And what pages if it's the page 19 that shows the where we break out from the 54 billion and going to 53, and then we break out the net 1 billion and a half production and we show you the gross.

Versus the investments embedded and that $1 billion, six and as a series of things.

Roughly a third of it or so.

Our specific ads that we're doing to continue the work on building out the risk and control infrastructure. Those are everything from continued ads and compliance independent risk and.

And all the functions that are necessary to for the most part build the operational and compliance infrastructure, that's required and fed and OCC consent orders, but as you know.

The right foundational work to do.

We have a series of increases.

Embedded in there, which are investments and technology.

Some of the expenses relate to things, we need to build to get the efficiencies out but we also have some net increases there also to continue building out some some product capabilities and things like that so I would just point you back to that $1 billion and fixes.

On a gross basis whats embedded in our numbers. This year 2021 that is.

Got it and I appreciate the color. Thanks for taking my question.

Sure.

Okay.

And operator.

Operator are you there.

Oh.

Hold on everyone.

Give us a minute.

And John Campbell Youre working on this.

Your next question comes from the line of Gerard Cassidy.

Thank you and good morning.

There arent trying it better be a good one given the anticipation.

And he would go.

Maybe you guys and your expense savings zoning and paid for 90 minutes and then.

And so.

But anyway and even.

Taking the question maybe Mike.

I know the net servicing income is always volatile quarter to quarter can you share with us the.

And what went home and as hedging this quarter.

Obviously, it was a negative number but again I know, it's volatile quarter to quarter.

Yes, sure and Gerard I May take you up on the idea by the way of limiting limiting Paul.

Maybe next quarter look I think.

Look at the.

And the MSR asset, obviously, theres, a theres a bunch of things that sort of impact what's happening with sort of drive.

The servicing income in there and I.

A couple of things you saw.

Does the higher Prepays.

And sort of the velocity and the mortgage market impacting that and then you also saw servicing.

Net cost.

And as model. So as you probably know with these assets like you're modeling your future cost, which then reduces or increases your income and the current period.

And you look at the.

Net servicing income going up a little bit as you sort of look at the cost that you might have to incur given some of the forbearance programs and the extensions of those and so there wasn't anything.

Outside of those items that was really driving driving the result.

Very good and then as a follow up.

And.

And I understand about the asset cap and the balance sheet, but in your net interest income expectations and slide 16.

And what kind of interest rate environment would you need to see for the <unk>.

Drag that you give us and that slide for that to go away. If you had your druthers, if you could paint the interest rate environment and Thats, a sensitivity analysis and assuming you guys do.

What would we need to see for them too.

And to disappear.

Yes. It is.

And I said earlier.

To get to the top end of that range. We're looking we're using sort of the implicit the implied forward curve.

As it stands you know over the last week.

A week or so.

And so I think as you think about all else equal.

And any steepening from here or just overall increase from here I think it would be would be helpful and additive to that.

Great appreciate it thank you.

And you have time for one more question and that question comes from the line of Erika Najarian with Bank of America.

Hi, Thank you for taking my question and Charlie. Thank you for your patience on this long haul and just wanted to get back to the question on gross versus small and wanted to get clarity on the $1 $6 billion from investments and I think earlier and the call. You mentioned that there was still mostly related to risk and regulatory relief.

Good work and.

As we go forward and.

Think about the potential for a higher ratio of net versus gross and how should we think about.

Offensive more often and some type of expense of investment do you think one of your peers today.

And you know $2 4 billion investments and $900 million of which was related to tech.

Yes, so just to be clear because I don't want them.

The $1 billion six that's and the investment line and roughly third of that is very clearly.

The risk and control Buildout.

But the reality is there could be other things that we're doing that's and the remainder.

Another big chunk of what's in that and increase our things that we're doing to drive efficiency and the company and.

And then there are obviously things that we're doing to build the future of the business.

To your question of how to think about gross and net and the level of investments for the future I think that is that's quite frankly.

And that's one of the reasons why we're just being very careful not to.

Commit to anything beyond 2021 for 2021, we've been very very thoughtful about what we believe we need to do what we wanted to do and what do we actually have the capacity to do and that's what's reflected in these numbers here.

We hired a series and new people both from the business side as well as <unk> on the digital side and.

And as we think through what the expense base could be in 'twenty, two and beyond.

We don't know at this point, what we want that increase to be.

Which over time, hopefully becomes more about building products and services to compete more effectively and the marketplace.

And so I'm not sure again, how to answer the question other than.

<unk>.

We expect to be doing that we do have some of the embedded in the numbers today.

But we want to make sure that we understand what.

We might want to do.

At the same time that we're saying we believe based on everything we know today that we still should be able to do that and drive the expense base down on a net basis, just not sure what the net number is sitting here today.

Great. Thank you for taking my question.

Of course.

And your last question comes from the line of Vivek and Jeff from J P. Morgan.

Yeah.

Hi, Thanks for squeezing me in.

So a quick one firstly to start with which is expense reduction.

And that's Charlie and Mike Sorry, I jumped over and then go with the pleasantries are saying Hello, because I know they are squeezing me in.

And we said.

Net revenue and digits down low single digits from the business exits and how 'bout expense reduction.

Yeah, Yeah, Vivek will give you more we'll give you more color as we sort of announce those and we get to the closing of some of those transactions but.

It's probably not that different I think relative to the revenue contribution.

Okay and then.

Charlie since this is the only opportunity we have to talk to you I have a question strategically just to understand and tissue I'm, making a lot of changes.

Three areas Firstly CRA since you are the biggest player have been what are you thinking there in terms of outlook for that business, including commercial real estate.

Mortgage banking since you've cut back and disclosure and is that a sign that you are pulling that back a little and.

And lastly, Charlie.

And your outlook for trading assets that down sharply year on year.

And your plans for trading.

Yes.

CRE and.

As you can see and our disclosures is an extremely important business for us we think we have.

A great franchise, which is made up of the customer base, but it's also the people that we have.

We're not you know our portfolio is not immune to losses that will.

<unk> be taken because of this environment.

Separate out them separate that out from we believe that we are.

And hopefully more than appropriately reserved for that.

Time will tell.

The Devil is in the detail when you talk about commercial real estate in terms of it's a very broad caption.

But when you look at who you're lending to what the structures are.

Obviously big difference between hotels and retail office space.

The level of security you have.

And so we.

We continue to believe.

That done properly.

We will continue to be a really important part of what we do.

And we've got a team that reacts.

And action.

Actions, they've taken certainly going even though even into.

Covid.

It will serve us well.

Trading.

It was and I think as I said before Vivek I think youre expanding the impact a little bit I think there's no question that when you look at our our corporate investment Bank and addition to our commercial bank.

<unk>.

And when we've asked people to take actions to.

Reduce balance sheet.

That's a place where we've gone.

And it's true on the deposit side, but it's also true.

The trading side as well both in terms of customer financing as well as trading assets where possible.

Again, I would say the same thing here I think our customers understand.

What we're doing and why we're doing it and they.

I understand the position that we're in.

And I think when we've looked at where we've had to make reductions it's been with an eye towards when the asset cap does eventually go away and we have a latitude to continue building as we were building and the past.

We would expect.

See more resources put there certainly to bring us back in line, where we were and then to build the business like we want to build the rest of our businesses and wells.

Okay, Great. One last one was mortgage banking Charlie any color on that plan and so that obviously you've been a leading player.

Much bigger piece for you than the other geographies.

And what's your thinking on that you've cut back on correspondent what are you thinking as you look ahead.

And given that you've cut mask, making they wanted to.

No I listen I think it's a particularly.

Home lending is a really important business for us to be and.

When we look at what we want to do to serve consumers across Wells Fargo.

<unk>.

Home lending and but when I say consumers I mean, both and our consumer and small business bank as well as customers that they deal with directly through their own channels as well as our wealth segment.

And home lending products are extremely important to that relationship.

We've got a great.

Team there.

As you know Mike Weinbach runs all of home lending Christy FERC co joined us as the CEO of our home lending business.

And.

I think for us, it's going to be going to that next level of detail, which is really understanding on the origination side by channel. What is profitability look like how do we continue to drive more profitability how.

How do we compete more effectively.

And in digital originations, where the banks generally have not done a great job versus what others have done and on the service excuse me on the servicing side.

Being more thoughtful probably than we've been about.

Portfolio by portfolio, what are the servicing economics, where do we think it makes sense for us to service, where does it not make sense for us to service and so.

I think what Youll see is us.

Becoming putting a finer point on what that looks like from a service perspective, and driving more profitability on the origination side.

But it's important for us.

Okay. Thank you.

Okay listen thank you very much certainly we appreciate all the time that you've put in and not just on this call.

But we know the revised disclosures create a bunch of work for you all but.

But hopefully it helps us have a better conversation going forward as we talk about what the future of the company is.

And as I said I think we've got.

A lot of work still.

To do I believe we are making great progress and.

And when these headwinds abate and the actions that we're taking.

And are reflected in our performance I continue to feel really good about what the opportunity holds for us. So thanks again for the time and look forward to talking to you some more take care.

Okay.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation.

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