Q2 2021 Wells Fargo & Co Earnings Call
Good morning, My name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Wells Fargo second quarter 'twenty 'twenty, 1 earnings conference call. 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 would.
I'd like to ask a question. During this time simply press Star then the number 1 on your telephone keypad. If you would like to withdraw your question press. The pound key. Please note that today's call is being recorded I would now like to turn the call over to John Campbell Director of Investor Relations. Sir you may begin the conference.
Thank you Regina good morning, everyone. Thank you for joining our call today, where our CEO, Charlie Scharf and our CFO, Mike Sena Masimo will discuss second quarter results and answer your questions. This call is being recorded.
Before we get started I would like to remind you that our second quarter earnings materials, including the release financial supplement and presentation deck are available on our website at Wells Fargo Dot com.
I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties fat.
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 in the earnings materials available on our website.
I will now turn the call over to Charlie.
Thanks, John Good morning, I'll make some brief comments about our second quarter results the operating environment and update you on our priorities I'll, then turn the call over to Mike to review second quarter results in more detail.
Let me start with the second quarter, we earned $6 billion or $1.38 per common share in the second quarter. These results included $1.6 billion decrease in the allowance for credit losses as present as credit quality continued to outperform our expectations charge offs continued to decline as the economy.
To improve and our customers continue to have high levels of liquidity revenue increased compared with the first quarter. While net interest income was stable, we had sizable gains from equity securities and card and deposit related fees increased reflecting increased spending expenses declined reflecting a decline in personnel expense.
Which is typically highest in the first quarter and progress on our efficiency initiatives. If you look through the reserve release and outsized gains from equity Securities. We are pleased that our results continued to show progress, even though high levels of liquidity weakness in supply change and low interest rates remained.
As headwinds economic growth was robust in the second quarter with real GDP estimated to have increased at an 8% annual rate with especially strong gains in consumer spending we continued to see supply chain shortages impacting both supply and prices across many sectors home prices are.
Weighted to have increased at a 24% annual rate as scarcity of properties for sale persisted and half.
Unit sales exceeded asking price used car prices continued to increase due to ongoing supply constraints with the second quarter Manheim index, increasing 17% from first quarter 'twenty, 1 and 45% from a year ago. However prices may have peaked in may after 4 consecutive months of record highs with june's.
Manheim index, finishing 1.3% lower than may.
For Wells Fargo consumer customers, nearly $50 billion of federal stimulus payments from round, 2 and 3 have been deposited into our customers' accounts and we estimate roughly 25% remained in their accounts as of July 2nd for our customers who received stimulus payments their median deposit balance was up 50%.
6% compared to April 2020, which is prior to the first round of federal stimulus payments and for all of our customers, including customers, who did not receive stimulus payments median balances were up 49% over that same time period weekly debit card spend was up every week compared to 2019 during the second.
Quarter and areas hardest hit by the pandemic have recovered, including travel up 11% entertainment up 38% and restaurant spending up 28% during the week ending June 25th compared with 2019.
Consumer credit card spending activity continued to increase up 13% in the second quarter.
<unk> 2019.
As of the weekend of June 25th travel related spending which was hardest hit during the pandemic was up significantly from 2020, but was the only category that is not fully rebounded to 2019 levels. Our commercial banking clients have also continued to have high levels of cash on hand, and accommodative capital markets and supply chain.
<unk> continued to.
2 a continued decline in commercial banking loans outstanding, albeit at a slower pace than the last few quarters now.
Now that we're halfway through the year, let me update you on progress we've made in the areas I highlighted at the beginning of the year.
Ive spoken at every call about our most important initiatives, making progress on risk and control wells Fargo's top priority continues to be building the right Foundation for a company of our size and complexity when done this should meet our regulatory requirements and we rank we remain committed to.
Devoting the resources necessary to operate with strong business practices and controls maintain the highest levels of integrity and have appropriate control and appropriate culture in place the amount of customer remediation and control related issues that existed when I arrived was many multiples.
Exists at our company I've spoken of what we've put in place to address these issues and by most metrics, we're making significant progress regarding our work on consent orders and other regulatory requirements. The work remaining is significant and as such this remains a multiyear journey for us while what's required for each is clear there are numerous.
Risk complexities with managing this amount of work concurrently and it will take time to consistently accomplish all at the level, we and our regulators expect as such we may have setbacks and progress will not be a straight line. However, I remain confident in our ability to complete the work.
Building a strong management team was another key priority when I first joined wells. Our objective was to ensure we have the talent necessary to close our risks and control gaps during the first half of my tenure around 60% of senior level hires were in these functions and many more across the company directed their efforts towards these <unk>.
<unk>. This remains our most important priority today, and we will continue to add resources here, but we're also adding significant resources to improve our competitiveness and provide the foundation for higher levels of performance. During the second half of my tenure, while we've continued to hire senior leaders in risk and control areas we've been in.
Creasing, our hiring in areas that will grow our business with over 70% of our senior level hires focused on this objective. This includes significant hires in the data platform and analytics strategy digital and our technology groups. We're focused on the cloud payments Fintech competition tech companies and our own.
On data and digital capabilities hires include a digital platform leader for all of our consumer businesses, our head of digital for commercial banking and the CIB head of strategy and innovation for consumer and small business banking head of our commercial auto group head of consumer banking National business development, and a new head of payment strategy.
<unk> for the entire company, we're also adding bankers in the CIB and commercial bank, where we see growth opportunities. We also.
Just announced last week that we've hired bailing as the new head of human resources, She will be joining us in October.
And providing clear business focus on strategic direction has been important as well as we allocate our resources, we will not do anything to jeopardize our control related work, but we have also begun to execute on plans to build what's necessary to compete effectively in today's dynamic business environment. Our playbook was dated and was <unk>.
To provide direction and be more aggressive about building leading products capabilities and innovating.
We've been focused on targeting our resources towards most meaningful today for our customers by selling or closing businesses and we're leveraging our breadth and scale to compete with banks and nonbanks alike by working to build new capabilities and work across the company deliver to deliver all of wells Fargo to our customer base, we're rebuilding core capabilities.
But are beginning to instill a mobile first mindset is part of a broader technology and data guided efforts..1 example is our credit card business, where we've been working with where we've been working on it since I arrived to build a foundation to compete more effectively being competitive here is both an opportunity to grow but more importantly.
As a strategic imperative is credit and payments are critical to maintain and build customer relationships and we will do this with both traditional card products in other ways over time, our playbook is simple build an experienced management team update and relaunch product.
Customers will make top of wallet improve customer service and leverage both our branches and strong digital capabilities to serve our customers in the second quarter, we announced the first new product to several to come and industry, leading cash back card, which is now just rolling out. We're also enhancing our deposit products are no overdraft product.
Clear access banking continued to perform well with over 825000 accounts opened since the launch in the third quarter of last year. We also simplified and improved the benefits of our portfolio by Wells Fargo checking customers in the second quarter of this year. These are just a few examples of how we're moving forward, but we have initiatives across.
All businesses, which will cover over time.
And lastly, we've continued to take meaningful actions and are progressing towards better returns as we highlighted at the beginning of the year, we see a path to get to double digit ROE TCE, excluding credit loss reserve releases, and then moving towards approximately 15%, we said that the path to double digit our OTC is dependent on <unk>.
Capital optimization and executing on our efficiency initiatives with CCAR complete on a return to the SCB framework. We're now on a position to return significant capital to shareholders. We expect to increase our third quarter common stock dividend to <unk> 20 per share subject to final board approval, increasing our dividend is a priority in our plan.
Continued increases as we grow earnings capacity. Additionally, our capital plan included approximately $18 billion of gross common share repurchases starting in the third quarter and concluding in the second quarter of next year. This may change depending on a variety of factors, including our earnings and economic outlook, Mike will provide more context.
Next here importantly, we remain on target to accomplish the expense reductions contemplating and achieving the double digit ROE TCE level, assuming no material changes in the economic environment or interest rates, we expect to achieve a sustainable 10% ROE TCE, excluding reserve releases in <unk>.
Other special items, both positive and negative on a run rate basis during 2022.
Beyond this we continue to believe we can further improve our returns through a combination of factors moderate balance sheet growth. Once the asset cap is lifted a modest increase in interest rates or further steepening of the curve ongoing progress on incremental efficiency initiatives, a small impact from returns on growth related investments.
In our businesses and continued execution on our risk regulatory and control framework. The combination of these factors, we believe would take our OTC to approximately 15% overtime.
And while we're focused on improving our execution and results, we know that supporting our customers and communities will continue to be an important part of our mission. The work we did through the pandemic was meaningful and necessary to help those most in need, especially consumers and small businesses, but there remains much more to do we offered payment deferrals waived fees supported small.
<unk> and diverse small businesses through the paycheck protection program, we committed to donate all gross processing fees from PPP loans funded in 2020 totaling approximately $420 million to help small businesses.
Recovery efforts and have completed funding of $234 million of our commitment we expect.
To fund the rest by the end of the year. We were also voluntarily extending our foreclosure moratorium on mortgage loans, we own through the end of this year and we're pleased that the industry is contemplating similar foreclosure extensions, we issued our first sustainability bond, which will fund projects and programs that support housing.
Portability socioeconomic our opportunity and renewable energy, we partnered with diverse firms and the offering of our $1 billion sustainability bond with approximately 75% of the economics go into these firms underscoring our commitment to supporting historically marginalized communities. We fulfilled the pledge that we made last year to <unk>.
Mid $50 million to black owned banks in communities across the country with investments in 2 additional African American minority deposit institutions during the second quarter, and we announced banking inclusion initiative, a 10 year commitment to help unbanked individuals gain access to affordable transaction accounts. This is a complex and long standing.
Issue that will require gathering the best minds ideas products and educational resources from across our communities to bring about change and help remove barriers to financial inclusion.
In summary, let me say that the outlook for the economy for the rest of the year is promising assuming continued success against Covid. The restocking of inventories is expected to be substantial and the excess personal savings should provide a cushion for consumer spending. However risks remain interest rates have been volatile and the recent rally in rates as <unk>.
Putting pressure on net interest interest income we've made meaningful progress on our important priorities during the first half of the year, but this is just the start of a multi year process to transform wells Fargo I want to thank everyone at wells for their hard work and focus on supporting our customers I'll now turn the call over to Mike. Thanks, Charlie and good morning, everyone. Charlie highlighted many of them.
As we're actively helping our customers and communities on slide 2 so I'm going to start with our second quarter financial results on slide 3.
Net income for the quarter was $6 billion or $1.38 per common share as Charlie highlighted our second quarter results included 8 billion 6 decrease in the allowance for credit losses pretax pre provision profit grew from both a year ago and from the first quarter as we grew revenue and reduced expenses.
We had $2.7 billion or approximately 2 billion after non controlling interests of pre tax equity gains predominantly coming from our affiliate affiliated venture capital and private equity businesses.
Approximately $2 billion was due to unrealized gains from follow on financing rounds, reflecting significantly higher valuations in a number of portfolio companies. The remaining approximately $700 million was realized gains.
Given the nature of these businesses. These gains tend to be episodic. However, since 2017. These businesses have generated annual gains in excess of $1 billion in every year, except 2020, which was impacted by the pandemic.
We completed the sale of student loans in the second quarter, which resulted in a $140 million gain and a $79 million write down related goodwill.
Our effective income tax rate in the second quarter was 19, 3%, which reflected accounting policy changes for certain tax advantaged investments, we elected to make these changes to better align the financial statement presentation of the economic impact of these investments with the related tax credits prior period financial statement line items have been revised which had a nominal.
Impact on net income on an annual basis, the changes did improve our efficiency ratio and increased our effective income tax rate from what was previously reported we provide details regarding these changes on slide 16 in the appendix of this deck and on page 30 of the quarterly supplement reflecting these changes we expect our effective income.
Tax rate for the full year to be approximately 20%.
Our CET 1 ratio increased to 12, 1% in the second quarter. This year CCAR stress test confirmed the significant strength of our capital position based on the results. We expect our stress capital buffer to increased 60 basis points effective in the fourth quarter of this year and as a reminder, our G. SIB capital surcharge will decrease by <unk> <unk>.
50 basis points effective in the first quarter of next year, which will bring our CET 1 regulatory minimum to 9.1% in the first quarter of 2022 as.
As Charlie highlighted we plan to return a significant amount of capital to our shareholders starting in the third quarter and expect to move closer to our internal target of 100 basis points above the regulatory minimum overtime. We also currently expect to maintain an incremental buffer of 25 to 50 basis points above our target to account for potential uncertainties.
And maintain flexibility under the SCB framework, we will have flexibility to increase capital distributions and its possible, we will be able to repurchase more than the $18 billion included in our capital plan over the 4 quarter period, depending on market conditions and other risk factors, including Covid related risks.
Turning to credit quality on slide 5 our net charge off ratio in the second quarter declined 18 basis points, the improving economic environment with the reopening of the economy government stimulus and ample liquidity as well as customer accommodations have resulted in our credit losses, continuing to trend significantly better than our expectations.
Commercial credit performance continued to improve and loan charge offs declined $69 million from the first quarter to 7 basis points, our lowest loss rates in second quarter of 2018.
The improvement was broad based with declines in all commercial asset types, including net recoveries in commercial real estate, while the overall outlook for commercial real estate continued to improve we remain focused on the areas most impacted by the pandemic.
The opening of the economy has continued to have a positive impact on retail hotel as cash flow has improved while losses in problem loans and office have been very low we continue to monitor this sector as longer term demand trends may be influenced by changes in hybrid work from home models. It's also important to note that even with the reserve release in the second quarter our.
Average ratio for commercial real estate loans was still higher than it was a year ago.
Consumer net loan charge offs declined from both the first quarter on a year ago to 32 basis points in the second quarter nonperforming assets declined $695 million or 8% from the first quarter driven by lower commercial non accruals declines in C&I and non accruals were driven by improvements across a number of COVID-19 impacted sectors, including entertain.
And recreation energy transportation services in retail declines in commercial real estate were driven by improvements in office.
A year ago $37.2 billion of our consumer loan portfolio, excluding government insured or guaranteed loans was in COVID-19 related payment deferral deferrals have declined 79% from a year ago to $7.8 billion at the end of the second quarter, we stopped offering non real estate related COVID-19 deferrals in the fourth quarter of 2020, but continue to offer.
Certain COVID-19 related deferrals in home lending for a maximum of 18 months. It is important to note that loans have already exited COVID-19 have already exited COVID-19 related deferrals have continued to perform better than we anticipated with approximately 94% of the balance is current as of the end of the second quarter.
We started to tightened our credit policies in March 2020 in response to the pandemic and we have now essentially returned back to pre COVID-19 levels of policies. However, we continue to be thoughtful of the much higher asset prices in areas like residential real estate and auto.
Due to the reserve release in the quarter, our allowance coverage ratio declined from both the first quarter and a year ago similar to the first quarter, while observe credit performance was strong there were still significant uncertainty reflected in our allowance level at the end of the second quarter and will continue to assess the level of our coverage.
Current economic trends continue we would expect to have additional reserve releases.
On slide 6 we highlight loans and deposits.
Average loans declined in the quarter the rate of decline slowed with balances down 18, 7% or 2% from the first quarter. The decline from the first quarter was almost entirely driven by lower residential real estate loans, primarily due to continued high prepayments and the re securitization of loans, we purchased out of mortgage backed securities last year.
The total of period end loans were down 1% from the first quarter and while it's hard to predict exactly what will happen during the second half of the year and while line utilization rates remain low we are seeing signs of green shoots with modest growth in period end balances compared to the first quarter in auto other consumer credit card and commercial real estate.
Average deposits increased $49.1 billion or 4% from a year ago and 3% from the first quarter with growth in our consumer businesses and commercial banking, partially offset by continued declines in corporate investment banking and corporate treasury, reflecting targeted actions to manage under the asset cap.
Now turning to net interest income on slide 7 net interest income was stable from the first quarter as favorable hedge ineffectiveness accounting results higher income due to additional forgiveness of paycheck protection program or PPP loans.
1 additional day in the quarter was offset by lower loan balances and the impact of lower interest rates.
As we think about net interest income for the remainder of the year the rate volatility observed over the last few weeks has shown how difficult it can be to forecast even for the next couple of quarters. The key drivers continue to be demand for loans on balance sheet yields which are impacted by the level of rates the shape of the curve and credit spreads.
While the recent rally in rates and continued softness in loan demand and put downward pressure on net interest income we still expect NII for the full year to remain in the range of flat to down 4% from the originally reported an annualized fourth quarter of 2020 level of $36.8 billion.
We're in the range, we end up will be dependent on the factors I mentioned if rates follow the current forward curve and overall loan balances remained flat from the period end balance at the end of the second quarter for the remainder of the year, which would require modest growth in commercial loans. We would expect net interest income to be in the lower end of the range. If we see rates back up from her.
And start to see more loan growth will move up in the range. We continue to closely monitor the evolving trends across each of the major drivers of net interest income and will provide updates to our outlook as the year progresses.
Turning to expenses on slide 8 noninterest.
Noninterest expense declined 8% from a year ago, primarily driven by lower operating losses and also reflected the progress we've made on our efficiency initiatives.
Let me highlight a few examples our customers are increasingly leveraging our digital capabilities with mobile active customers up 6% from a year ago and the number of checks deposited using mobile growing 9% from a year ago. These changes and others have enabled us to adjust branch staffing and you can see this coming through in lower head count and expenses on the consumer banking and lending segment.
Importantly to date, we've been able to make these adjustments while improving client satisfaction.
We reduced the number of our locations, including branches and offices by 5% since the start of the year a reduction of over 2 million square feet. We also recently agreed to sell our tower in downtown Phoenix, which includes over 500000 square feet. We continue to evaluate on locations and locations with upcoming lease expirations for closure and consolidation opportunities.
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We reduced professional and outside service expense by 14% during the first half of this year compared to a year ago. This reduction was driven by lower spend on consultants and contractors on various projects across the company.
In commercial banking, we have made progress on changing how we serve our customers optimizing our operations and other back office teams and reducing the number of commercial banking lending platforms. These efforts were reflected in lower head count expenses in this segment.
We are on track in executing our efficiency plans included in our expense outlook of approximately 53 billion.
Our outlook, excluding restructuring charges and the cost of business exits, which totaled $192 million. During the first half of this year and included a $1 billion of operating losses, which totaled just over $500 million during the first half of the year.
Keep in mind operating losses can be lumpy and unpredictable on especially as we continue to address the significant work left to do to SaaS Fi our regulatory requirements.
We also assumed approximately $500 million of incremental revenue related expenses and these have been higher than expected. So far this year due to strong equity markets, which is a good thing as the associated revenue more than offset any increase in expenses at <unk>.
Current market levels hold we would expect incremental revenue related compensation to be approximately $1 billion.
Which could put us over 53 billion, we will continue to update you as the year progresses.
Turning to our business segments, starting with consumer banking and lending on slide 9 consumer and small business banking revenue increased 7% from a year ago, primarily due to higher debit card transaction volume and higher deposit related fees, which were lower in 2020 due to fee waivers provided at the onset of the pandemic.
Home lending revenue increased 40% from a year ago, driven by higher servicing income as last year, we had significant a significant negative valuation adjustment to our mortgage servicing rights asset. We also had higher origination and sales revenue in the second quarter due to higher gains from the re securitization of loans, we purchased from mortgage backed securities last year and an increase.
And retail originations.
7% decline in revenue from the first quarter was primarily due to lower retail held for sale originations and gain on sale margins.
And on sale margins are expected to continue to decline in the second half of the year.
Credit card revenue increased 14% from a year ago, driven by increased spending. Additionally in response to the pandemic second quarter 2020 included higher customer accommodations and fee waivers.
Auto revenue increased 7% from a year ago and higher loan balances.
Now turning to some key business drivers on slide 10, while we believe mortgage originations in the industry declined from the first quarter, our mortgage originations increased 3% a declining correspondent originations was more than offset by growth in retail with an increase in retail held for investment volume, partially offset by lower held for sale volume.
Our second quarter retail mortgage origination volume increased 10% from first quarter and was the highest since 2015.
We currently expect third quarter originations to decline modestly on the refinancing volumes can be stronger than currently forecasted with the recent rate rally if lower rates persist.
We also expect our retail originations to decline less than the industry industry as we've improved capability to serve our customers mortgage financing needs.
Consumer demand for auto loans continue to be very strong despite higher prices and limited inventory auto originations increased 19% from the first quarter and 48% from a year ago with June setting new monthly record for originations exceeding our previous high set in June of 2016.
Turning to debit card purchase volume increased 12% from the first quarter and 31% from a year ago, reflecting higher consumer spending due to the stimulus payments improving economic conditions.
Credit card point of sale of purchase volume was up 21% from the first quarter as the economy continue to open and in May we had our highest monthly spend volume in recent history. The increased activity has not yet translated into significantly higher balances as payment rates remain high.
On slide 11, the commercial banking results are highlighted and it excludes the corporate trust business, which is now reported in corporate and prior periods have been revised.
Middle market banking revenue declined 9% from a year ago, primarily due to the impact of lower loan balances and lower interest rates, which were partially offset by higher deposit balances and deposit related fees.
Asset based lending and leasing revenue decreased declined 12% from a year ago, driven by the impact of lower loan balances, which was partially offset by improved loan spreads higher net gains on equity securities and our strategic capital business and higher revenue from our renewable energy investments.
Noninterest expense declined 9% from a year ago, primarily driven by lower salaries and consulting expense.
Average loans declined for the fourth for the fourth consecutive quarter and were down 22% from a year ago. The demand for loans declined due to low client inventory levels and strong client cash positions. While there are some green shoots in select industries demand has not yet picked up.
Average balances were up 5% from a year ago, reflecting significant liquidity from stimulus programs.
Turning to corporate and investment banking on slide 12.
In banking total revenue declined 6% from a year ago. The decrease was driven by lower debt capital markets revenue the impact of lower interest rates and lower deposit balances predominantly due to actions taken to manage under the asset cap.
Commercial real estate revenue grew 21% from a year ago, driven by higher <unk> gain on sale margins and volumes commercial real estate capital markets transaction volume increased significantly from a year ago, driven by low rates tighter loan spreads excess liquidity in the market and stable improving real estate fundamentals, while acquisition activity picked up.
On the second quarter loan demand was predominantly driven by refinance activity.
Markets revenue declined 40%, 45% from a year ago from lower trading activity across most asset classes compared to the higher trading activity, we experienced in the second quarter of 2020 as the markets recovered due to the monetary and fiscal stimulus and response to the pandemic. Our markets revenue has been negatively impacted by actions we've taken to manage under the asset cap is.
Well.
Noninterest expense declined 12% from a year ago, primarily driven by lower operating losses.
Average deposits declined 20% from a year ago, primarily driven by continued actions we've taken to manage under the asset cap.
On slide 13, we have wealth and investment management, which grew revenue by 10% in the second quarter compared with a year ago noninterest income was up 18% from a year ago, primarily driven by higher asset based fees on higher market valuations, which was partially offset by lower net interest income driven by lower interest rates.
Revenue related compensation drove the increase in noninterest expense compared with a year ago.
We ended the second quarter with record client assets of $2, 1 trillion up 20% from a year ago, reflecting strong market performance.
Average deposits were up 6% from a year ago and average loans increased 5% from a year ago due to customer demand for securities based lending offerings.
Slide 14 highlights our corporate results.
<unk> growth from a year ago and from the first quarter was driven by the equity gains from our affiliated venture capital and private equity businesses that I highlighted earlier on the call second quarter results also benefited from the gain on the sale of student loan student loans and a modest gain on the sale of our Canadian equipment Finance business.
We'll now take your questions.
At this time, if you'd like to ask a question simply press star followed by the number 1 on your telephone keypad again that is star 1 for any questions. Our first question will come from the line of Betsy <unk> with Morgan Stanley.
Hey, good morning.
Good morning can you hear me, Okay, alright, thanks for that.
Hey.
So I did just want to understand a little bit about the commentary that you were making earlier around the 10% ROTC debt.
Expecting you will be able to do that in 2022 without reserve release, which is.
On a seemingly a pretty bold statement given.
Consensus is looking for if I ex out the reserve release it feels like there is a percentage point or so differential there can you help us understand what the drivers are going to be to do that.
And if it's on the expenses can you give us some sense as to what.
Which parts of your business is going to be feeding that 10% most.
Yes, So let me start out and then Mike can chime in I guess.
We thought about it as to just let's first start and think about the earnings of this quarter and do our best to look through all of those things, which we know.
There arent really recurring and so if you think about the sale of the student loan business the change in allowance.
And even obviously, we've got those outsized gains in EP and BP.
But at the same time, we don't assume they go to zero over the course of the following year.
<unk>.
And then you could even normalized for charge offs getting them to somewhat of a higher level, but if you do that.
What we've said is that with our expense reductions that we've contemplated.
With the ability to return capital.
You can get to.
That level and so we've obviously had the ability now to return to the significant amount of excess capital that we have.
That's an extremely meaningful driver of the improvement in Rowe TCE.
And it's a.
I.
Think about it as like a somewhat modest improvement in the rest of the performance to get there from in terms of the company from where we sit today so.
We don't want to talk in any level of specificity at this point about the specifics about expenses.
But we're working extremely hard not just to get the efficiencies that were important to.
To meet our expectations for this year.
The position is properly next year.
To reduce expenses on a net basis, while we have the ability to invest significantly inside the company.
Yes, and I would just point out Betsy it's not a full year 2022, what he said was the run rate in 2022 at some point right. So yep.
Alright, so it could be your <unk> exit run rate.
Could be.
Okay.
And then just separately on.
Could you speak to the flexibility on the buybacks I know you indicated the 18 or $18.5 billion under the SCB framework should we be taking that as a minimum buyback level because.
I think that reflects your ask in the or at least what you not announced but what you put into the test.
Bob.
And you have got earnings that you are generating and the environment's improving so so so could you imagine that buyback could be higher than that over the course of the next 4 quarters.
Yes, I think I mean, I think the signal is that it could be higher or lower.
Depending on exactly how our results turn out on what we think the.
What we think the outlook for the economy is and potentially where the stock prices, even though thats really not a factor on our thinking today, given our view of the valuation.
We obviously would hope that it would be more not less.
And we have the flexibility under the SCB framework.
To do that so I think you all can do your calculations on what you think will earn next year.
Giving you the guidelines for how we're thinking about where we're targeting our capital ratios to be and we'd like to.
Don't see any need to have excess capital sitting around the company at this point, especially given the fact that we have the asset cap.
Okay, Charlie and Mike. Thanks, So much appreciate it sure.
Your next question will come from the line of Steven <unk> with Wolfe Research.
Hey, good afternoon.
So I wanted to start off with a question just on the head count trajectory you start to make some real progress driving some of the headcount reductions that you've spoken to it sounded about 6% year on year, but if I look comp you against the peer group.
<unk>, probably being the closest comp you still have 50000 more employees. Despite a similar business mix and scale I recognize that certainly some of that can be tied to the consent order, but was hoping Charlie you can maybe just give us some context our perspective on it.
As you start to execute on the plan of optimizing that head count what's the right level to support your strategic vision for the franchise.
Yes, I think it's a great question I think.
Your numbers are are are accurate for sure just a couple of things I would say I think first of all.
You can imagine we try and do all of those numbers ourselves.
And between other places that we've all worked.
At the senior management team is very hard to get apples to apples because different people in source different <unk>.
Functions.
John.
And so but directionally you're point is still right. So I'm not sure of the magnitude is exactly right.
Versus just bank of America, but.
Directionally I think.
It is a fair statement.
I think that is what the <unk> that is a simple driver that gets everyone's attention here as well as.
We're frankly, just as we look around the company and we see our processes and we see the things that we haven't done nearly as well.
And so that's why when we think about the future that we have we still continue to believe that there are significant efficiencies on a gross basis that we'll be able to continue to drive out the company over time, we would love to do as much of it through natural attrition as possible given the size of the company we have.
Significant attrition.
And people self selected because of how we're going about doing things.
But I think when we think about where we're going and our ability to reinvest in the company.
We think that Theres a lot there and I think again as we get towards the end of the year, We will talk about next year with some more specificity.
At some point give you a little more clarity I think we're still on the stage of peeling the onion back and every time you Peel a layer the on your back to see the next layer, even more clearly and I think we're still in that stage.
But it does give us.
Pretty good.
Feeling about our ability to continue to drive this forward.
Thanks for that perspective, Charlie and just for my follow up on the NII outlook, Mike I was hoping you could just unpack the NII guidance a bit further specifically what does it contemplate in terms of premium am in excess liquidity deployment.
And are there is there any noise relating to some of the loan sales.
That could drive some volatility in the back half as we think about the trajectory.
Yes.
There is no there is no noise from loan sales per se, but let me let me break out.
<unk> of it and kind of talk through what was included there. So obviously the.
Curve is going to be an important element of it.
And what we've said in the remarks right is that at this point, we're assuming it's about where it is right. It's been bouncing around the last few days, but sort of think about it is about where it is.
Right now.
Then as you sort of look forward on loans and.
And you assume that overall loan stays sort of flattish to where we exited the quarter that does require a little bit of growth modest growth on the commercial side and so that's sort of embedded in the assumption I think on premium am where you saw it come down a bit.
In the quarter versus the first quarter, we're still expecting that to come down.
It could bounce around slightly versus what the what the assumptions are given where rates are but we think the direction still the right direction.
And then when you have you may have a little bit of noise in between Q3 and Q4, given some of the PPP related.
Given this that may happen, but but that's sort of what we're assuming overall to get to that.
Get you towards the bottom of the range that we've given.
Hopefully, we're we're surprised by loan growth or a backup in rates again, but that's what we're assuming at this point.
That's great color thanks for taking my questions.
Your next question will come from the line of Ken Houston with Jefferies.
Thanks.
Mike on the on the mortgage business I wanted to ask you you said that you had the loans that were in the loan book that you moved into and re securitize. Just can you help us understand how much of a benefit that might've been on mortgage banking this quarter and just your general outlook for origination trends on what's happening on the gain on sale market. Thank you.
Yes.
Good good questions Kevin.
I'll try and pick it if I missed something let me know, but as you sort of think about gain on sale.
The gain on sale continues to come down each quarter, and we would expect that to continue and at this point, what that's driven by just the capacity thats been built up in the industry and as people get a little more competitive on price that's going to drive.
Gain on sale down now I think what you've also seen US do there is really focus on the retail channel.
And to some degree deemphasize the correspondent channel or use it to kind of fill in the capacity that we've got and so that should be helpful. As we sort of think about gain on sale, but the direction is certainly going down and I think as I said at this point I think it's really capacity.
Driven more than anything else from from here forward.
As you look at the and I also said in the remarks that we think origination volumes are going to be down a bit in Q3 versus Q2.
Lots of different prognostications on the market, we think based on what we're seeing we think will be down less than the market, but but nonetheless, it will be a little bit down now.
Could see a little bit of a.
GAAP of refi activity that could change that a little bit but right now we think it's probably down just a little.
As you look at.
The impact of the Epo gains it was about.
Third 50 million on a linked to increase on a linked quarter basis.
We do expect to continue to have some gains in the third and fourth quarter. It probably comes down a bit from where it was in the second quarter as we sort of look.
By quarter, but maybe a little bit less than may.
Maybe a little bit less than what it increased versus the first quarter, but we do expect those to continue and you will see we still got about little under $20 billion of of those loans on the balance sheet and Youll see the exact number when we put out for Q.
Alright, great. Thanks, and just 1 follow up on consumer related fees.
Good to see the deposit related side on card rebounding can you just talk about the type of momentum that youre seeing there and just.
Should we expect ongoing.
Improvements from here in those areas, yes look it's just activity levels picking up and you can see that in the in the card volume metrics that we've put out there and so I think assuming assuming we continue to see the recovery take hold and activity levels pick up then.
There should be those are highly correlated there so.
This is Charlie I would just add I would say different slightly different dynamics on dividend credit debit.
Debit if you look at the remarks that I made the consumers still have a substantial amount of cash you see it in overall deposit levels.
And the willingness to spend as things open up as.
Certainly what youre, saying and so.
That should continue to drive debit spend upward.
And then credit.
As having.
Benefits from reopening that the whole industry is seeing.
Understood. Thanks, guys.
Your next question comes from the line of John <unk> with Evercore ISI.
Good morning.
Wanted to see if you can give a little bit more color just around the loan growth outlook, maybe if you could talk about commercial versus consumer on the commercial side are you starting to see utilization trends turn on capex beginning to contribute some.
<unk> willingness to draw down and then on the consumer side, just curious what youre seeing in terms of payment rates specifically in the card businesses are are we starting to see.
On the payment rates inflect and do you think thats sustainable.
Yes.
On its Mike.
I'll take that and Charlie can jump in if he wants.
I'll try to pick it apart piece by piece and the commercial bank.
Loans are still down and utilization rates are pretty low on.
On a historic basis, and I think overall that has not inflected yet and there is lots of reasons high liquidity supply chain issues demand for.
Product in certain industries lots of things that sort of underpin that but we haven't really seen that inflect yet there is a little bit of maybe differences by size of clients or by sector, but overall, it's still still not quite quite there yet now theres lots of good conversations. So I think people are really thinking about investments and really our thinking.
About building inventory levels over the coming quarters, but.
I think that will take some time before it starts to translate into into loan growth in the commercial and the commercial bank.
In the corporate investment Bank, we are we do see the loans there are up a little bit so youre seeing some activity in subscription finance real estate in a few places, but again relatively small so far.
But you are seeing a little bit of activity, there and we'll see how that how that progresses on the.
On the consumer side.
I know what others are talking about this too if you look at through the end of period.
Balances youre seeing a little bit of growth in auto we had a really good quarter from an origination point of view on the auto business, but it's a relatively small portfolio in the scheme of the balance sheet.
Youre seeing growth a little bit of growth in card. Although the activity has really picked up there it hasnt quite translated into bigger volumes given the payment rates as you sort of pointed out there's still payment rates are still really high.
And I think they will come down and normalize eventually, but they're still pretty high so I think we'll see how that.
How that progresses and then we still expect.
A further decline.
Albeit at a much slower pace.
In the home lending space as we work out of the EPS the early.
Early buyout loans in and see prepayment activity start to start to stabilize in that business. So.
So we'll see how it all comes together over the next quarter or 2.
Okay. Mike. Thanks, that's helpful and then separately on the consumer front can you maybe elaborate little bit on the rationale for exiting the personal credit lines.
Product and.
If there is any other areas like debt within your lending products suite that you might be considering similarly to exit.
Sure This is Charlie.
That was a product of a.
Pretty exhaustive effort that we went through across the whole company to look at what we thought was core where we had some kind of strategic advantage or where it really.
Was important for the customer relationships as we look forward.
And so out of that exercise came our decisions to sell corporate trust to exit the international wealth business.
Sell the asset management businesses and a couple of other things that we've announced.
The things that we've announced are the things.
That we're actively working on and so theres really.
Nothing more.
In progress now.
The way we looked at the business was quite simple as it was very very small business for us.
We have products.
In our card products as well as we are still on the personal loan business and so we have the ability to continue to serve customers, who either want access to credit.
Or actual being able to draw down.
And funded over term.
And so again in the <unk>.
Dave just simplifying the company around focusing on products that are most important to the broadest set of customers. That's what led us to the decision.
Got it alright, thank you for taking my questions.
Of course.
Your next question comes from the line of Gerard Cassidy with RBC.
Thank you good morning, gentlemen, Mike can you share with us I think.
I don't think you addressed this but your loan loss reserves remained very strong you guys have very strong credit as evidenced by this quarter in the history of this company.
And your reserves are Bang on 100 basis points, I think above where they were a day 1 in January of 2020, and when you guys did see some true up can you share with us.
The outlook for reserves could they get back down to that level and that the outlook is even better than it was in January of 2020, Covid reserve is actually fall below seasonal levels.
Yes, John I think that's a.
First on the reserves, we need to be reserved for a whole bunch of different scenarios on any given time and so as we sort of look at the path that we're on there's a lot a lot to be optimistic about but there are still some risks there that we need to be we need to be mindful of and from where we are today, but if things keep progressing.
Well, we should have future releases as we have noted as you think about where you end up I think thats a hard.
The hard thing to call right now in terms of any degree of certainty on it at a point in time, because it'll be a function of as you mentioned in the outlook that you have at that point the the mix of your balance sheet and other factors that go into sort of your view on the future.
And what could happen, but could we end up a little bit higher maybe can we ended up a little bit lower maybe.
Think it's.
They are all possible scenarios, depending on on what point in time, you are talking about and as you know theres a lot of things like elements of the office market in commercial real estate that'll take a take a while to really play out.
And so we'll see how that progresses over time, but I think it'll be a function of all those things of exactly where we ended up.
Very good thank you.
I know this question is putting the cart before the course non <unk>.
Asking you guys to predict when the asset cap will be lifted but.
On the asset cap is lifted.
How do you think Youll proceed going forward Theres been some talk in the markets that some of your peer banks are being stretched with their supplementary leverage ratio. In fact, Jpmorgan now has told US that this is their binding constraint.
And you have to wonder if the wholesale deposit market is going to be disrupted because of this freeing up wells Fargo without the asset cap may give you guys the opportunity to pick up some wholesale deposits. So again not asking when the asset cap is going to be lifted, but how does it look after it is left and what are you guys thinking.
Well again, I think it's very hard to answer the question because of as we as you know we don't know the timing of the asset cap Justice. If we don't know the timing of.
Any changes, which could potentially happen on SLR or the way other banks will deal with that so.
There are a whole series of unknowns that go into the question that I'm not sure that we're in a position to answer quite frankly.
Yes.
Just add 2 things.
If you think about the actions and we've been very public about this a lot of the actions we've taken as a result of the asset cap is to work with clients to manage deposits to other vehicles or other institutions in some cases.
And we continue to do that so there's likely to be opportunity there with clients and and we've managed.
Areas like our markets business down.
I think a lot of that it could be.
Financing type trades and some of that.
We think there'll be demand at the right time, and so so I think as you sort of look at that there should be plenty of opportunity for us as we look forward, but as Charlie said exactly what shape that will take us a little bit of a function of when it happens.
Thank you I appreciate the color.
Yeah.
Your next question will come from the line of Matt O'connor with Deutsche Bank.
Hi, guys.
Some of this has been kind of weak throughout the call, but I was hoping you could just put together if we look up on that 2 or 3 years, and obviously, assuming you're well pass the offer cap what are some of the key organic revenue growth driver for Wells Fargo, and how meaningful can might be you mentioned credit card.
You mentioned some of the markets on the wholesale business.
It's a wildcard, but maybe kind of looks like 3 or 4 of them. If there are.
What might move the needle as we think about the next few years because you are probably 1 of the few stories where.
You've got leverage to rising rates, but there's also organic cost opportunity like you talked about and probably from organic without the opportunity flow.
Hopefully.
Package that together for us.
Yes, no I appreciate the question.
And again.
Put aside the interest rate environment for a second.
And I think listen the reality is for a.
Im not sure what the right period of time is but I'll, just say for a period of time.
We have been laggards across most of our businesses.
At growing revenues.
For many many years, we had very very strong financial performance.
It's been a while since that's been the case and when you look at the underlying trends of the businesses while.
I personally think we've done remarkably well.
In terms of our share stats across the franchise given all that this company has been through.
Which says an awful lot about the people on the frontline that do it day in and day out there has just been very little of that we've really done.
To focus on growing the franchise and I do want to be fair to everyone here right, which is that given all the issues that we've had whether it's sales practices and the consumer bank as an example.
Mary Mack's job when she was put into that role was the fixed that problem not to focus on growing the business.
And we continue to have other issues around the company. So as we've talked about where our priorities are.
As I've said in my remarks, we understand that.
Continuing to build our risk and control infrastructure and satisfy the regulatory requirements is a gate to a really successful future of ours that we need to get through but at the same time answering your question I really do believe the opportunities exist in every 1 of our core businesses.
And when we go through when we think about the consumer segment again, we've been getting our a reasonable share of deposit flow not because we're pricing for it not because we've done anything really interesting in our coverage model our products, our digital or anything like that its because of who we are on the relationships that we have.
We need to alter the course by changing all the things that I just mentioned and those are the things that we're actively working on the background in the background, whether it's all of our digital capabilities with this mobile first attitude looking at all of our products and services thinking about how we serve the different segments using the data and information that we have to become more targa.
And our offerings that that should drive a different level of growth in the consumer business. We've talked about the card businesses as 1 of the pieces of our consumer lending business you go on to the you pick the business.
In our middle market business.
On.
We don't see much revenue growth book, both because of rates and because of the balances there.
And we do believe we're the best commercial lender in the country.
And the best at being in a position to serve those customers far more broadly and so whether it's through improving our treasury management products.
Or the work that we've talked about about utilizing our CIB platform to sell investment bank products to these customers, who we bank for decades is just a very meaningful opportunity for us.
CIB.
We're not going to be all things to all people.
When you look at our fees relative to.
The lending commitments that we have out there just as a measure of opportunity.
We're not even close to where our company with our risks are existing risk profile should be and thats by the way. It's been the team has been improving it but we're not shy to say we want to improve it even more from here focused by industry focused byproduct.
Utilizing the competitive advantages that we have so I really believe in.
No I don't believe anyone out when the exact same thing.
Got you we've got online.
Capabilities and wells Trey that we've completely.
<unk> utilized.
Have a platform.
For brokers that want to go independent that we've completely underutilized.
And there too the all the things that berries summers is doing to bring our platforms together to be able to offer all of the best products across all the platforms do a better job.
With things like security based loans and mortgages, where our stats clearly lag the competition.
Those are just some soundbites, but we really believe it's everywhere and so that work is going on on in the background and hopefully what youll start to see like we've seen like you've seen with credit card is youll start to see things come to market, but again nothing is going to jeopardize the risk work we have to do.
But obviously it sounds very broad base on towards the opportunity, but any way to size that.
If you didn't have the asset cap you balance it would be say 200 billion bigger now or that we have.
Loan growth for the industry, 4% over the next several years per year, you can do 50% better than that just any soundbites on.
I would just where you could be now if you didn't have it or.
Michael on that.
Jim.
Like honestly, we're not even thinking about what life is like without the asset cap we quantify.
For ourselves.
What the impact is on having it in this environment because that's the reality of it.
<unk>.
But there are plenty of opportunities I mean, if you go through all the things that I spoke about before very few of those require balance sheet now it doesn't mean that there's not opportunity cost for having it but that's not an excuse for us not to do some other things and win.
When we get to the future we will talk about it when we get there.
Understood. Thank you and Matt I've quantified some of the actions we've taken in the past that in other forums and so I'd go back to some of that but it's significant and it's hundreds of billions of dollars of actions we've taken to help manage through the asset cap. So that should give you a pretty good sense of.
What what the impact has been.
Okay. Thank you.
Your next question will come from the line of Vivek <unk> with Jpmorgan.
Hi, Thanks for taking my questions Charlie Mike.
Quick clarification to your answer just the last question.
Charlie You said you are contemplating life.
Without the asset cap does that mean that the $18 billion buyback debt you're talking about on the CCAR.
Not that assumes that current situation it does not assume the lift up the asset cap.
Yes.
But I think he met was we're not playing we're not playing a bunch of what it's like where we would where we would have been right now if like the asset cap wasn't in place right. So I think that I would take that in that in that context.
And I think as we sort of look.
For our capital planning, we're assuming that it's in place during the period.
Okay.
Second quick 1 for you Mike and Jim.
Net gain.
How much was it and could it continue.
Yes, the hedge and effectiveness.
Absolute impact in the quarter is very small you do have a bit of a linked quarter variance because we had a negative hedging effectiveness.
Results in the first quarter, given what happened with rates during the first quarter, but the absolute impact that's embedded in the second quarter is actually a really small vivek.
Okay. So then something else drove down debt long term debt costs by 50 basis points.
Yeah.
I think if you look at long term debt rate part of it is.
As.
Part of it is we reduced our long term debt. If you look at the absolute long term debt cost, we reduced the rate and we reduced the amount and the rates down.
Okay, great. Thanks, Mike.
Your next question will come from the line of David long with Raymond James.
Hi, everyone.
It relates to the buybacks. It seems like you guys are pretty optimistic on your capital levels and the economic backdrop can you accelerate the pace of buybacks here in the near term by that I mean is it possible that you could buyback.
On a higher fraction in the third quarter, meaning 5 or $6 billion worth of your stock.
Yes look we're always looking at like the pace and we're not going to get into specifics of what we're going to do before but when you say fast like we haven't said how much we intend to do by quarter.
And so.
Obviously, we're going to we're going to be mindful of.
Of.
The pacing that we do it and we will we're going to be prudent about about that and we start with.
A lot of extra capital so so.
So we feel really confident that we'll be able to get that moving at the right pace soon.
Got it thanks for that color and then my second question relates to the PPP forgiveness on.
It's not going to be huge to the bottom line for you guys.
Could you disclose what the impact was on forgiveness fees in the quarter specific to the second quarter.
We did not but you did see we did see our PPP balances come down from.
Roughly about $12 billion of about $8 billion, so and we'll see those continue to come down and we'll continue to have some <unk>.
Impact from the remaining loans start to get forgiven over the next few quarters.
So keep in mind that we that we had said that we are giving away.
The fees.
And so very little if any net bottom line impact from that yet so we're giving away the fees for the gross fees for the loans originated in 2020.
So and Thats.
Mostly what's being forgiven now.
Alright got it I appreciate it thank you.
Your next question will come from the line of Ebrahim <unk> with Bank of America.
Hi, just had a very quick follow up on and I know this is a few years out on Charlie but I think you mentioned over time, you think the bank can achieve a 15% growth.
Is that how much of debt.
Is it dependent on interest rates moving higher and does that eventually you need the asset capital move higher for all wells to get to that 15% kind of.
Yes, it certainly does.
Assume that the asset cap is gone.
On.
And it assumes higher rates and we haven't really been specific about exactly what that means and what we've said is listen we first want to get to double digits. This is a we're on a journey.
And Thats kind of where we are that's where we're headed and once we get to 10%. Then we can talk with some more clarity about what's next.
Got it and just in terms of clarifying.
Your guidance on expenses, how should we think about beyond 2020 tool is it safe to assume that incremental expenses growth would be driven by revenue generation as opposed to debt investments. So there may be some room in terms of cost expense savings.
On this year, yes, we havent, we havent talked about.
Our outlook on expenses passed this year I think what we've said, which I think is continuing to be true is that we've got a we're in the middle of a multiyear efficiency program and even with some of the investments that we need to make that we should be able to bring expenses down on a net basis for the for the next couple.
The years, but.
So I think thats still stands.
That's helpful. Thank you.
Your final question will come from the line of John Mcdonald with autonomous.
Hey, Mike I wanted to just do another quick follow up on the expense comments for this year could you just repeat what you said about the revenue related expenses and where they are trending relative to what you baked in and kind of how that ties to the 53 target for this year.
No sure sure John Thanks.
Embedded in our original outlook of about $53 billion, we assume that revenue related would increase about $500 million.
And at this point, we think that's probably more like a $1 billion. So an incremental 500.
And that's really largely driven by the.
Advisory assets and business that we have on our wealth management.
Group, that's doing really well, particularly given where the market levels have been.
And so that's putting pressure on the 53 billion. So it is possible if that holds that we could be a little over 53.
And obviously that excludes.
Restructuring and the cost of business exits. So so that's the way to think about it.
Okay and then it also includes the expense benefit of business exits too right. So that's not factored into that.
No the 53 sorry.
Sorry, 53, John assumed that those businesses were here the full year, except for the student loan business, but for corporate trust and asset management to assume they were there the full year once we get to closing which should happen. Later this year, we'll update how we think thats going to progress based on how we think the transition service agreements will play out.
Okay, and then just looking at your year to date expense number is the cadence then implies that youre stepping down in the back half of the year to something that kind of average is closer to $13 billion a quarter. It just I'm just kind of playing out the math is that right way to think about it.
I think I think I think debt.
What the math would imply.
Okay.
Thank you.
Thanks, John.
With that I will turn the conference back over to management.
Great well listen thank you all so much for the time, we appreciate it and if we don't talk to you during the quarter. We will talk to you next quarter take care.
Thank you all for joining today's call you may now disconnect.
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Yes.