Q3 2021 Wells Fargo & Co Earnings Call
Okay.
[music].
Welcome and thank you for joining the Wells Fargo third quarter 2021 earnings Conference call.
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After the Speakers' remarks, there will be a question and answer session.
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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 Brad good morning, everyone. Thank you for joining our call today, where our CEO, Charlie Scharf and our CFO, Mike Sena Masimo will discuss third quarter results and answer your questions. This call is being recorded.
Before we get started I would like to remind you that our third quarter earnings materials, including the release financial supplement and presentation deck are available on our website at Wells Fargo Dotcom.
I'd also like to caution you that we may make forward looking statements during today's call that are <unk>.
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 in the earnings materials are available on our website I will now turn the call over to Charlie.
Thanks, John and good morning, everyone I'll make some brief comments about our third quarter results the operating environment and update you on our priorities.
Then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start with some third quarter highlights we earned $6.0 billion or $18.0 per common share in the third quarter. These results included a one 7 billion decrease in the allowance for credit losses is credit quality.
To improve revenue declined on lower gains from equity securities, which were elevated in the second quarter. There was still strong.
Expenses continued to decline, reflecting progress on our efficiency initiatives and included $250 million associated with the September OCC enforcement action and.
And for the first time since first quarter 2020, we grew both period end loans and deposits in the third quarter.
We continue to see that our customers have significant liquidity and consumers are continuing to spend.
While lower than the peak in March.
<unk> customers medium deposit balances continued to remain above pre pandemic levels up 48% for customers, who received federal stimulus and 40.
I'm, sorry up 48% for customers, who receive federal stimulus and 40% higher for those who did not receive federal aid weekly debit card spend during the third quarter was up every week compared to 2019 and in the week ending October one was up 14% compared to 2046.
<unk> compared to 2019 areas hardest hit by the pandemic have recovered, including travel up 2% entertainment up 39% and restaurants spending up 20% during the week ending October one compared with 2019.
Consumer credit card spending activity continued to increase up 18% in the third quarter compared to 2043% compared to 2020.
During the week ended October one.
<unk> related spending which was hardest hit during the pandemic was up significantly from 2020, but remains the only category that is not yet fully rebounded to 2019 levels still down 8% compared to 2019.
Commercial banking loans were up slightly at the end of the third quarter. While line utilization was stable at historic lows supply chain difficulties and labor shortages continue to represent significant challenges for our client base and as I said earlier overall credit performance continued to be strong now.
Now let me update you on the progress we've made on our strategic priorities first building, an appropriate risk and control infrastructure.
Has been and remains wells fargo's top priority.
We reached a significant milestone with the termination of the CFPB consent order issued in September 2016 regarding improper retail sales practices. It's exploration reflects years of hard work by employees across Wells Fargo intended to ensure that the conduct at the core of the CFPB order will not.
Not recur.
As a reminder, this is the second important regulatory milestone we achieved this year with the OCC terminating a consent order related to our BSA AML compliance program in January but.
But the recent OCC actions are a reminder, that the significant deficiencies that existed when I arrived must remain our top priority I believe we're making meaningful progress and I remain confident in our ability to close the remaining gaps over the next several years, having said that it continues to be the case that we are likely to have setbacks along the way.
We are a different bank today than we were several years ago, we run the company with greater oversight transparency and operational disciplines. We have a new leadership team. This team of 18 operating committee members are now new to their roles I've spoken of our new leaders in many of our control functions, but we also.
You have many new business leaders. This includes new leaders in consumer banking small business banking auto lending home lending credit card merchant services retail services and personal lending digital strategy wealth and investment management and commercial banking our control infrastructure is different.
And we continue to invest in it we take a different approach to the consumer today, we created a sales practice oversight and management function.
And office of consumer practices are approached consumer remediation is dramatically different as we have meaningfully increased the amount paid to consumers and have accelerated payments to customers.
While we are committed to devoting the resources necessary to our risk and regulatory work. We are also focused on improving the products and services, we offer we're making investments in digital capabilities and making it easier for customers to do business with us.
In the third quarter, we announced our new long term digital infrastructure strategy that will move us to a multi cloud environment. This is a critical step in our multiyear journey to be digital first and offer easier to use products and services. We also joined the <unk> North American network to provide car buyers dealers with fast.
And easy online sales and financing.
And as I've spoken about previously we're on track to rollout a new consumer mobile app at the beginning of next year.
We've also been making significant enhancements to our payments capabilities and are seeing that momentum pull through on our customers' zelle usage with zelle users, increasing 24% transactions up 50% and volumes are up 56% from a year ago. We are executing on our work to simplify our products and build compelling offerings.
Tailored to different customer segments clear access our no fee overdraft checking product now has over $1 million outstanding customer accounts as a reminder.
This launched in September 2020, and all of our retail accounts, which received ECH direct deposit half hour overdraft rewind feature which automatically reevaluate transactions from the prior business day that are incurred in overdraft. This feature has helped over one 3 million customers.
Wade overdraft related fees on $7.0 million transactions in the third quarter through.
With emerging affluent and affluent segments, we're making substantial changes to more consistently and intentionally serve these customers, including products service marketing and management routines Youll hear us talk more about how we're executing on this in the coming quarters after.
After successfully launching active cash our new cashback credit card in July earlier. This month, we launched reflect card that rewards customers for making on time payments.
Our new head of small business Derek Ellington will start in just a couple of days and we believe this is another attractive growth segment for US next month, Paul Camp, who will be joining wells Fargo as the head of our global Treasury management businesses.
This new role brings together, our treasury management and global payment solutions teams into one organization, which will enable us to be more efficient and leverage our capabilities more effectively to help clients manage their funds and process payments worldwide.
While we've been focused on improving the products and services, we offer to our customers. We've continued to support our communities. We voluntary commit voluntarily committed to donate all gross processing fees from PPP loans funded in 2020 and created the opened for business fund to support small businesses impacted by the pandemic we have now.
Donated $305 million in support of small business recovery, including 215, <unk>, which in turn is expected to help nearly 150000 small business owners maintain more than 250000 jobs. Additionally, in the third quarter, we launched connect to more.
Resource hub for women owned businesses and a mentoring program partnering with NASDAQ entrepreneurial center to empower 500 women owned businesses, we committed to invest $5 million through the neighborhood lift program to help more than 300, low and moderate income residents in Philadelphia with home down payment assistance and we published.
Our updated ESG report and goals and performance data, which includes new disclosures on our workforce by race gender and job category.
As we look forward, while there certainly are risks that remain including the latest wave of Covid infections. The recent U S fiscal policy stalemate and inflation concerns the outlook for the economy as promising consumers' financial condition remains strong with leverage at its lowest level in 45 years and the debt burden.
Below its long term average companies are also strong as well.
We remain on target to achieve a sustainable 10% ROE TCE subject to the same assumptions we've discussed in the past on a run rate basis at some point next year and.
And we will then discuss our plan to continue to increase returns I want to thank our employees for continuing to work hard to make wells Fargo better for our customers shareholders and communities I will now turn the call over to Mike Thanks, Charlie and good morning, everyone.
Charlie summarized how we are helping our customers and communities on slide two so I'm going to start with our third quarter financial results on slide three.
Net income for the quarter was $6.0 billion or $18.0 per common share.
Our results included a $8.0 billion decrease in the allowance for credit losses. This is reflective of the continuing improvement in credit performance and the economic recovery.
Pre tax pre provision profit grew from a year ago as lower revenue driven by a decline in net interest income was more than offset by lower expenses.
We continue to execute on our efficiency initiatives, which has helped improve the expense run rate and as Charlie highlighted the third quarter included $250 million in operating losses associated with the September OCC enforcement action.
Noninterest income was relatively stable from a year ago.
Within that equity gains declined from the second quarter, but increased $220 million from a year ago predominantly due to our affiliated venture capital and private equity businesses.
We also had an increase in investment advisory and other asset based fees from a year ago as well as in card deposit related and investment banking fees.
These increases were more than offset by declines in other areas, including lowered lower mortgage banking revenue and lower markets revenue and corporate investment banking.
Our effective income tax rate in the third quarter was 22, 9%.
Our CET one ratio declined to 11, 6% in the third quarter as we repurchased $8.0 billion of common stock.
As a reminder, our regulatory minimum will be nine 1% in the first quarter of 2022, reflecting a lower G SIB capital surcharge.
Additionally, under the stress capital buffer framework, we have flexibility to increase capital distributions and its possible, we will be able to repurchase more than $18 billion included in our capital plan over the four quarter period, depending on market conditions and other risk factors, including Covid related risks.
Turning to credit quality on slide five our net loan charge off ratio was 12 basis points in the quarter.
Commercial credit performance continued to improve and net loan charge offs declined $42 million from the second quarter to three basis points.
The improvement was broad based and included modest net recoveries in our energy portfolio and in commercial real estate.
The commercial real estate portfolio has continued to perform well.
Covering retail and hotel properties reflected increased liquidity and improved valuations.
While we have not seen any widespread stress in office, we continue to watch this sector closely and believe that any impact as a result of return to office or hybrid working plans will take time to play out.
Consumer credit performance also continued to improve with strong collateral values for homes in autos and consumer cash reserves remaining above pre pandemic levels.
Net loan charge offs declined $80 million from the second quarter to 23 basis points.
We continue to have net recoveries in our consumer real estate portfolios and losses in both credit card and auto declined.
Nonperforming assets declined $321 million or 4% from the second quarter.
Driven by lower commercial non accruals with declines across all asset types.
Energy was the largest driver given significant improvement in fundamentals on the back of higher commodity prices.
Our allowance level at the end of the third quarter reflected continued strong credit performance, the continuing economic recovery and the uncertainties that still remain.
Economic current economic trends continue we would expect to have additional reserve releases.
On slide six we highlight loans and deposits.
Average loans were relatively stable from the second quarter with a decline in residential mortgage loans, largely offset by modest growth in most of our consumer and commercial portfolios.
Total period end of loans grew for the first time since the first quarter of 2020 and were up $15.0 billion from the second quarter with growth in commercial and industrial loans.
No other consumer credit card and commercial real estate.
Average deposits increased $60.0 billion or 4% from a year ago with growth in our consumer businesses in commercial banking, partially offset by continued declines in corporate and investment banking and corporate treasury, reflecting targeted actions to manage under the asset cap.
Turning to net interest income on slide seven.
Net interest income grew $109 million or 1% from the second quarter and was down $470 million or 5% from a year ago.
The decrease from a year ago was driven by lower loan balances and the impact of lower yields on earning assets, partially offset by decline in long term debt and lower premium amortization on our mortgage backed securities.
We had 20 billion of loans, we purchased out of mortgage backed securities or <unk> at the end of the third quarter down $4 billion from the second quarter. These.
These loans do contributed to net interest income and we expect these <unk> loan balances to decline substantially by the end of 2022.
At the end of the third quarter. We also had $11.0 billion of PPP loans outstanding and we expect the balances to steadily decline over the next several quarters and to be under $1 billion by the end of next year.
We continue to expect net interest income to be near the bottom of our initial guidance range of flat to down 4% from the annualized fourth quarter 2020 level of $44.0 billion for the full year.
Turning to expenses on slide eight noninterest.
<unk> expense declined 13% from a year ago. The decrease was driven by lower restructuring charges and operating losses and the progress we've made on our efficiency initiatives. During the first nine months of this year. These initiatives have helped to drive a 16% decline in professional and outside services expense by reducing our spend on consultants and contractors and eight.
Percent reduction in occupancy costs by reducing the number of locations, including branches and offices.
Occupancy costs have also declined from lower COVID-19 related cost.
And a 5% decline in salaries expense by eliminating management layers and increasing spans of controls across the organization and optimizing branch staffing.
Now let me provide some specific examples of progress we're making on some of the initiatives.
We are continuing to work on reducing the underlying cost to run our consumer banking business. The pandemic accelerated customer migration customer migration to digital which continue with mobile logins up 14% in the third quarter from a year ago, while teller transactions were flat from a year ago, there were over 30% lower than pre pandemic levels.
As transactions have migrated Atms and mobile.
Over the past year, we've reduced our number of branches by 433, or 8% and lowered head count and branch banking by 23%.
We continue to focus on generating efficiencies in our branches and have a number of initiatives designed to further reduce expenses, including reducing cash handling time and simplifying certain branch processes.
Wealth and investment management has had strong increases in revenue related compensation. However by executing on efficiency initiatives non revenue related expenses in the third quarter declined 6% from a year ago and non advisor head count was down 10% from a year ago.
We have aligned our wealth management business under eight divisional leaders, creating better coordination and efficiency. We have also implemented a more efficient client service model across all distribution channels and have reduced total square footage by rationalizing our real estate footprint.
Corporate and investment banking has continued to make progress on various efficiency initiatives. These efforts include reducing head count supporting products regions or sectors with low levels of market activity and opportunity optimizing operations and support teams vendor optimization and in sourcing and reducing spend on contractors and consultants.
We're also working on initiatives and centralized functions, including operations, where we have realized savings from location optimization lower third party spending by eliminating consulting arrangements and consolidating vendors. The operations group has also reduced spans and layers with savings coming from eliminating manager roles.
Automation efforts and strategy enhancements have driven process improvements, while reducing costs in many areas, including fraud management card collections we.
We've also been working on an additional opportunities through technology enablement that have longer lead times, but should result in benefits that we expect will reduce operations related expenses over time.
With three quarters of actual results.
Already our current outlook for 2021 expenses, excluding restructuring charges and the cost of business exits as approximately $58.0 billion.
Note that we had $193 million of restructuring charges in cost of business exits during the first nine months of the year.
This outlook includes an expectation of higher operating losses, and higher revenue related expenses and we assumed earlier in the year. Our expense outlook also assumes a full year of expenses related to Wells Fargo asset management, and our corporate Trust services business.
And we expect these sales to close during the fourth quarter, we will update you on the expense impact of these initiatives after they close.
As mentioned the outlook accounts for the fact that we expect full year operating losses to be approximately $250 million higher than our assumptions at the beginning of the year. This includes approximately $1 billion of operating losses incurred during the first nine months of the year and our outlook assumes $250 million of operating losses in the fourth quarter just to remind you the operating losses can be lumpy in them.
Predictable, especially as we continue to address the significant work needed to satisfy our regulatory requirements.
Our current outlook also assumes revenue related compensation will be approximately $1 billion. This year, which is higher than the $500 million. We assumed at the beginning of the year strong equity markets have driven revenue related expenses, which is a good thing as the associated revenue more than offsets any increase in expenses.
Now turning to our business segments, starting with consumer banking and lending on slide nine.
Consumer and small business banking revenue increased 2% from a year ago, primarily due to an increase in consumer activity, including higher debit card transactions and lower COVID-19 related fee waivers.
Lending revenue declined 20% from a year ago, primarily due to a decline in mortgage banking income driven by lower gain on sale margins origination volumes and servicing fees.
Net interest income also declined driven by lower loan balances. These declines were partially offset by higher gains from the re securitization of loans, we purchased from mortgage backed securities last year.
Credit card revenue was up 4% from a year ago, driven by increased spending and lower customer accommodations and fee waivers in response to the pandemic.
Auto revenue increased 10% from a year ago on higher loan balances.
Turning to some key business drivers on slide 10.
Our mortgage originations declined 2% from second quarter with correspondent originations growing 2%, which was more than offset by a 5% decline in retail. We currently expect our fourth quarter originations to decline modestly given the recent increase in mortgage rates and the typical seasonal trends in the purchase market.
Despite strong consumer demand for autos inventory shortages are putting downward pressure on industry sales and driving higher prices. The competitive environment has remained relatively stable and we've had our second consecutive quarter of record originations with volume up 70% from a year ago.
Turning to debit card transactions were relatively stable from the second quarter and up 11% from a year ago with increases across nearly all categories.
We had strong growth in new credit card accounts up 63% from the second quarter driven by the launch of our new active cash card.
Card point of sale purchase volume was up 24% from a year ago and 4% from the second quarter, while payment rates remained high average balances grew 3% from the second quarter. The first time balances have grown since the fourth quarter of 2020.
Turning to commercial banking results in slide 11, middle market banking revenue declined 3% from a year ago, primarily due to 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 declined 12% from a year ago, driven by lower loan balances and lower lease income.
Noninterest expense declined 14% from a year ago, primarily driven by lower salaries and consulting expense due to efficiency initiatives as well as lower lease expense.
After declining for four consecutive quarters average loans stabilized in the third quarter line utilization remained low and loan demand continued to be impacted by low client inventory levels and strong client cash positions. However, there was some increase in demand late in the quarter and period end balances increased $7.0 billion or 1% from the second quarter.
Turning to corporate and investment banking on slide 12, and banking total revenue increased 12% from a year ago. This growth was driven by higher advisory and equity origination fees and an increase in loan balances, partially offset by lower deposit balances predominantly due to actions taken to manage under the asset cap.
Commercial real estate revenue grew 10% from a year ago, driven by higher commercial servicing income loan balances and capital markets results in stronger commercial gain on sale volumes and margins and higher underwriting fees.
Markets revenue declined 15% from a year ago, driven by lower trading activity across most asset classes, primarily due to market conditions.
Noninterest expense declined 10% from a year ago, primarily driven by reduced operations expense due to efficiency initiatives.
Wealth and investment management revenue on slide 13 grew 10% from a year ago, a decline in net interest income due to lower and lower interest rates was more than offset by higher asset based fees, primarily due to higher market valuations.
Revenue related compensation drove the increase in noninterest expense from a year ago I highlighted earlier the progress we've made on efficiency initiatives to reduce non revenue related expenses, including salaries and occupancy expense.
Client assets increased 13% from a year ago, primarily driven by higher market valuations.
Average deposits were up 4% from a year ago and average loans increased 5% from a year ago, driven by continued momentum in securities based lending.
Slide 14 highlights our corporate results.
Revenue declined from a year ago, driven by lower net interest income primarily due to the sale of our student loan portfolio and lower noninterest income due to lower gains on the sale of securities in our investment portfolio.
The decline in revenue from the second quarter was primarily driven by lower equity gains from our affiliated venture capital and private equity businesses.
<unk> expenses included the $250 million operating loss associated with the OCC enforcement action in September.
With that we will now take your questions.
At this time, we will now begin the question and answer session.
He would like to ask a question. Please first on mute your phone and then press Star one please record your name at the prompt.
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Once again, please press star one and record your name if you would like to ask a question at this time. Please standby for your first questions.
Our first question will come from Scott <unk> of Piper Sandler Your line is open.
Good morning, Thanks for taking the question.
I guess, what I was hoping you could sort of address the cost outlook certainly appreciate the commentary regarding the fourth quarter in particular.
We look forward you guys have had.
The expectation that cost could come down year over year for the next couple of years.
Of course puts you guys in a very unique position.
Many of your peers, but so many people are talking about things like wage inflation right. Now just curious to what degree are you seeing that and more importantly is there enough flexibility in your existing outlook such that even despite higher wage pressures you could still see costs down year over year for the next couple of years.
Sure. This is this is Charlie thanks for the question.
I guess, let me start with.
The wage inflation I think we certainly are seeing.
Wage inflation I would say, it's very different across different parts of the company and very different across different job categories that we have.
And so as we approach it we're trying to be very thoughtful about ensuring that we're continuing to be as fair with people as we can be as well as paying competitively.
We actually are making awards to people in our branches.
Which equate to roughly $52.0, an hour.
From the beginning of October through the end of the year.
To thank them for what they're doing but also address the competitiveness that exists out there and we're evaluating what makes sense for the longer term and in places of the company, where we do see.
Wage pressure, we're acting accordingly, but I would not say that it is something that we see everywhere across the entire company and every single job.
But we're certainly prepared for it and look at it very very regularly as we look at.
Things like attrition and whatnot.
But to the broader question I think first of all we're in the middle of doing our budgets now as I'm sure you hear from everyone. When they when they do these calls at this time of year.
Our goal is still the same that we've said in the past, which is we still would like to see net reductions in the overall expense base.
We are in a unique position in that I would say in two ways.
First of all we do have the significant amount that we're spending on regulatory orders and we're not assuming that we get efficiencies out of that.
In the near future, but one day when we're when we built all thats required that will be an opportunity for us, but that's not even on the radar screen for us right now.
But we still have just tremendous.
Excess expenses across the company you can see it in head count you can see it in efficiency ratios across the businesses.
And what I found here is the same thing I think that Mike.
Mike and I have seen it a lot of other places, which is it's like peeling an onion back you think you see what's.
What's incredibly clear.
Once you actually get rid of those inefficiencies you then start to see the next level.
And.
It becomes part of the culture, and we engaged the entire company.
Moving that way, so we still think that there.
Extremely meaningful efficiencies.
Efficiencies.
We can pursue for quite some time here.
Which was which.
Which hopefully will both allow us to have net reductions, but also invest appropriately whether it's in technology or products, which.
As we've said we're extremely focused on as well.
Perfect. Thank you very much and then I was hoping.
Mike you might be able to expand on a comment you made about loan growth.
Or excuse me loan demand improving later in the quarter, there seems to be a little bit of a divergence emerging between the kind of demand, we're seeing at say smaller and middle market companies for instance versus what we're seeing with larger corporates that might have better access to the capital markets curious if you could just provide a little more color on where youre seeing that improved demand. Please.
Yes.
And I assume we will see some divergence across different.
Some of the peers, which you sort of look at this but if you look at the commercial bank as an example.
We're actually seeing.
The demand in the pipeline build in kind of the middle and upper end of the client base with a little bit less of demand emerging so far on the lower end.
Which which I know is counter to what you. The way you asked the question, but I think that's what we're seeing right now.
And I think in part that's because the clients and the lower end of our client base still have a lot of excess liquidity and theyre still dealing with supply chain crunches and other issues that are sort of impacting their need for liquidity and their need for credit.
So I think and I think that we'll start to see more demand I think more consistently across the client base over time as things play out, but that's what we're seeing in the commercial bank I think when you look more broadly and you look at the consumer side.
We have seen balances grow in auto we've seen them in card when you look through the home lending.
Data that we give you we are seeing growth in our on our kind of core nonconforming mortgage book as well.
That's offset by.
But by the declines in these in these loans that we bought out from securities last year, but we are seeing some growth there too and then you see some growth in the commercial and the corporate investment bank.
And that's really a little bit of a lot of things happening across the corporate investment bank, whether it's real estate subscription finance and other other sectors that are really driving.
Some of that growth and so again, it's still relatively modest so far in terms of what we've seen in <unk> and I think it will take some more time for it to really play out in a more meaningful way.
But it is encouraging to start to see at least a little bit manifest so far and I would just encourage you to make sure that youll look at the period end balances as well as the averages because it.
It certainly gets to the heart of the question and then just one final thing I'll say on this which is we.
We're not.
We're not stretching in any way in terms of credit.
Or pricing or things like that too.
To try and get to a result.
We're continuing to at the same disciplines that we've always had and it's going to be a question of nor balances arising because of greater customer activity.
That's terrific. Thank you guys very much.
The next question comes from Ken Houston of Jefferies. Your line is open.
Hey, guys. Thanks.
Good morning.
Just wondering Mike if you could just talk a little bit about just some of the ins and outs.
Underneath NII upside from balance sheet mix, meaning you saw a little bit of increase in premium am.
And just remind us like how that mechanism works in terms of what rates need to do to have a ongoing improvement there and.
Are you at the point of how closer to the point, where your incremental purchases are replacements on the securities book are getting closer to what's rolling off.
Thanks, Ken.
I think when you think about premium amortization I think I think you said it backwards, but like we're getting a benefit from premium amortization coming down in the quarter and you saw that in our results is roughly $90 million a little bit maybe a couple a couple of bucks less but.
And so we expect as we've been saying, we expect that to continue to come down I think it'll be somewhat gradual as we look out the next couple of quarters youre not going to see big.
Big step Downs I think it will come down again in the fourth quarter, maybe a little less than we saw from the second to the third quarter.
And then as rates as <unk>.
<unk> seen over the last three months rates have been a little all over the place and so it's a bit of a function of where.
Where mortgage rates are and theres, a little bit of a lag too to it as it comes through the data so, but we still expect the general trajectory to be coming down on premium amortization, it's just a matter of exactly how fast.
And over what time period that'll that'll happen.
Think on the the second part of the question what was the second part again Ken.
Just about reinvestment rates versus the underlying portfolio on the securities book.
Yeah, no and again even on that.
Keep reminding people is you sort of look at that.
The third quarter and rates were much much lower than they are today for most of the second quarter and so really we've seen them rally at the at the tail end of the quarter and kind of stabilize to come down slightly.
Since then over over the last.
Or so.
And so that that gap is closing obviously in terms of what's rolling off and you know getting closer to kind of the overall average in the portfolio, but we still have a little ways to go to.
For rates too for reinvestment rates to match sort of what's rolling out of the portfolio.
Okay got it and just last quick one just long term debt you've been meaningfully reducing the footprint.
Helped by the mix improving on the balance sheet as to how much more of an opportunity is that too.
Continue to lower the long term debt footprint and reduce the cost of it. Thanks, Mike Yeah, Yeah, no. It's a good question and I think our constraint is going to be T. Lack you know how much <unk>, we have to hold it.
And I think you can probably model that out a little bit. So we have a little bit more room to go to continue to optimize the mix here and bring.
The long term debt down.
But it's likely at some point.
Likely at some point next year that'll that'll start to change.
The next question comes from Steven <unk> of Wolfe Research. Your line is open.
Hi, good afternoon.
So wanted to ask a follow up on that.
On the last line of questioning around the NII outlook and if I take all the different component pieces that you just that you mentioned and destroyed in the blender so more constructive loan growth commentary, some modest but steady premium and benefit but still have some reinvestment headwinds.
Is it reasonable to expect that you can grow NII versus the lower end of the guidance range for 'twenty one.
And separately, what's your appetite to deploy excess liquidity just given your excess reserves parked at the fed at least as a percentage of the overall balance sheet is still quite elevated relative to many of your peers.
Yeah, maybe I'll start with the second one and I'll come back to the first part Stephen as we think about redeployment.
We are still being pretty patient and as I as I just mentioned to Ken's question. You know you look at what's been happening over the last few months rates were much lower they rallied recently at the same time the basis between treasuries and mortgages is actually compressed a bit so made them a little bit relatively more more expensive and so I think.
So if you look at what's happening in inflation and with tapering coming in we still think that that there is more risk to upside on rates than there is downside at this point and so we're still being patient as we sort of look at our our redeployment there.
And when opportunities present themselves, we'll take advantage of them and we did that a little bit at the end of the third quarter, where we accelerated.
Some purchases that we were making given the spike in the rally that we saw there and so we'll continue to do that but we're going to we're going to be patient as we as we see how things develop over the coming months.
As you sort of think about the range for the full year we.
We've been giving a range for a reason right because theres a lot of moving pieces right and Theres still a few months to play out and I think if we obviously see.
Faster loan growth and we expect that'll be a positive if we see rates.
Move a little bit higher than what the forward curve has that'll be a positive we have.
We still have to just to keep up with where the securities portfolio. We have a lot of purchases to make in the fourth quarter and so were where rates end up throughout will be important.
And then on the margin, there's things like PPP and other factors that sort of drive drive that and that'll be determined based on the client forgiveness trends that we see in our in our client base. So I think.
There are scenarios, where we could be a little bit better than what we what we.
Projected there and there are some scenarios, where we could be a little bit worse, depending on how all those factors play out.
That's great color. Thanks for taking my question.
Thank you. The next question will come from John Mcdonald of Autonomous Research. Your line is open.
Hi, I wanted to follow up on the expenses when.
When we think about the aspiration for expenses to be down.
Next year and understanding that you've gone through budgeting and Thats. Our goal right now Mike is that can we think of it is that your goal kind of relative to the 53 and a half and wouldn't include help from the business exits.
Yes, John No I think we you know we've.
We think about the business exits just separate from the core efficiency, we're driving in.
You know for lack of a better way to describe it.
If we think that theres going to be a savings of X dollars as these businesses roll off take the 53 and a half and subtract VX.
And that'll be the new our new goal.
And Youre starting place yeah.
And so and when we when we gave you we gave you at a high level some detail about that in in April and when these when these close in and we've got good clarity on it we'll be very transparent about.
How to reset the baseline and.
And the starting point.
And in terms of you expect some gains on sales I assume those are.
The same lines and those should probably come in the fourth quarter is what you are currently thinking yes. They may not all be in the fourth quarter, given how the deals were structured like but not 100% of the gains will be in the fourth quarter, but a good chunk of it will be in the fourth quarter and obviously, we'll be clear on what that was when it happens.
Okay and the last thing for me is if we want to dream about loan growth coming back for the industry. How do we think about how much capacity you have to grow loans, while staying under the asset cap and where does that come from is it coming from cash liquidity mix and moving other stuff around the balance sheet can you just give us some thoughts on that.
Yeah.
We all dream of faster loan growth. So so I think we're aligned there but the.
Look I think we've got plenty of room to grow on the loan side and.
And whether it comes from initially from cash that's sitting at the fed or.
That would be the kind of the first place, but if we needed to we could we could reduce the securities portfolio as well if it grew much faster than what we expected that would be a nice problem to have but.
At this point, we have plenty of capacity to grow.
Okay. Thanks.
Thank you. The next question comes from Ebrahim <unk> of Bank of America. Your line is open.
Hey, good morning.
I guess, just one big picture question Charley appreciate you mentioning Dennis setbacks as you go through the whole regulatory process at the same time and we talk to investors I think that's it.
And change it.
The longer you stay within that asset gap I was wondering if you could address just in terms of when we think about the franchise, both somewhat Allen and client standpoint.
How what should your shareholders be about that or do you think that's well taken care of.
Well I think it's well I would say I do think it's well taken care of I'll start there, but I think we think about it.
We think about it everyday that we take actions to stay below the cap.
I think as Mike talks talks.
Just spoke about.
We have significant room on the asset side of the balance sheet, which is where you really want to be there for clients, where they need you and so when you are out hustling for business.
We're certainly able to fulfill their needs.
On.
It doesn't matter, whether it's consumer or whether it's a corporate.
Our experience has been.
That we continue to find ways to optimize the balance sheet in a way that has very little client impact.
And where we have to.
Move deposits off the balance sheet.
We work with customers.
To come up with other off balance sheet solutions for them and I think our experience has been that customers are very very understanding of what that is so again I think as we think about and by the way we have not limited the growth of deposits on the consumer side at all.
So when we think about.
The more long term impacts.
I think.
We certainly would have liked to have been in a different position.
We had a choice.
But we're trying to be very smart about.
Having as little franchise impact as possible when we make these decisions.
And make sure we're communicating with with customers and I think that people here at wells have done an amazing job.
Of of <unk>.
Striking that right balance and as I said I think.
Or is open for business as anyone on the asset side.
And I think customers appreciate that as well.
Got it thanks for shedding perspective, and just one quick one Mike on the NII when you look at the fourth quarter.
Yes, <unk> on your full year guidance should does the net net of all of that imply that fourth quarter and I should actually is good all from third quarter levels.
Can you disclose what the PPP impact was for the third quarter in a number.
Yeah, I think on the on the on the fourth quarter you can model like based on what your assumptions are right and as I said will be sort of near the bottom of the range and you can sort of pick where you think it will be based on.
How you feel about it I.
I think for third quarter, the PPP impact was about $115 million.
And just to give you a little context, I was a little bit lower than what we saw in the second quarter and we would expect the fourth quarter to be a little bit lower than that potentially but that'll all be based on how clients.
The pace of forgiveness requests that we get from clients, but overall a pretty small.
Sequential impact.
And that's all baked into our forecast.
Understood. Thank you.
Thank you. The next question comes from John <unk> of Evercore ISI. Your line is open.
Good morning.
On the expense side, how should we think about the timing and the magnitude of the remaining.
$7.0 billion in cost saves and would you say that any of the latest regulatory developments impacted how you're thinking about the magnitude or the or the timing of the realization of those saves.
Yeah, John it's Mike.
As we as we said at the beginning of the year, we were going to get about $10.0 billion of the $8 billion. This year and the annualized impact starts to build as you go through the year. So some of that you get in the run rate coming out of 2021.
And some of that will take take more time to get at and as I mentioned, where we have to.
Introduced new technology.
Or other new capabilities. It just takes longer to get at some of it and as we sort of said at the beginning of the year.
This is a multiyear plan so we're not going to get all of that in the first.
First 12 months by by any stretch.
As we get to January we will give you a better view of what what to expect on 2022.
Okay got it and then separately on the loan front can you just maybe give us a little more detail on trends you're seeing in the card business and.
Including spin.
Spending volume as well as payment rates and then separately.
Any thoughts on the impact of the buy now pay later product on how youre thinking about your product set.
Yeah, I think when you look at payment rates are still really high like they bounce around a little bit month to month and you know in the last quarter, so but they are there.
Really high.
So what you're getting when you when you look at the balance growth Youre seeing youre really getting that through an increase in.
In the point of sale purchase volumes that are coming through Charlie highlighted a bunch of stats you know based on what we're seeing in in the book, but I'd say overall.
Spend patterns spend is pretty still pretty strong.
Pretty stable from what we saw in the second quarter up <unk>.
First is the.
The comparable periods last year or in 2019, and as you would expect in any given week or month or quarter the different categories move around.
Quite a bit depending on what's happening.
Sure.
What's happening based on.
That time period, and then I think when you look at so you can see that point of sale volumes are up 24% from the quarter a year ago of 4% sequentially.
And you can see the new account growth, which is up quite a bit under 50% from a year ago and 63% from the second quarter based on the new products. We've launched so so we're still I would characterize it is still really strong activity levels.
Despite the noise you see out there related to.
The Delta variant and other things.
And on the this is Charlie on the buy now pay later I would say.
I would describe buy now pay later as another option.
Of providing credit.
And servicing the merchant.
I think it's I think as others have said, it's still overall a relatively small portion of the market.
But I think there'll be a place for it but it's not going to supplant all the other types of credits.
That exist out there.
Our owned retail services business, we have our own personal lending business.
And we've got a significant number of merchant relationships ourselves so.
It's a place that we will be in addition to the products that we have and over time.
My guess is it'll continue.
Youre seeing a proliferation of people involved now that some time at some point become far more consolidated for all the reasons that these other industries have been consolidated.
Including.
Those that can really provide a differentiated experience for the merchant.
So.
Hopefully that helps.
So that does thanks, Charlie appreciate it.
Thank you. The next question comes from Matt O'connor of Deutsche Bank. Your line is open.
Hey, guys.
Charlie I wanted to follow up again on the comment about likely to have additional set box on the regulatory stuff and just to flush out a little bit of if you don't mind, just kind of like a broad risk statement. Just in case like you never know or should we just be prepared for.
More meaningful whether it's a speed bump or potential land mine.
Between here and specifically the end of the asset cap, which I think everyone. Just wants a key key turning point.
Yes, I guess.
I would describe it this way, but everyone focuses on the asset cap and I understand all the reasons for that for sure.
And I think what's important to us is that we want to make sure that there's complete transparency.
Which we believe we have a few read our 10-Q.
But also we want to make sure that you are just thinking about.
The broad set of things that we're dealing with and the reality is the asset cap embedded in the fed consent order is one very important order, but we still have other consent orders with other agencies, which are still extraordinarily important we have other inquiries that are in progress that are described in there.
And so I just think it's important that we're completely transparent it's nothing different than what we've been saying.
And when you talk about speed bump versus land mines.
Fully we all.
Work to make sure that we minimize the likelihood of a land mine.
But as I've said before there is the interconnectedness.
Just the pure amount of things that we have to do a complex.
We're judged on.
<unk> practices that were in place years ago as well as practices that are in place today and we're judged based upon the overall progress based upon the initial.
Due dates of some of these things and so.
Nothing changes my perspective about net net are we moving forward I absolutely believe we are.
We have.
Uh huh.
We're able to see all the internal metrics every interim date and things like that.
<unk>.
The outsiders can see but.
We choose our words very carefully on things like that and so I just want to make sure that people understand that we have these things that are that are out there.
And don't want you to be surprised if something happens, but it doesn't change our point of view of what the opportunity is and how confident we are about being able to close these things.
And as a follow up I know you can't tell us what the conversation kind of content is with the regulators, but can you at least tell US do you have like the point of the conversation like.
The asset cap, we submitted the plan you accepted it like how long is this going to take like.
Is there we are.
Just on the outside to try to understand like what the level of communication is because I think on some fronts. There's a lot of communication like OCC I think sits on all of the bank's offices. So there's a lot of regular communication, there, but with the fed and the asset cap is kind of like you know is there any conversation about it even if you can't tell us.
A couple of things first of all we have and I think this is not just us I think this is true of all banks, we have regular conversations with all of our regulators absolutely with the OCC is as you say there are many examiners in our offices on a regular basis.
But we have an extremely open.
An interactive relationship.
With the CFPB with the fed with the FDIC and all other appropriate regulators, including the SEC FINRA overseas regulators and that is the way we treat the relationships.
I have found the fed.
To be clear.
Assistant.
In their approach to issues that relate to supervision I think thats, just a general comment that I would say.
I haven't I haven't seen things deviate from that and as I have said when you look at the consent order it.
It doesn't say submit a plan and then we'll talk about lifting the asset cap. It describes in there what we have to do.
And so you just assume that there is that there is.
We have a constant level of engagement that we're really clear on what we have to do and we're doing the work to get there.
Okay. That's helpful color. Thank you.
Thank you. Our next question comes from Gerard Cassidy of RBC. Your line is open.
Thank you.
Mike can you share with us your credit quality is very strong similar to many in the industry. Your net charge off ratio of course was an incredibly low 12 basis points.
Do you have an idea how long you can kind of sustain such a strong level of net charge offs. When you may want when it may reach a more normalized level sometime looking out and then second your reserves relative to loans I think are about 170 basis points and when we go back to that day one.
The seasonal number that you guys put out in January of 2020. It was about 93 basis points in that difference in Europe at the widest of all your peers. So any thoughts on just where the reserve could go as well. Thank you.
Thanks Gerard.
A couple of things I think so far.
We've all I think in the industry have been wrong about when credit or how credit will normalize.
And at some point I think we all expect that we're going to get back to.
More normal more normal charge off rates now, having said that the new normal might be different if people.
Keep higher sustained higher liquidity balances throughout time, so so I think thats something to still play out.
Thank you at this point, it's Charlie highlighted in his script, we still people still have high liquidity balances, we're seeing high pay off the chart payout payoff rates in credit cards and other and other.
Loans and so so there's no reason to think that we shouldnt continue to have strong credit performance in the near term 12 basis. It may not be 12 basis points, but it should still be historically quite.
Quite strong at least in the near near term and we'll see how it starts to normalize I think as it as it is.
Just let me add one thing on that I just think.
When we think about long term earnings power of the company and we think talk about.
Our ability to get to sustainable return numbers, we assume that the charge off number will go up from there. So we agree it's extremely low that it won't stay here and just as you think about when we think about our returns we make adjustments for that and.
So if.
If they do start to rise next year.
Then.
It will be hopefully in our assumptions and if not then we will get there sooner maybe but we will explain why.
Yeah, and as it relates to coverage ratio today, you know as we've said for the last couple of quarters, we continue to be reserved for a whole different whole number of different scenarios.
Hopefully it will prove out to be very conservative relative to what plays out over the over the coming coming quarters and if we continue to see trends continue we will have more we'll have more releases as we go.
I think whether you get back to a day, one seasonal levels or not I think is a really almost impossible question to answer given its going to be a function of all the variables you now have to consider and what your outlook is with the different risks are and at that time and if you go back to first quarter of 2020, I think we had what three five.
5% unemployment at that point.
And it was a very rosy I think pre COVID-19 it was.
It was it was a very.
Very kind of utopian environment, I think from an economic perspective, and so will we get it back to exactly that that outlook hard to say, but but I think we continue to think if things play out we'll have more releases and that number will go down.
Very good and then as a follow up can.
Can you give us an update in the middle market investment banking initiatives. How successful have you guys been in penetrating your existing customer base.
Yes.
We've highlighted you are we think that's a really big opportunity over over a long period of time, but it doesn't happen in a quarter or two it takes some time to really make sure that we've got those relationships built out and the way we want we really started to put some extra focus on it.
A very disciplined way late last year.
So I'd say, we're still early I think we're seeing some.
<unk> Green shoots where we've had some opportunities that we've won over the last few months or couple of quarters that we might not have been in a position to have.
Before that but it'll take some time to play out, but we do think the opportunity is pretty big.
Great. Thank you very much.
Thank you. The next question comes from Betsy <unk> of Morgan Stanley. Your line is open.
Hi, How're you doing.
Betsy.
Two questions one on the branch network just wanted to get your updated thoughts on.
How you see your footprint today and is there more of an opportunity to expand or to optimize.
That's a good question Betsy I think.
We're actually doing a bunch of work on exactly what that looks like because we have been very very focused on.
Net reductions given the fact that we were behind some others and so the team has done a great work.
Just in terms of identifying.
We'll describe them as just we had a significant number of very obvious.
Consolidation opportunities, there really not closures, which really consolidation, where we have the appropriate.
Local coverage.
Thank you.
The work that we're doing is is to really think through at this point.
Where we have significant share where we have less share, but we have enough concentration what our footprint looks like in some of those places.
To figure out how we.
We can actually.
Reorient the existing number of branches that we have over a period of time. So I think the reality is we will continue to optimize.
Because as time goes on we will continue to need less we're focused on not leaving communities that need our help without solutions.
We're going to certainly windup with smaller footprints in a lot of other places because of branch usage is changing.
But we will use this as an opportunity to figure out how to redeploy some of those resources as well.
Okay, and then I have the same question on your wealth platform I know you recently brought in.
<unk> Barry to run that and just want to understand the strategy. There if you don't mind.
Sure I think we've got the.
The strategy falls into.
Kind of afford distinct buckets.
Number one is we have our.
Think of it as you know are independent.
Broker channel.
Where.
The old <unk> words.
Businesses like that we'd first that came together to form that network.
We have then financial advisers that work extremely closely with our bank branches.
And believe that's still.
Relatively untapped opportunity for us.
We also have a <unk>.
Platform.
Where.
Brokers can actually go into when I say independent of the wrong phrase in the beginning those are people who are employees, but we have a platform where people can actually.
Go independent and continue to do the business through us.
And then we have.
Our online business.
Well straight.
And so we've got those distinct.
Different points of distribution.
And we're focused equally on maximizing the value that exists in all of those historically I think we ran it much more as just one big opportunity and I think we feel like we.
Have underinvested in the online piece and the independent piece for sure.
And the bank branch piece.
Is something which we think is just as I said, just a very meaningful opportunity given the amount of affluent customers that we have in our branch footprint.
Thanks.
Thanks Betsy.
Thank you.
Again, if he would like to ask a question. Please press Star then one and record your name and our next question comes from Victor Nature of J P. Morgan Your line is open.
Hi, Charlie.
Kind of go back to the regulatory consent orders.
To get a sense from you.
Given the setback we had this quarter with the additional consent order you've obviously spent a lot on these you have hired and brought in a lot of folks already since you've been there over the last two years and a lot of consultants a lot of in house people.
So what do you need to do differently, especially you as a management team to not have.
More of those setbacks.
And have it go in the direction that you were hoping it would go with us.
Yes, I would say.
There is there is there is nothing new.
That we have to do as far as reaching an endpoint. So so so if you said pre consent order or post consent order does it change.
What we have to do to build out the right capabilities with the right controls.
In this case in mortgage the answer is absolutely not.
And so again, whether or not it's being done fast enough.
And the regulators mines relative to how long some of these things have been going on.
Which predate many of us that's.
That's the context, which they need to look at this in.
Because that's who they regulate.
How they have regulated so again I think for us and I'm not minimizing a consent order consent orders, a very big deal, but the work that's embedded in there.
The end state is the same end state that we would have contemplated building ourselves and so there is some more a lot more formality that's part of the process now.
And the OCC will be more deeply involved in the series of the checkpoints and things like that.
And.
And there certainly is some more work that comes out of an exercise like that but the end state is the same.
And so when you say separately as Charlie.
Either should we think you know that entitle them enough is it a three year timeframe with that five year timeframe, just because youre right. We've all been dealing with US before you got there. So it has already been five plus years. So.
Any any sense of direction there.
I think listen I don't want to go I believe.
In the perfect World, we'd lay out all of our plans for.
For everyone, but we're obviously not in a position to do that and I think.
What I would just encourage you to do is look at.
The things that we've closed.
Hopefully youll continue to see progress as we look forward and you will be able to draw judgments based upon that.
<unk>.
And relative to what it means for our business as I've said, we still have a fair amount of flexibility.
In order for us to grow fee based businesses and grow businesses that require.
Balance sheet usage on the asset side.
<unk>.
So I think.
Yeah.
I just I just I can't give you any more specificity other than we don't want to mislead people.
<unk>.
And it's not as if we're not thinking about the future.
So again try and be very careful not to wait too much on one side or the other but we've got a lot of people here that serve customers every day and every single person isn't working on a consent order. Many are we've got a huge amount of resources that are dedicated to it but as you see we're building.
<unk> in the card business, we are building products and our.
And our retail services business, we're doing the same across the digital platforms across the company.
And so.
And as we execute on these items.
You build the confidence of the regulators. So it's not as if you have to wait until everything is completely done to be able to continue to move forward not just with your confidence, but with their confidence in as well. So hopefully in terms of the progress that we believe we are making.
We're that's what we're seeing and so youll.
You'll see us put all the resources towards these things to minimize the time frame, but get them done properly at the same time that we're moving the business forward.
Thanks Allen.
At this time, we have no further questions and I'd like to turn the call back over to management.
Well listen thank you all for the time today, we appreciate it and we're all here to answer any follow up questions you have to take care.
Thank you for your participation on today's conference call at this time all parties may disconnect.