Q4 2021 Wells Fargo & Co Earnings Call
Welcome and thank you for joining the Wells Fargo fourth quarter 2021 earnings conference call all.
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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'd now like to turn the call over to John Campbell Director of Investor Relations. Sir you may begin the conference.
Thank you Brad and good morning, everyone. Thank you for joining our call today, where our CEO , Charlie Scharf, and our CFO , Mike Sandeman Simo will discuss fourth quarter results and answer to your questions.
This call is being recorded.
Before we get started I would like to remind you that our fourth quarter earnings materials, including the release financial supplement and presentation deck are available we just refreshed stores.
I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties.
Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the form 8-K filed today containing our earnings materials.
Information about any non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can also be found in our SEC filings in the earnings materials are available on our website.
I will now turn the call over to Charlie Thanks, very much John and good morning, everyone I'll make some brief comments about our 2021 results the operating environment and update you on our priorities I'll, then turn the call over to Mike to review fourth quarter results and some of our expectations for 2022 before we take your questions. Let me start.
With some 2021 highlights we earned $21 5 billion or $4 95 per common share in 2021 expenses declined 7% from a year ago, reflecting lower operating losses and progress on our efficiency initiatives red.
Revenue increased 6% as we benefited from strong gains from equity securities and gains from sales of our student lending asset management and corporate Trust businesses. We also have broad based revenue growth across our businesses, including called lending consumer and small business banking credit card auto.
Commercial real estate banking and wealth and investment management.
Credit quality improved significantly as the economy improved and our customers had high levels of liquidity.
Our loan charge off ratio declined from 35 basis points in 2020 to 18 basis points in 2021, and our allowance for credit losses declined by $5 7 billion.
Deposits increased 78 billion or 6% and loans grew 1% with declines in the first half of the year offset by a 5% increase in the second half.
We also returned a significant amount of capital to our shareholders, including increasing our common stock dividend from <unk> 10 per share to <unk> 20 per share in the third quarter, and we repurchased $14 5 billion of common stock predominantly in the second half of the year. After the return to the SCB framework our results in the fourth quarter.
<unk> also showed continued broad based momentum we earned $5 8 billion or $1 38 per common share. We grew loans by $32 6 billion or 4% and deposits by $12 1 billion or 1% from the third quarter.
Expenses declined 1% from the third quarter and 11% from a year ago, and we generated positive operating leverage over both periods.
Importantly, we continued to prioritize our risks and control work.
And the strong economy continues to positively impact our customers and our results consumers continue to have more liquidity than prior to the pandemic, but we do see this declining as the median balances today are 27% higher than pre pandemic levels, but are down 10% from the third quarter consume.
Credit card spend also continued to be strong up 28% from the fourth quarter 2020, and up 27% from the fourth quarter of 2019 holiday sales were strong with spending up 31% to three weeks, leading up to Thanksgiving and that momentum continued post Thanksgiving all spending.
Fees were up in the fourth quarter compared to a year ago with the largest increases in travel fuel entertainment and dining.
Weekly debit card spend during the fourth quarter was up every week compared to both 2019 and 2020. This increase was driven by higher transactions, but also higher spend per transaction, reflecting inflationary impacts and increased spending and higher cost categories such as travel.
We are watching the impact from omicron on customer on consumer spending and while there is some softening in restaurants travel and entertainment in recent weeks overall spending remains strong in the first week of January with credit card up 26% and debit card up 29% versus the same week in <unk>.
20.
And we saw strong loan growth from the third quarter across our commercial businesses, including commercial real estate asset based lending middle market banking and our markets and banking businesses.
So I've been at the company for a little over two years now and I thought I'd spend a few minutes, giving you my thoughts on our progress overall I feel great about what we've accomplished and continue to feel energized about the opportunities in front of us.
I think about this along several dimensions talent leadership and culture risk regulatory and control financial and strategic process progress and our work on ESG and broader reputational issues.
I have spoken of the substantial talent changes we've made but just to remind you 11 of 18 members are new to the operating committee and two are new to their job since I arrived Additionally, well over half of the senior most people at our company, meaning those who were one level below the operating committee are new to their roles and a significant proportion of them.
Were hired from outside the company. This is a dramatic change.
In our leadership and with it we've changed how we run the company how we prioritize your work and how we view our responsibility broadly.
We began a process two years ago to change the culture and priorities of the company and the most significant part of this prioritization was the building and implementation of an effective risk and control framework across the company.
Our approach and our progress are entirely different than they were when I arrived we are laser focused on meeting our own expectations and those of our regulators we have clear plans in place and clear owners for every regulatory deliverable. We have we have detailed reporting on how we're progressing on those plans.
To review this reporting every single week at the operating committee level. The detailed involvement of the operating committee members is very different from what was happening before I arrived our ability to identify issues has also improved from two years ago.
I continue to believe that we are making significant progress and this is based on what we see in our internal reporting it doesn't mean that we're perfect. The fact that we have multiple consent orders makes it complex.
Next time to build all of our capabilities and it's certainly in the regulators per view to look at issues that have been outstanding for a long time like the OCC did in the third quarter, but I would point you to the comments made by the OCC and their recent consent order that highlights that we have taken steps to comply with their 2018 order and we're.
<unk> to addressing remaining requirements.
I remain confident in our ability to continue to close the remaining gaps over the next several years, having said that it continues to be the case that we're likely to have setbacks, along the way, but that doesn't change. The fact that we believe that the quality of the talent. We now have and the processes. We now have in place will enable us to get the work done.
We're making progress increasing the earnings power of the company and have also begun to invest in a more holistic and aggressive way to drive stronger organic growth in all of our businesses. You are just now beginning to bring things to market that are differentiated.
And a number of significant opportunities are exciting we're continuing to track to the financial return goals. We've discussed first achieve a sustainable 10% ROE TCE subject to the same assumptions we discussed in the past and then target 15%. We continue to believe that we will achieve the 10% during one of the core.
Orders in 2022 on an annualized basis to achieve this we are aggressively focused on driving efficiencies and we're seeing net expense reductions after significant investments in our control Buildout and our businesses. We are aggressively returning excess capital to shareholders now that we've returned to the SEC FCB.
Framework, we continue to manage credit well and we're seeing early benefits from higher interest rates growing loan balances and higher fees and certain businesses. We're doing this while devoting significant resources to building our franchise, we had fallen behind in providing competitive digital capabilities for our clients. This is change.
In the fourth quarter, we announced a rebuilt mobile banking experience for consumer and small business customers that is set to beginning roll to set to begin rolling out this quarter. It has a new modern look and feel and a simpler user experience that will help our customers more easily accomplish their banking needs. This.
Platform as necessary to drive significantly higher digital adoption from our customers, even with our existing capabilities in the fourth quarter, our customers logged in $1 6 billion times, using a mobile device up 7% year over year teller transactions remained more than 30% lower than pre pandemic.
Nick levels, we also announced that later this year, we'll be adding an all new virtual assistant Fargo to the App customers will be able to get answers to their everyday banking questions asked Fargo to complete the task for them and Fargo will also provide personalized insights and recommendations to help customers better manage their finances.
We will also be introducing the first phase of the redesign of our public website early this year.
In addition, we are beginning to come.
Beginning to become more active on the wholesale side for example, we announced that we're collaborating with HSBC to optimize the settlement of foreign exchange transactions through a blockchain based solution, which will reduce settlement risks and associated costs.
We're also approaching payments and credit card is very differently. We believe credit cards will remain important as both a credit and as a payment vehicle. We were also doing additional work around non card payments and believe we must succeed here to be a key financial services provider two years ago, our products and capabilities supporting those.
Products were not as competitive as necessary in 2021, we launched two products, including active cash cash, which we believe is the best cashback product in the marketplace and reflect which rewards customers for on time payments.
We improved the core experience, including investing in advertising simplifying our digital application and enhancing our underwriting. These efforts have driven an increase in digital card activation paperless statements and enrollment alerts. We are opening approximately twice as many accounts as well as we were pre launch of these products and importantly.
We're not competing on credit in fact, the quality of applications.
And the accounts, we're booking continues to be better than what we were booking historically away from card, we're beginning to invest in our broader digital payments across the platform enhancing our capabilities, increasing limits and broadly reducing the friction and moving money as evidenced zelle momentum continued to accelerate with zelle transaction.
<unk> up 46% from a year ago.
We are also taking a very different approach and that we believe that for us to be successful, we must consider a broader set of stakeholders and our decisions and actions. This is not in lieu of shareholders. In fact, we believe it will enhance our returns to shareholders over time.
We have taken significant efforts to support small businesses since the beginning of the pandemic and recently fulfilled our roughly 420 million opened for business fund commitment to assist small businesses and recovering from the pandemic by working with not for profits to offer capital technical assistance and long term programs.
<unk> was created by dominating the gross processing fees, we made from administering the paycheck protection program loans in 2020.
Additionally, we made significant climate commitments in 2021 in the fourth quarter, we joined the net zero banking Alliance and industry led leadership group designed to foster collaboration and support banks and aligning their financing with the goal of achieving net zero greenhouse gas emissions and climate change is one of the most urgent.
Environmental and social issues of our time and last year, we announced our goal to achieve net zero greenhouse gas emissions, including emissions attributable to financing by 2050, we expect to announce our first finance emission targets for the oil and gas and power sectors. Later this year.
We made our first solar plus battery storage tax equity commitment.
Once it is operational it will be one of the largest solar and battery projects in the company last year, we surpassed $13 3 billion in cumulative tax equity investments and nearly 600 wind solar and fuel cell transactions. These investments have provided 13% of all.
<unk> scale wind and solar capacity in the U S. Over the past 16 years, we continue to be one of the top investors in affordable multifamily housing in the U S as well as an active lender for affordable rental housing developments.
<unk>, we're committed to expanding affordable homeownership for example in the fourth quarter, we committed to invest 5 billion $5 billion through the neighborhood lift program to help more than 300.
Low and moderate income residents in Houston with home payment down assistance.
Im sorry home down payment assistance.
We've also supported our employees and in December we announced that as part of our commitment to providing comprehensive benefits and competitive pay we're increasing U S minimum hourly pay levels to a range of 18 to $22 effective at the end of this month.
This week, we announced new efforts that will rollout over the course of 2022 to help our consumer customers avoid overdraft fees and cover short term cash needs building on other changes we've made over the last several years. The changes we announced include the elimination of transfer fees for customers enrolled in overdraft protection.
The elimination of non sufficient fund fees.
Early access to direct deposit by providing customer access to funds up to two days before their scheduled deposit.
24 hour Grace period for customers that overdraw their account to cover the balance before incurring an overdraft fee and a new short term credit product for customers to meet personal financial needs. This builds on existing features we already have in place, including clear access banking, our no overdraft checking account that.
We launched in September 2020, and we now have over $1 1 million outstanding customer accounts overdraft, Rewind, which was introduced in 2017, which automatically re wines overdraft fees when a covering direct deposit is received by the next morning, which will rebuild.
Placed by our expanded 24 hour Grace period balance.
Balance alerts that help customers avoid overdrafts by sending more than $1 3 million alerts every day.
Putting all of these changes in perspective. These fees are down significantly since the financial crisis, we have alternatives for both customers that do not want to overdraft.
And those that do this.
This is a competitive marketplace. We continue to review our capabilities in pricing with the goal of providing value to our customers.
And let me make a few comments now as.
As we look forward.
While there is a risk with the continued growth of the omicron variant or potentially other variance later this year I expect to see continued strong economic trends in 2020 to consumers' financial condition remains strong modest debt growth strong asset appreciation and higher deposit balances have left household balance sheets.
In excellent condition.
Which should help drive continued strong consumer spending corporate America has demonstrated the ability to adapt to the ever changing pandemic conditions inventories remained unusually lean as businesses adopted a defensive posture and supply chains have been disrupted. This is expected to result in substantial gains in <unk>.
<unk> production as they continue to restock.
We're beginning to see loan growth and expect this to continue.
In a moment, Mike will provide our thoughts on net interest income and expenses for 2022 I commented earlier that we that we remain on target to achieve a sustainable 10% ROE TCE subject to the same assumptions we have discussed in the past on a run rate basis at some point this year and that once we have achieved this goal.
We'll discuss our plan to continue to increase returns, but at a high level. We continue to believe we can further improve our returns through a combination of factors, including 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.
<unk> execution on our risk and regulatory control framework and moderate balance sheet growth. Once the asset cap is lifted it's important to note. We currently have the ability to grow loans, even under the asset cap.
The changes we made to the company.
And continued strong economic growth prospects prospects make us feel good about how we're positioned to entering 2022. We also remain cognizant that we still have a multi year effort to satisfy our regulatory requirements with setbacks likely to continue along the way.
And we continue our work to put exposures related to our historical practices behind us.
As we look forward, we will continue to be aggressive in driving progress and improvement in our performance embrace our responsibility to our customers and communities and I remain incredibly optimistic about our future.
I want to conclude by thanking our employees, who are going to continue to serve our customers through another challenging year I appreciate their hard work and their resiliency, while we made progress on making wells Fargo better.
I look forward to all that we accomplished in the year ahead, I will now turn the call over to Mike Great. Thanks, Charlie and good morning, everyone. Charlie summarized how we helped our customers communities and employees last year on slides two and three so I'm going to start with our fourth quarter financial results on slide four.
Net income for the quarter was $5 8 billion or $1 38 per share common share our fourth quarter results included a $943 million net gain on the sales of our corporate Trust services business and Wells Fargo asset management.
There could be future gains related to these sales due to post closing adjustments and earn out provisions.
And $875 million decrease in allowance for credit losses as credit trends continued to be strong.
And a $260 million impairment of certain leased railcars due to changes in demand for these cars we.
We also had $2 5 billion or $1 9 billion after non controlling interest of equity gains primarily from our affiliated venture capital and private equity businesses. The <unk>.
Third consecutive quarter of strong returns in these businesses, our effective income tax rate in the fourth quarter was approximately 23%, including the discrete impacts related to business divestitures.
Our CET one ratio declined to 11, 4% in the fourth quarter, reflecting share repurchases and an increase in risk weighted assets, primarily from loan growth in the quarter.
We repurchased $7 billion of common stock in the fourth quarter, partially offset by $1 4 billion of new issued issuances predominantly for the annual matching contribution for our Form 10-K plan.
As a reminder, the regulatory minimum for our CET one ratio will be nine 1% in the first quarter of 2022, reflecting a lower G SIB capital surcharge.
Turning to credit quality on slide six our net charge off ratio was 19 basis points in the fourth quarter <unk>.
Commercial credit performance continued to be strong with net loan charge offs declining $10 million from the third quarter to two basis points.
Despite the challenges created by the pandemic the commercial real estate portfolios continue to perform well commercial real estate valuations in investment activity has rebounded off their lows across all property types. Although there is still is some risk in office and select hotel and retail segments.
Consumer credit performance also remained strong with higher collateral values for homes in autos and consumer cash reserves remain above pre DAC pre pandemic levels.
<unk> net charge offs of $393 million increased $172 million from the third quarter of $152 million of the increase is related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans.
Nonperforming assets increased $145 million or 2% from the third quarter driven by an increase in residential mortgage non accruals, primarily resulting from certain customers exiting COVID-19 related a combination programs loans that were modified in 2021. Upon exiting forbearance are reported as non accrual until they perform for a period of time over.
They're all early performance of loans that have exited forbearance have been aligned with our expectations.
After increasing during the first four quarters of the pandemic commercial nonperforming assets have declined for four consecutive quarters and were back to pre pandemic levels in the fourth quarter.
Our allowance level at the end of the fourth quarter reflected continued strong credit performance the ongoing economic recovery and the uncertainties that still remain if the economic recovery continues we would expect to have additional reserve releases.
On slide seven we highlight loans and deposits average loans grew 2% from the third quarter with growth in both our commercial and consumer portfolios. We had strong growth late in the quarter and period end loans grew $32 6 billion or 4% from the third quarter with broad based growth across most of our commercial and <unk>.
Consumer portfolios.
I'll highlight the specific growth drivers when discussing our business segment results.
Average deposits increased $89 9 billion or 7% 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 eight.
A year ago, we provided our expectation for 2021 net interest income to be flat to down 4% from the originally reported annualized fourth quarter 2020 level and we ended up being down 3% for the full year.
Fourth quarter net interest income was down $93 million or 1% from a year ago and grew $353 million or 4% from the third quarter.
The increase in the third quarter was driven by higher loan balances, including higher interest income from loans purchased from securitization pools or <unk> we.
We also benefited benefited from higher trading assets and a favorable funding mix.
In the fourth quarter, we had $318 million of interest income associated with the <unk> and.
And at year end, we had a total of $17 3 billion of these loans down from $34 8 billion, a year ago and as I highlighted last quarter. We expect these balances to decline substantially by the end of this year.
We also had $130 million of interest income in the fourth quarter from Paycheck protection program loans or PPP loans.
And were outstanding.
Outstanding declined to $2 4 billion at year end.
We've reflected the headwind from these portfolios running off in our 2022 net interest income waterfall that I will review later on the call.
The net interest margin increased eight basis points from the third quarter three basis points of which was due to higher interest income from <unk>.
Now turning to expenses on slide nine.
Noninterest expense declined 11% from a year ago.
The decrease reflected progress we made on our efficiency initiatives, including reductions in personnel costs consulting spend that occupancy occupancy expense.
We'll provide specific examples of the progress we made in our efficiency initiatives in 2021 later on the call before updating you on our expense expectations for 2022.
We also had lower restructuring charges and operating losses in the fourth quarter compared with a year ago.
Fourth quarter expenses included one month of approximately $100 million of operating expenses from our corporate Trust services business and Wells Fargo asset management prior to their sales on November one.
Now turning to our business segments, starting with consumer banking lending on slide 10.
Consumer and small business banking revenue increased 4% from a year ago, primarily due to higher deposit related fees as fourth quarter of 2020 included some COVID-19 related fee waivers.
Fourth quarter 2021, and also reflected an increase in consumer activity, including higher debit card transactions compared with a year ago and the benefit of strong deposit growth was largely offset by lower spreads.
Charlie highlighted the enhancements and changes, we're making to help our customers avoid overdraft fees the impact from the fees that will be reduced including the elimination of non sufficient fund or NSF fees as well as overdraft protection transfer fees is estimated to be approximately $700 million annually.
Also we expect that they may be partially offset by other fees due to higher levels of activity as well as the expiration of various fee related waivers that were in place in 2021.
In terms of new features to be rolled out in the latter part of the year, including a 24 hour Grace period for Overdrafts and a new short term loan product, we will have to observe how customers respond.
Home lending revenue declined 8% from a year ago, primarily due to lower mortgage banking income driven by lower gain on sale margins and origination volumes.
Even before the recent rate back up we started to see a drop in application volume in December and we expect originations to decline in 2022, which will put pressure on margins as the industry adapts to the lower volume.
Credit card revenue was up 3% from a year ago, driven by higher point of sale volume, partially offset by higher rewards costs, including promotional offers on our new active cash card.
Auto revenue increased 17% from a year ago and higher loan balances with the average balances up $6 8 billion.
Turning to some key business drivers on slide 11.
Our mortgage originations declined 7% from the third quarter, we expect our first quarter originations to continue to decline due to lower refinance activity and the typical seasonal slowdown in the purchase market, we increased our non conforming originations in the fourth quarter and have grown our nonconforming portfolio for seven consecutive months, reflecting the.
And our capabilities as well as the reintroduction of cash out refinancing late in the first quarter of 2021.
Turning to auto eliminate limited vehicle inventories continued to constrain industry New car sales. However, we had our third consecutive quarter of record originations with volume up 77% from a year ago with the majority of our originations coming from used cars originations.
Originations also benefited from the enhancements we continue to make in our capabilities importantly, we are maintaining our underwriting standards and continue to be cautious about the increase in vehicle prices over the last year or so.
Turning to debit card transactions were relatively stable from the third quarter and up 10% from year ago with increases across nearly all categories.
Credit card point of sale purchase volume continues to be strong was up 28% from a year ago at a 11% from the third quarter.
While payment rates remain elevated balances grew 5% from a year ago to the strong purchase volume and the launch of new products.
A new credit card accounts more than doubled from a year ago, driven by a new active cash card and we're pleased by the quality of the accounts we've been attracting.
Turning to commercial banking results on slide 12.
Middle market banking revenue increased 2% from a year ago results included higher deposit balances and modestly higher investment banking fees, partially offset by the impact of lower interest rates.
Asset based lending and leasing revenue increased 1% from a year ago, driven by higher net gains from equity securities and higher revenue from renewable energy investments, partially offset by lower loan balances.
Noninterest expense declined 10% from a year ago, primarily driven by lower personnel and consulting expense due to the efficiency initiatives as well as lower lease expense.
Loan balances started to increase late in the third quarter and now have grown four for four consecutive months with growth accelerating in December as with other portfolios. We are adhering to the same credit risk appetite Inc.
Increases in the middle market banking were driven by growth from our larger clients a modest uptick in revolver utilization and strong seasonal borrowing.
Growth in asset based lending and leasing was driven by new client wins as well as increased levels from higher prices and some increases in inventory levels.
Turning to corporate investment banking on slide 13.
Banking revenue increased 17% from a year ago investment banking had a strong quarter with higher debt origination and advisory fees banking results also benefited from higher loan balances.
Commercial real estate revenue grew 8% from a year ago, driven by higher loan balances and capital markets results in stronger commercial real estate financing activity loan originations returned to pre pandemic levels and we had a healthy pipeline as we started the new year.
Markets revenue was relatively stable from a year ago was down 14% from the third quarter, primarily due to lower trading activity in spread products and equity derivatives.
Average deposits in corporate investment banking were down $23 7 billion from a year ago, driven by actions taken across all lines of business to manage under the asset cap.
Average loans increased from both the third quarter and a year ago across all lines of business on a period end basis loans grew every month since June and growth accelerated in December .
Well wealth and investment management on slide 14.
The revenue grew 6% from a year ago as higher asset based fees and market valuations more than offset a decline in net interest income due to lower interest rates.
The 5% increase in expenses from a year ago was primarily driven by higher revenue related compensation, which was more than offset by higher revenue. This increase was partially offset by lower salaries expense, reflecting progress on efficiency initiatives client assets reached a record $2 two trillion up 9% from a year ago, primarily driven by higher market valuations.
Average deposits were up 7% from a year ago and average loans increased 5% from a year ago driven by the continued momentum in securities based lending.
Slide 15 highlights our corporate results.
Revenue increased eight from a year ago, driven by strong results in our affiliated venture capital and private equity businesses and gains on the sales of our corporate Trust services business and Wells Fargo asset management.
These businesses contributed $1 6 billion of revenue in 2021, excluding net gains on sale at $1 $5 billion of noninterest expense.
We expect approximately $200 million of these expenses associated with transition services agreements to remain in 2022 with offsetting revenue. So it's P&L neutral.
We also expect approximately $300 million of corporate overhead expenses related to these businesses to remain in 2022, which we expect to manage down over time.
Turning now to our expectations for 2022, starting with net interest income on slide 16.
As the last couple of weeks have demonstrated is challenging this early in the year to predict the rate environment loan demand and other variables that impact net interest income for the full year.
Let me highlight the key drivers of our net interest income for 2022.
We are assuming the asset capital remain in place throughout 2022.
Moving left to right on the waterfall as we've discussed previously we have a headwind this year from the runoff of PPP and <unk> loans.
However, our current outlook for loans is for average balances to grow low to mid single digits from the fourth quarter of 2021 to the fourth quarter of 2022.
Along with other balance sheet mix changes this is expected to more than offset that headwind.
This net result would increase net interest income approximately 3% in 2022 from the $35 $8 billion, we generated in 2021.
Moving to rates and re pricing. The recent forward curve includes approximately $3 25 basis point rate hikes. This year beginning in may.
Assuming this were to play out net interest income has the potential to grow up to an additional 5%, resulting in approximately 8% in net interest income growth in 2022 versus 2021.
That said the implied forward curve has changed a lot over the last month and a half so it's very hard to forecast with any certainty.
Another way to view our asset sensitivity is from the disclosure we provided in our third quarter 10-Q filing it showed that the estimated impact of our of an instantaneous 50 basis points increase in short term rates would increase net interest income by approximately $2 7 billion over the next 12 months.
Ultimately the amount of net interest income we earned in 2022 will depend on a variety of factors, including the absolute level of interest rates the shape of the yield curve loan demand and cash redeployment.
Now turning to expenses on slide 17, we made progress last year on our efficiency initiatives and we continue to identify new opportunities our portfolio of initiatives that includes realized and identified potential gross saves has grown from approximately $8 billion to $10 billion and we are continuing to work across the company.
We expect to execute on our remaining identified initiatives over the next two to three years and will continue to invest across our businesses.
<unk> similar to last year, we are excluding from our efficiency initiatives the resources needed to address our risk and control work and will continue to add resources as necessary to complete this important work.
We have been reducing expenses across our businesses, but let me highlight a few examples of the progress we made last year, we eliminated management layers and increased span of control with a 20% decrease in managers with low span of control. We completed approximately 200 270 branch consolidations in 2021, a continuation of the progress. We've made the last few years with branches that are <unk>.
11% since 2019, we've also optimize branch staffing levels to better reflect our customers how our customers are using our branches.
Within our technology organization, we've reduced non engineering roles by approximately 40% driven by accelerated adoption of the agile framework and.
And head count across the company declined approximately 6% from a year ago, excluding divested businesses.
In addition to reducing the number of branches. We also reduced our office real estate portfolio by approximately 7% and occupancy expense was down 9% compared with a year ago.
This year, we expect to continue to realize savings from these initiatives and including an incremental 5% reduction in office real estate real estate.
Additionally, the investments, we're making in technology should drive improvements in operations consumer banking consumer lending and commercial banking importantly, these efforts should not only reduce expenses, but also improve the customer experience with enhanced fraud detection and more service self service capabilities and faster underwriting decisions.
Now turning to our 2022 expense outlook on slide 18.
Following the waterfall from left to right, we reported $53 8 billion of noninterest expense in 2021.
This was largely in line with our most recent guidance except for higher operating losses.
We had approximately 500 million of expenses in 2021 related to business exits and restructuring charges and the civil money penalty associated with the OCC enforcement action in September .
We also had approximately $1 billion of expenses in 2021 from the Wells Fargo asset management, and our corporate Trust services business, which were sold and that will not continue in 2022.
So we believe a good starting point for the discussion of 2022 expenses is the $52 3 billion.
We are assuming a modest increase in equity markets. This year and expect revenue related expenses to grow by approximately 300 million. This.
This includes expected increases in wealth and investment management and corporate investment banking, partially offset by expected declines in home lending, reflecting lower origination volumes.
Revenue related compensation is a good thing and the associated revenue will more than offset any increase in expenses.
We also expect approximately 500.
Benefits related inflationary increases in 2022 above and beyond the normal level of merit and pay increases driven by higher personnel expenses, including the minimum wage increase that Charlie highlighted and other compensation changes.
Through our efficiency initiatives, we expect to realize approximately $3 3 billion of gross expense reductions in 2022.
This reduction is expected to be partially offset by approximately $1 2 billion of incremental investments.
Merrily related to higher personnel.
<unk> expenses in commercial banking, corporate and investment banking and technology as well as increased spending on risk management. We also expect approximately $500 million and increased spending in other areas, including higher FDIC insurance assessments higher travel and entertainment expenses, which were significantly lower in 2021 due to the pandemic.
Accordingly, our full year 2022 expenses are expected to be approximately $51 5 billion.
Any net reduction of approximately $800 million versus the $52 3 billion.
Embedded in our assumptions and our approximately $1 3 billion of operating losses for 2022, which is the amount we had in 2021, excluding the $250 million associated with the OCC enforcement action, while we've made significant progress on working through legacy issues. As we've previously disclosed we still have outstanding litigation and regulatory issues and related expenses could signal.
Typically exceed the levels, we had in 2021.
We made substantial progress last year in executing our efficiency initiatives, but we still have significant opportunity to get more efficient across the company. We are focused on achieving that expense reductions while appropriately investing in our businesses. This remains a multi year process with the ultimate goal of achieving an efficiency ratio in line with our peers and based on our based on our business mix.
We will now take your take your questions.
At this time, we will now begin the question and answer session.
I would like to ask a question. Please first on mute your phone and 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 question.
Our first question of the day will come from John Mcdonald of Autonomous Research Sir Your line is open.
Hi, good morning.
Mike I was wondering if you could give us some sense of if the asset cap remains in place how much capacity do you have to look to grow loans. Obviously, the H eight data is picking up it feels like loan growth getting better for the industry.
Just wanted to make sure that you are invited to that party and you guys can grow loans.
Staying under the asset cap.
Hey, John Thanks for thanks for the question. So just as you know and I think it's implicit in what you asked but the constraint for us on the on.
On the asset cap is really on the deposit side and so that's the part where we're actively taking action to make sure. We've got the room, we need to particularly for our retail clients.
Clients and we're continuing to do that on the loan side, we still have we're not constrained on growth.
On the loan side. So we still have plenty of room to continue to grow with our clients.
And could you give us some sense and your NII outlook, what kind of loan growth you are building in and also liquidity deployment assumptions and how you're thinking about liquidity deployment, given where the curve is here, yes, sure embedded and on slide 16, we've assumed.
What kind of low to mid single digit growth when you compare fourth quarter, 21% fourth quarter 'twenty two.
And so hopefully we're optimistic that we will be able to get there and maybe there is some certainly some scenarios where it could be it could grow faster than that but thats. The assumption that we used we use there embedded in that in that column to on the chart in the loan growth and other balance sheet stuff is some is some modest redeployment into the securities portfolio I would say.
Modest.
So sort of single low kind of <unk>.
Mid to low single digit sort of increases in the securities portfolio as well.
And so those are the assumptions embedded there and I think as we look at where the curve is today.
We're we're still being overall pretty prudent and patient, but we are.
And a very small way beginning to.
Bye Bye some securities in the portfolio.
Okay got it thanks, Mike.
Thank you.
Question will come from Ken Houston of Jefferies. Your line is open.
Thanks, Good morning, guys, Mike you had mentioned that.
You did a little bit better last year 4 billion of gross saves versus what you originally thought at three six and you just commented that you still have a good line of sight.
As far as efficiency initiatives can you help us understand Mike three three for this year.
How you are feeling about that but more importantly.
Line of sight, how far out do you have that and do you continue to see an ability to take out this type of cost as you go forward even past this year. Thanks.
And Ken what we're really trying to do is make sure. We embed this in the DNA of how we operate the place and so that's ultimately what's going to be really important for us over the long run and I think youre seeing that the portfolio grew from $8 billion to $10 billion in terms of the.
The initiatives that we've either executed on or about are in the process of executing and so I think youre seeing sort of that progress and growth. There. So you can sort of do the math of what we've done and what we've accomplished so far what we've identified for this year and what's left for the.
For next year and I continue to believe that we've got more to do that we haven't sort of built into that portfolio yet.
And so the teams continues to work on that every every.
Every day.
As you look at our confidence level on the <unk> that we put into the forecast we feel we feel good we've got really good line of sight.
And I think given what the team was able to do last year, we have confidence that we'll be able to execute on that.
Okay, and then just let me just add to something that Mike said, which is.
I'm always I'm a firm believer on these efficiency initiatives, especially in a company like this.
Even if you go back over a decade.
One of the strengths of this company was never efficiency. It was it was far more on the revenue side and so as we get the efficiencies that we're starting to see it is like peeling. The onion back where then the next set of opportunities become even clearer and so we're ginning up the same process that we do.
At the beginning of this venture where we came up with the initial $8 billion.
To go back and say, Okay. Now what's next in a very methodical way across the company. So we feel I feel really good about what's in our numbers for next year.
And we're going to continue to pursue this and I think it's just as just as you've seen in our numbers.
It gives us the ability to spend our investments.
<unk>.
And two.
Become more efficient overall as a company so.
<unk>.
I personally don't feel like we're close to done.
Got it and if I could just ask the other side of that question too, which is that youre doing a little less than the incremental investments versus what you did last year, how do you get comfortable that youre doing enough, especially what we're hearing from the industry pressures not just inflation, but just on the need to continue to and you mentioned this Charlie about all the new things you are rolling out, but how do you how do you land.
On that number and how do you get the confidence that it's the right amount that you are reinvesting.
Yes, that's a good question I think we do I think what most.
Good companies do which is they sit around.
Tables, and they ask everyone to come back with what you want to spend money on.
And then figure out what you can actually do I think we are.
<unk> a tremendous amount on the technology side since Saul van burden, who runs technology for us.
He was brought in.
And I think we're going to we're going to try and spend as much as we physically can get done.
But I think we're always asking the question of what's next.
But I think the different position that we're in versus others is we're still in the ramping up stage.
Which I also look at this opportunity because we have moved slower historically.
Investing in some of these areas and to the extent that we find more efficiency money. It gives us the opportunity to spend more broadly, but I do feel good I think we as a company we as a management team do feel good about what we're investing.
Next year relative to where we stand as a company.
Okay. Thanks, a lot guys.
Thank you. The next question comes from Betsy <unk> of Morgan Stanley . Your line is open.
Hi, good morning.
Okay.
I had two questions one was on.
The overdraft fees that you mentioned I think you said that it was like a $700 million in.
Packed, but we look at the regulatory filings in the regulatory filings show a higher level of overdraft fee run rate like in the $1 billion kind of range. So I'm just trying to understand.
What why it would be only 700.
Well first of all I mean, we're not eliminating overdraft fees.
We're making a series of changes that we think.
Makes sense for the consumer.
We have an account that doesn't allow overdraft, but we have an account that does allow overdraft and so we think it's got it's.
More consumer friendly than it was in the past, but we do continue to believe that there are a substantial number of customers out there.
<unk> want us to pay overdraft on their behalf.
After they've worked through a bunch of the the <unk>.
Offers and benefits, we're giving them and they're willing to pay for that.
Got it okay. So the NSF fees will be eliminated, but youll have a different product that comes in.
Well no. It's the same NSF fees will be eliminated entirely.
Our overdraft fee will stay but we've added a series of things such as we'll give you availability on direct deposits two days in advance we will give you an additional 24 hours. After you would otherwise would have been charged for an overdraft.
Secure it so our overdraft fees will go down, but we're still going to be providing the overdraft product and will still be charging for it.
Alright, so my bad because I thought overdraft NSF.
Pretty similar but yes.
Yes, I think of it that you think of the <unk>.
NFS NSF fees when you when you don't pay something into overdraft like a check and.
When you return it than you've been historically you would've charged a fee for that returned item. That's an NSF fee the overdraft as overdraft fees come into play when you actually pay something in overdraft.
Yes, I got it okay.
So I was using to my shorthand and Thats why that alright, and then the second question is on the loan growth that you were talking about earlier in the prepared remarks and with John .
<unk> is no longer.
Able to be used as a reference rate for C&I or cray or any loan or any product rights starting Jan one how does that.
The impact to you is is that could that be a benefit to your loan growth in C&I and Cray and how are you thinking about shifting the reference rate that youre going to be using with your clients.
Well I mean, we've started we've started that shift already as you as you would imagine right and we started we stopped offering.
New effectively stopped ordering offering new LIBOR based loan products.
So at some point in the fourth quarter.
We've probably done in the wholesale side, maybe including wins so take out the consumer mortgage business, we've done something like 4500, or just just under that new facilities based on so far with the large majority of that and obviously theres different ways to calculate so for the large majority of those are using sort of a simple daily simple right. So it's so.
If removes obviously that will.
Adjust.
And so I think we're seeing clients start to get used to it and start to use it.
Complementing what we're doing on the wholesale side as we've got.
We've stopped our offering LIBOR based arms last year and so we've got.
Tens of thousands a couple a couple of tens of thousands at this point in terms of arms on the books using using so for they're there as well and so I think it's starting to take hold.
Yeah, I was just thinking like the capital markets might not be.
Deep enough yet to be competitive against so far are.
<unk> in our product at least for the first half of this year. So could that give you a little advantage herein.
Alright.
I don't see that having a huge impact on loan growth, but okay, maybe we'll be surprised a little bit, but I don't see that happening.
Alright, because I didn't think the CLO bid was there yet for so far.
Yes.
I don't see that happening I think there are starting to be some clo's and suffer but I don't see that happened being a big driver.
Okay. Thanks.
The next question comes from Erika Najarian of UBS. Your line is open.
Hi, good morning.
My first question is for you could.
Could you give us a sense of what.
Deposit growth or runoff assumption you have in your 2022.
Simulation and similarly, what kind of deposit repricing you presume.
Yeah, no. Thanks, Eric.
As you can guess like we're in a bit of a different spot than others right given our asset cap and so we're already constrained on deposits and so we're pushing away deposits every every week now.
And so I don't expect.
This year to have much of a runoff.
In deposits.
And if we start to see deposit levels going down will start pushing others, often so I don't see that going to be a big driver.
For 2022 as you think about.
Betas and deposit pricing assumptions, it's largely similar to what we saw the last rate cycle, but I would say that over the last 345 years, our deposit base has changed quite a bit. If you look at just based on the segments. We are in.
Shorthand.
We're at 57% of our deposits are in our consumer and small business banking business. Today. If you go back a number of years that was probably closer to <unk> 43 or 45%.
And so the remixing of sort of our deposits as a result of some of the actions we've had to take will kind of lower the overall data for the first number of rate hikes, but but I think it will look pretty similar too.
To what we saw and as you can imagine since we're constrained on growing deposits were not going to.
Not going to be a leader on pricing likely as we go over the next number of quarters.
And just to clarify so the betas in the last cycle.
Remember were driven by a handful of CIB deposits right and clearly that has been.
Pushed out given asset or some of that has been pushed out given asset cap restrictions. So embedded in this NII number is the experience of the last cycle that included the beta the debate is contributed by those deposits.
As we actually look out today, you have a much better and less rate sensitive deposit base.
For sure and the betas might be similar on the CIB deposits. We just have less of them as a percentage of the overall book, which lowers our overall beta omics yeah.
So we will see in a lot of that will be driven by what we see in the competitive environment right. So on particularly on those wholesale deposits, but it'll have a smaller impact on us than it did in the past just given the mix understood.
Mike My last question is for Charlie.
I think your investors are no risk.
Seating very warmly.
Might have said about your.
Trying to change how the bank is thinking by constantly identifying cost saves to fund future investments and as we look out and what looks like a more favorable rate backdrop and revenue backdrop from a growth perspective for banks do you see yourself reinvesting more of the identified savings.
<unk>.
As we enter a more favorable revenue backdrop.
I don't think.
Hi.
I guess the way.
Put it is we don't think about it.
Relative to what the rate scenario is or how much we're making in NII I think again, just think about where we are in the stage of our evolution.
Which is.
We're <unk>.
<unk> our investments based upon just.
What can physically be done not based upon how.
How much we actually want to spend I mean, there are always a couple of small places around the place where people want to spend and you do have to prioritize.
I think a lot of the answer to your question will have to do as we continue to.
Do our work strategically to determine where we want to.
Create additional capabilities across the company, we would expect the investment number to grow for sure.
<unk>.
But also as you know we're spending a lot of money on infrastructure and I'm not talking about the risk build out I'm just talking about the basic infrastructure of the company.
So.
I think as we sit here today.
We still think that we have an opportunity to both become much more efficient and to continue to.
Grow the level of investments that are going to drive business results inside the company and that will.
That's.
I would say is focused upon where we think we need to get to relative to how much money, we should be spending as a company as opposed to any upside that we have because of just the change in rates at this point.
Got it that's clear thank you and there is no doubt.
Thanks.
For us.
That just it takes.
It takes the pressure off of us to think that if we were to think that way. If we were to say, okay. Because of nothing we've done rates have gone up we should then start spending a lot more money.
We're still in this as I said earlier, we're still in this phase of.
Challenging ourselves to become as efficient as we should be.
And that.
Having that pressure across the company at this stage for US is still a good thing just is where it is to challenge people to come up with where we should be investing.
Thanks, Charlie.
The next question comes from Matt O'connor of Deutsche Bank. Your line is open.
Good morning.
Wanted to ask about the asset cap.
Can you just remind us like where you are in the process from your perspective have you implemented everything that you committed in your proposal and it's just a matter of consistently executing on those tranches or are there still I'll call it material changes.
That youre, making to address those issues.
Matt.
Understand youre getting youre very consistent and wanting to know the answer and I certainly appreciate that.
We have across all of this regulatory work, we still have a substantial amount to do.
It's really not right for me to talk about.
Under any specific concern order, where we think we are in the process.
Because again, what I've said ultimately is what's going to matter is whether our regulators believe it's done to their satisfaction.
Really unhealthy to get into the game of do we think we're done do we think they are making the right conclusions I think.
It's on us to continue to do all that's necessary.
And when they are comfortable that we satisfy those obligations.
They will make that determination and so I just.
Again, Im sorry, I understand.
Why you seek more detail.
But it's just a difficult thing and probably not the right thing for us to get to that level of specificity.
I appreciate that and I know I asked.
The final question kind of every quarter, but obviously, that's a key part for the stock.
I've also asked the kind of follow up question.
I think you have like a flu of local regulator on site or at least on site virtually.
But I think there's a perception that is kind of more of the central regulators that are kind of kind of be the ones that make the call and just remind us in general.
What is like the frequency of dialogue with them.
More of the central regulators.
And just any flavor you can add on the communication there. Thank you.
It's fair that.
I think I would speak for most big banks.
The level of dialogue with both local staff.
And with DC is substantial and meaningful I mean, I can just tell you even from my last role.
It is it's the right thing to do again, we certainly have increased I think the level of dialogue that we have since the new team has gotten here.
And it's hard to put specific.
How often we do it but it's it's very very regular.
I think it's true that all of the big banks, both local staff as well as the staff in D. C are both extremely important.
In their monitoring and the way they draw conclusions about the company and we.
<unk> worked hard to treat both extremely respectfully.
There's a very direct.
And opening communication on their side as far as I can tell and as I said, we we say the same to the local people as we do to.
The D C staff.
But again they are in there are very very important part of the journey that we're on and we want them to be as knowledgeable about what's going on here.
On all of these important issues.
We're always available and willing to have those conversations with them.
Okay. Thank you.
The next question comes from Scott <unk> of Piper Sandler Your line is open.
Good morning, guys. Thank you for taking the question.
Mike I wanted to ask a little bit more.
More detail about repositioning I think I can figure this out mostly from from your guide and disclosures, but would still be curious to hear your thoughts just with your significant asset sensitivity can you talk a little bit about sort of where you are most sensitive on the curve and sort of when and how youll benefit.
Put simply as the first hike the same benefit as the third and so on or where is it more of when is it more or less powerful.
Yes.
To state the obvious probably the short end of the curve is most meaningful right. So when you look at just the whole curve shifting up something like two thirds of the benefit ends up being on the short end and so so that's going to be by far the most meaningful piece of it I think for the first number of rate rises it's hard to say exactly how many.
I think the first three or four though it's pretty linear.
And you can use our disclosures as a way to sort of model that you get it earlier and you get it in March it's worth.
Or more than if you get it in June and so forth and so it's pretty.
It's a pretty good guide at this point to use use it that way.
Okay perfect. Thank you and then just separately one of the criticism on the story over the past few years has been that there are a number of.
Your competitors lot of a lot of smaller banks out there that sort of suggest that it's still pretty.
Easy to steal talent and.
Business from Wells Fargo, your emerging loan growth seems too.
Be running kind of contrary to what's been that argument for the last couple of years can you just sort of touch on that criticism and sort of where you are in terms of comfort with sort of stability and growth of the workforce.
Listen I feel I feel great about the people that we have here and.
I've listened to that for quite a while since I've been here.
People for specifics with very little seems to come back.
Listen, it's a very very competitive.
Workplace.
We lose people to competition, we hire people from competition of all sizes.
<unk>.
I think.
I would say as I've said before when you look at the team that we have in place both at a senior level all the way down to people that we cover customers.
I feel great about it.
And I can honestly tell you we I'm trying to remember might keep me honest here if he likes but we sat around a room and talked about Oh, My God look at all the people that we're losing to the smaller competitors and what are we going to do about it that conversation hasnt happened and were very knowledgeable about about attrition that's happening at the company. So it's a small company.
Higher as a banker it might be a big deal for them, we're lucky enough to have.
A very broad set of.
Coverage officers.
But that's not to say, it's not competitive so maybe.
Maybe they're right but.
We feel good about the people that are here and we're going to work hard to keep the people that are here.
Yeah, and I would just add a little color we've been.
Happy at what we've been able to recruit in places like the investment Bank, we've hired almost.
Two to three dozen relatively senior investment bankers, we've hired a bunch of people in the commercial bank on the frontline.
So I think as Charlie said, it's definitely competitive and you can always find an anecdotal story of where somebody left to go do a bigger job at a smaller place or so forth.
But we feel we feel.
I think the teams feel good about being able to attract good people into the roles and so obviously, we've got to be competitive on pay we've got.
But I think people are attracted to.
Attracted to the franchise and attracted to the sort of direction.
So far it's been constructive.
Constructive there and I just want to say one other thing, which is especially when you get out get down into places like the commercial bank.
Our.
Different businesses that tougher consumers.
As we've talked about having to improve the talent and some parts of the company.
The talent that we have in those areas is.
Really exceptional and it's really deep.
And it's a huge strength of the company, it's been a strength of the company for very long time. So again I think that might tell you just.
Just how we think about the people that we have and again, we never want to lose good people.
But it happens but it's.
Not something that we worry about hurting the franchise at this point.
Okay got it okay perfect.
Very much appreciate those thoughts so thanks again.
Sure.
The next question will come from John <unk> of Evercore ISI. Your line is open.
Good morning.
On the low single digit to mid single digit loan growth assumption can you give us a little more detail how that breaks out among the.
The products other than our core C&I versus commercial real estate and consumer and then separately are there any areas of the loan book that you are really emphasizing at this point are seeing opportunities to ramp your activity similar to what you've been doing on the credit card side.
Yes.
<unk>.
It's a little bit of growth really across the board.
John and I think we're seeing opportunity really everywhere and I think if you look at on the card side, we are expecting to see some growth in the card side. Some of that will be like true revolve balances some of that will be some of the <unk> balances coming off the new products.
Which will start to really pay off at the end of next year into the year after.
We've been really happy with what we've seen in the auto space.
In this environment are pretty good assets pretty short.
Lived assets and high quality.
In terms of what we've what we've seen there. So we see some continued opportunity to grow there.
And then on the consumer side, you have to go a little bit I'm, sorry on the mortgage side you have to go a little bit below the covers.
And if you look at the nonconforming space, we are seeing some growth there, which we think will.
Continue as we go into the year, that's offset by these <unk> loans going away.
But nonetheless, we see some growth there so it's really.
Yeah.
Gave some color on the commercial banking saw from my comments.
We do expect some more opportunity in the multifamily and apartments in asset classes like that in commercial real estate. So in places like commercial real estate were being really targeted about it.
And even where you see a little you see a little limited growth in places like office in the quarter and even in places like that cash to equity ratios are up.
Structures or better spreads are better given sort of what we the way we're managing that so so we're being really really cautious in that space, but but I do think it'll be a little bit of growth across across the board. If we're if we're successful.
Okay, Great. That's helpful and then separately on the buyback front buybacks came in a little bit better than we had expected in the fourth quarter. Maybe you can just give us your thoughts on on the outlook. There on your appetite buybacks and also the how youre thinking about the dividend here in terms of deployment.
Yes.
We've.
Talked about this before and we're maybe in a different spot than others, just given some of the constraints we have on the asset cap, but.
We still feel like we've got excess capital you can see that in the in the numbers yourself.
We do expect that we'll continue to see some loan growth. So that will drive some art of UA and so that we've got to be thoughtful about about that.
And so as we laid out earlier last year. We said, we would do 18 at least $18 billion of buybacks through the four quarter period, ending next in the second quarter.
Still is.
Achievable and we potentially have the opportunity to go above that if we decide that's the right path either this quarter next quarter.
So we'll look at sort of how we feel.
With all the things, we got to think about and make that decision.
You sort of think about the dividend I think Charlie covered this a couple of times last year as you think about a payout ratio that we hope to get to on a normalized basis would take out some of the onetime things that you see in the results, it's really kind of a 30% to 40% payout ratio is what we target over time and that just takes some time to get there.
So I think we'll ultimately that's the board decision in terms of when and how much we increase the dividend, but we're.
We're still marching down that path, but it takes some time to get there.
Got it alright, thanks, Mike appreciate it.
The next question comes from David Long of Raymond James Your line is open.
Good morning, everyone.
You've talked in the past about the operating expense savings being a multi year plan and our initiative and so with your guidance. This year in the $51 5 billion range.
Should we be expecting 2023 operating expenses to still be below that level.
Yes look at this point as we think about it our our goal would be to see a net reduction next year.
I think we will obviously give you more guidance on how thats progressing as we get towards the end of the year and that.
That'll be a function of what we think we can invest properly and what inflation looks like and a whole bunch of factors but.
We're certainly given what our view on the efficiency side is targeting that but we'll give you more guidance on that later and later in the year.
I don't know anything yet.
Okay, Great and then.
As a follow up a little bit longer down the road once the consent orders are mostly in the past if you replace the cost to date to improve and upgrade your internal operations with the expected cost to sort.
Just maintain proper controls and risk management efforts afterwards, how much savings do you see there.
Yes look I think there is some savings there, but that's our focus now is getting the work done and getting all this stuff in place and making sure it's operating properly.
So we're focused a little bit we're being thoughtful about how we implement that stuff, but our focus is a little bit less on making it the most efficient and optimized.
Process. So we will get there when that stuff is all done and running for a while but it will.
That's a few years off I think in terms of really optimizing the risk.
And compliance.
Got it thanks, Mike appreciate it.
Okay.
The next question comes from Steven Chu Bank of Wolfe Research. Your line is open.
Hi, good morning.
So just wanted to squeeze one more question here just on the fee outlook now there's a fair amount of noise in the fee line. This quarter I know you didn't give explicit fee guide for 2022.
The impact of a business how's the overdraft change some weaker mortgage banking and normalization in equity gains how should we be thinking about the right jumping off point for fee income just looking ahead to next quarter and 'twenty two just more broadly.
I think you I think you just outlined it.
Sure.
I think you just have to take each aligns right and I know we've talked about this on calls before like if you look at.
One of the biggest fee lines you take the investment advisory and US are other asset based fees, that's a function of our client assets and what the equity market is doing primarily and so thats.
It's something that you can model and we've got.
<unk> grew a bit as we went through.
Through through the year last year.
I think as you said, we're in the mortgage space will.
We will see some fourth quarter number and the consumer side is probably a good place to start your jumping off point modeling.
And as I think others have spoken about to us.
We all expect the mortgage market to be down with refinancings really driving that.
And how well we do it will be a function of how well, we're able to sort of penetrate on the on the purchase side. So.
Hopefully hopefully we are down a little less than what the market is but that'll be a function of what we can deliver and so I think you just got to take each of those lines and sort of model it model it forward.
Thanks, Mike and then maybe I'll just squeeze one more in if I can just on the.
The earlier discussion around excess liquidity deployment.
It looks like you deployed some of that excess in the quarter and yet if I look relative to pre pandemic levels, you've still seen a doubling of excess reserves and those deposits that you guys have on balance sheet as you'd noted earlier should be stickier as the fed initiated Qt just given some of the changes in deposit mix I was hoping you could just size the them.
Mount of excess liquidity available for deployment today, if the long end continues to grind higher is there any appetite or willingness to deploy more aggressively than that mid single digit growth thats contemplated in the NII walk.
Yes.
First thing we'll be looking at is how fast loans are growing right. So obviously, that's like the place you would want to see that liquidity to get deployed first.
Support customers and so that'll be a function of what we think is going to happen over a series of quarters.
But I think when you look at the securities portfolio, we have done a lot in the last year.
Both in increasing our mortgage exposure increasing their structure products CLO exposure. The place that you saw the decline was really in the treasury side, and so given sort of what was happening in the rate environment.
And so I think you will see us start deploying more and as I mentioned earlier we've started.
And a very small way already given sort of what we've seen over the last couple of weeks.
But and I think really how much how fast we go or how much. We go will be both a function of what we think is going to happen with rates, but also how fast we think loans will grow and so.
Those two things I think will drive sort of the pace and at this point and embedded in our outlook or considerations there.
We do expect a modest increase in the portfolio and so we'll see how but we'll make that determination based on all the factors there that I mentioned.
Very helpful color, Mike. Thanks, so much for taking my questions.
The final question for today will come from Gerard Cassidy of RBC capital markets. Your line is open.
Thank you good morning, guys.
Charlie you talked about joining the net zero alliance as with some of your peers.
Can you frame out for us as you guys get deeper into that and your peers do as well how should we.
I'm trying to estimate what types of risks you might be coming up against and how do you guys monitor those risks.
Listen I think it's a great.
It's a great question I think it's the question that everyone is asking and I think the whole point about joining these alliances is to ensure that we're all benefiting from <unk>.
Each others experiences.
And those that have.
Experienced this in other parts of the world to understand.
How to actually think about that what we're doing is we're going through.
How we think the impact of climate.
On a much longer term basis.
Can impact all of the different businesses from a risk perspective, but also understanding where the opportunities for us are.
And so whenever we.
Talk about where we're going on climate with our goal to get to net zero.
I think people too often jump to that means we're going to stop doing things first of all what we're trying to do is to assure that we're doing everything we can to help all of our clients transition.
And that doesn't mean walking away from clients.
It means helping them invest in areas.
Whether it is when we can do that in lots of different ways across the company, we know with our own balance sheet or.
Or the public markets.
To invest in very very different ways, and I think what youll start to see from us and others.
Is a lot more disclosure on what the embedded risks are.
But also all the different things that we're doing.
To play our part in reducing emissions more broadly so I just think it's just it's a question that I think we should continue to ask as we all continue to.
Yes.
Provide.
More significant disclosures then we've all done in the past on the topic.
I appreciate that thank you.
Pivoting to the follow up question on credit obviously your guys credit is fantastic like the industry.
Considering what we just came through can you give us some color on the reserve I assume as we normalized credit you and your peers.
Should we be looking at the reserve building over the next 20 in 2022 going into 2023, the loan loss reserve building that is.
So let me start Mike and then you just pick up I think the one thing obviously and I think that you guys. All notice is.
Not everyone starts at the same position when you look across what people have done with reserving.
Sure.
Across the industry.
I think we feel very good about where we are relative to what we're seeing we also make determinations member on a forward looking basis as to what the embedded losses are.
And I think.
Everyone's got a different point of view on that.
On the way that looks and I think we're at the.
We're doing the right thing.
Still think its.
Assumptions are appropriate and conservative.
And beyond that remember.
The idea of looking forward in terms of what's going to what.
What's going to change.
In addition to just loan growth and making sure that we provide for growth and the balance sheet.
It depend on the ultimate outcome of.
The performance of the economy.
And so as we sit here today, we feel very very good about it.
But it can take lots of different turns in.
Hopefully, we're still insulated from some level of downturn from where we sit today given the assumptions that we've made because of the uncertainty that exists in the environment.
So I'm not worried about where we are in 2022 personally, but I think as we look beyond that.
Living and breathing calculation.
Great. Thank you.
Okay.
Listen thank you very much everyone for four at the time and we appreciate it.
We will talk to you over the next quarter take care Bye bye.
Thanks, everyone for your participation on today's conference call at this time all parties may disconnect.