Q1 2022 Wells Fargo & Co Earnings Call
Welcome and thank you for joining the Wells Fargo first quarter 2022 earnings Conference call.
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After the Speakers' remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press star one.
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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.
Thanks, Brad Good morning, everyone. Thank you for joining our call today, where our CEO , Charlie Scharf and our CFO , Mike Sena Masimo will discuss first quarter results and answer your questions.
This call is being recorded.
Before we get started I would like to remind you that our first 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 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 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 first quarter results the operating environment and update you on our priorities I'll, then turn the call over to Mike to review the first quarter results in more detail before we take your questions.
Let me start off with some first quarter highlights we earned $3 7 billion or <unk> 88 per common share in the first quarter.
Our results included 21 cents per share impact from a decrease in the allowance for credit losses.
Broad based loan growth with both our consumer and commercial portfolios growing from the fourth quarter.
While net interest income was down modestly from the fourth quarter driven by fewer days in the quarter. It grew 5% from a year ago.
Higher interest rates, along with our expectations for continued loan growth.
Should drive higher net interest income growth.
Net interest income growth that we anticipated at the beginning of the year, Mike will provide more details regarding our current view later on in the call How's.
However, the increase in rates negatively impacted our mortgage banking business.
Mortgage origination market experienced one of its largest quarter liquid quarterly declines that I can remember and it will take time for the industry to reduce excess capacity.
Credit performance remains incredibly strong and our net charge off ratio declined to 14 basis points.
While we have minimal direct exposure to Russia, or Ukraine, we're monitoring monitoring certain industries that have the potential to be impacted by the conflict and economic sanctions, but thus far don't have concerns.
In addition, we returned a significant amount of capital to our shareholders in the first quarter, including repurchasing $6 billion of common stock and increasing our common stock dividend to <unk> 25 per share the significant changes we've made across the company and put us in a position to increase the dividend and our work continues.
The health of our consumer and businesses so far as it remains strong so we're entering a period of uncertainty.
March was the eighth straight month in which inflation outpaced income with lower income consumers being most impacted by rising energy and food prices.
That said higher deposit balances and rising wages have thus far allowed consumers to weather. These headwinds we continued to see medium deposit balances above pre pandemic levels up approximately 25% compared to 2020, but down from the highs observed in 2021.
Consumer credit card spend remains strong up 33% from a year ago, all spending categories were up with the highest growth in travel entertainment fuel and dining.
After strong growth in the first quarter of 2021, driven by stimulus payments debit card spending increased 6% in the first quarter of 2020 to discretionary spending remains strong with entertainment up 39% and travel up 29% from a year ago. The increase in energy prices was reflected in a 27.
1% increase in fuel spending.
Loan demand from our commercial customers increased with growth in both commitments and loans outstanding as customers borrowing needs are increasing to fund working capital expansion.
Credit quality remains strong with net recoveries in our commercial portfolio now.
Now let me update you on progress we've made on our strategic priorities.
Building, an appropriate risk and control infrastructure remains our top priority and I continue to believe that we're making significant progress.
Early in the first quarter, we named Derek flowers, our new Chief risk Officer, following Mandy Norton as retirement announcements.
Eric has extensive experience managing risk, including the work he has done over the last several years of managing the build out of wells fargo's risk and control framework Derek has been with Wells Fargo for over 20 years and is familiar to our familiarity with the company and his risk background make him the ideal candidate to succeed Mandy who I'd like to thank the true.
Mendes progress you made in transforming the risk organization.
We also continued to make progress in resolving legacy regulatory issues with news in January that the OCC had terminated a consent order regarding add on products that the company sold to retail banking customers before 2015.
We have much more work to do to satisfy regulatory requirements and we will likely have setbacks, but I am confident in our ability to continue to close the remaining gaps over the next several years.
We remain focused on improving our financial performance, while investing to drive growth across our business providing our.
Customers with simple easy to use and fast digital experiences is one of our most important strategic priorities in the first quarter, we began rolling out our new mobile banking experience for our customers and our consumer businesses and feedback has been very positive digital adoption, which is critical to both delivering seamless digital experience.
<unk> that our customers expect and reducing the cost to serve has continued to increase with mobile active customers up 4% from a year ago. We added approximately 500000, new mobile active customers in the first quarter alone we continue to invest to improve our digital capabilities with additional enhancements plan.
For this year.
We're also focused on reducing friction in moving money, we've continued to invest in zelle and made changes to expand customer usage, including increasing spending limits. These changes have helped to drive 21% growth in active customers and a 33% increase in sand volume from a year ago.
We continued to enhance our credit card offerings with our partnership with built rewards and Mastercard.
This first of its kind co brand card allows members to pay rent and earn points with no transaction fees on rent payments at any apartment in the U S. In.
In the first quarter, we selected encino to streamline our origination underwriting and portfolio management for our small business customers. This collaboration is expected to provide our customers with a more streamlined lending experience and builds on our existing relationship that we announced last year to accelerate our digital transformation.
Within our commercial banking and corporate investment banking businesses.
Let me just make some summary comments before I turn it over to Mike as we sit here today, our internal indicators continue to point towards the strength of our customers' financial position, but the federal reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth.
In addition, the war in Ukraine adds additional risks to the downside.
Wells Fargo is positioned well to provide support for our clients and a slowing economy, while we will likely see an increase in credit losses from historical lows, we should be a net beneficiary as we will also benefit from rising rates, we have a strong capital position and our lower expense base creates.
Margins from which to invest.
We remain diligent in extending credit and are focusing on managing the other risk types within the company as well we remain on target to achieve a sustainable 10% our OTC subject to the same assumptions we've discussed in the past on a run rate basis at some point this year.
We continue to focus on a broad set of stakeholders and our decisions and actions.
As we've all seen the reports and images coming out of Ukraine are deeply concerning in order to support those most impacted we announced a $1 million in donations across three nonprofits in support of humanitarian aid for Ukraine, and Ukrainian refugees as well as services that support the U S military.
Earlier. This week, we also announced plans to introduce hope inside centers and select branches to increase access to financial education and guidance.
Working with operation Hope is one important way, we can remove barriers to financial inclusion as part of our banking inclusion initiative, which is focused on helping more people or unbanked gained access to affordable mainstream banking products.
Since the pandemic began close to a 100000 of our employees never left the workplace and last month, we started to welcome the rest back to the office, it's been great to be back together again and I want to thank all of our employees as they work together.
To better serve our customers our communities and each other I will now turn the call over to Mike.
Thank you Charlie and good morning, everyone net income for the quarter was $3 7 billion or <unk> 88 per common share and our results included a $1 1 billion decrease in the allowance for credit losses predominantly due to reduced uncertainty around the economic impact of Covid on our loan portfolios.
Our effective income tax rate in the first quarter was approximately 16%, which included net discrete income tax benefit due to stock based compensation. We expect our effective income tax rate for the full year to be approximately 18%, excluding any additional discrete items.
Our CET one ratio declined to 10, 5% still well above our regulatory minimum of nine 1%.
We highlight capital on slide three the decrease in our CET one ratio from the fourth quarter reflected a $5 1 billion reduction in cumulative other comprehensive income driven by high interest rate higher interest rates and wider agency MBS spreads, which reduced the ratio by approximately 40 basis points.
We adopted a standardized approach for counterparty credit risk, which had a minimal impact on total risk weighted assets.
We continued with our strong capital returns.
We repurchased 6 billion of common stock in the first quarter, bringing our total repurchases since the third quarter of 2021% to $18 3 billion.
Which is in line with our 2021 capital plan.
While we have flexibility under the stress capital buffer framework to exceed the share repurchases contemplated in our capital plan, we will be disciplined in our approach given the current rate volatility and currently expect to have significantly lower levels of share buybacks in the second quarter.
Finally, we have submitted our 2022 capital plan and as I've called out before it's possible that our stress capital buffer could increase when the federal reserve publishes our official stress capital buffer in the third quarter, while our G. SIB surcharge of one 5% will remain the same for 2023.
Turning to credit quality on slide five.
Commercial credit performance was strong again with 29 million of net recoveries in the first quarter driven by recoveries in energy asset base lending and middle market.
Consumer credit performance was also strong.
Losses were down $59 million from the fourth quarter, which included a $152 million of net charge offs related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans.
The first quarter included higher auto losses, and seasonally higher credit card losses.
Nonperforming assets decreased $323 million or 4% from the fourth quarter.
Commercial non accruals were down $423 million declining again this quarter and are now below pre pandemic levels.
Consumer non accruals increased $82 million driven by an increase in residential mortgage non accruals, primarily resulting from certain customers exiting COVID-19 related a combination programs.
Overall early performance of loans that have exited forbearance have exceeded our expectations.
Our allowance for credit losses at the end of the first quarter, reflecting continued strong credit performance less uncertainty around the economic impact of Covid, the economic recovery, thus far and an outlook that reflects the increasing risks from high inflation in the Russian Ukrainian complex.
On slide six we highlight loans and deposits average loans grew 3% from a year ago in the fourth quarter.
Period end loans grew for the third consecutive quarter and were up 6% from a year ago with growth in both our commercial and consumer portfolios.
I'll highlight the specific growth drivers when discussing business segment results.
Average deposits increased $70 6 billion or 5% 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.
First quarter net interest income increased $413 million or 5% from a year ago and declined $41 million from the fourth quarter. The decline from fourth quarter was driven by $178 million of lower income from <unk> and paycheck protection program loans as well as two fewer days in the quarter, which offset the impact of higher earning earning.
<unk> yields and higher securities and loan balances.
Last quarter, we highlighted that in net interest income for full year 2022 could potentially increase by approximately 8% driven by loan growth and other balance sheet mix changes as well as the benefit from rising rates, which was based on the forward curve at that time.
Obviously, a lot has changed over the past three months.
Loan growth has been solid and average loan balances were up 3% versus the fourth quarter and 2% at period end. If we continue to see increased demand as possible that average loan balances will be up in the mid single digits from the fourth quarter of 2021.
<unk> fourth quarter 2022 up from our prior outlook earlier this year of low to mid single digits.
The rate increase is currently included in the forward rate curve would also drive stronger net interest income growth than we anticipated earlier in the year How's.
However, it's important to note that the benefit from rising rates is not linear and we would expect deposit betas to accelerate after the initial rate hikes and customer customer migration from lower yielding to higher yielding deposit products will also likely increase.
Higher rates will also have a negative impact on mortgage volumes and potentially on market related fees in corporate and investment banking private equity and venture capital businesses and in wealth management.
Given our current expectations for higher loan growth in recent forward rate curves net interest income for full year 2022 could be up mid teens on a percentage basis from 2021.
That said net interest income growth will ultimately be driven by a variety of factors, including the magnitude and timing of fed rate increases deposit betas and loan growth.
Now turning to expenses on slide eight noninterest expense declined 1% from a year ago, we continue to make progress on our efficiency initiatives and expenses also declined due to the divestitures last year.
First quarter. The first quarter included approximately $600 million of seasonally higher personnel expenses, including payroll taxes restricted stock expense for retirement eligible employees and 400 K matching contributions.
We also had $673 million of operating losses, which were primarily driven by higher customer remediation expense predominantly for a variety of historical matters.
Our full year 2022 expenses are still expected to be approximately $51 5 billion.
However, as we experienced this quarter operating losses can be episodic and hard to predict when we will continue to update you on our expense expectations throughout the year.
Turning to our operating segments, starting with consumer banking and lending on slide nine.
Consumer and small business banking revenue increased 11% from a year ago, primarily due to higher deposit balances higher deposit related fees, primarily reflecting lower fee waivers and an increase in debit card transactions.
We continue to reduce the underlying cost to run the business and serve customers.
Customers have continued to migrate to digital channels and correspondingly teller transactions are down 45% from pre pandemic levels.
Over the same period, we've decreased our number of branches by 12% and branch staffing by approximately 30% and we have more opportunities to improve our efficiency, while we continue to make enhancements to better serve customers.
Earlier this year, we announced changes we are making to help our customers avoid overdraft fees, we began to implement some of these new policies and we'll be rolling out the rest of the changes this year, we eliminated fees for non sufficient funds and overdraft protection transactions in early March to these changes didn't have a meaningful impact on our first quarter results.
We still expect the annual decline in these fees to be approximately $700 million. However, as we highlighted last quarter. This is an annualized estimate and the reduction may be partially offset by higher levels of activity and we will we will observe how customers respond to the new features that will be introduced in the latter part of the year.
Home lending revenue declined 33% from a year ago, and 19% from the fourth quarter, driven by lower mortgage originations and crest margins, given the higher rate environment and competitive pricing in response to excess capacity in the industry.
Mortgage rates increased to 156 basis points in the first quarter and are above rate levels observed for the most of Alaska, where most of the last decade, reflecting.
Reflecting this environment, we expect second quarter originations and margins to remain under pressure in mortgage banking revenue to continue to decline.
We started to reduce expenses in response to the decline in volume and expense expect expenses will continue to decline throughout the year as excess capacity is removed and aligned to lower business activity.
Credit card revenue was up 6% from a year ago, driven by higher loan balances and point of sale volumes.
Auto revenue increased 10% and personal lending was up 2% from year ago, primarily due to higher loan balances.
Turning to some key business drivers on slide 10.
Our mortgage originations declined 21% from the fourth quarter, we believe the mortgage market experienced the largest quarterly decline since 2003, primarily due to lower refinance activity in response to higher mortgage rates.
Lending loan balances grew modestly from the fourth quarter, driven by the third consecutive quarter of growth in our nonconforming portfolio, which more than offset declines in loans purchased from securitization pools or EPS.
Turning to auto origination volume increased 4% from a year ago, but was down 22% from fourth quarter due to credit tightening and higher risk segments and increased price competition as interest rates rose and we targeted solid returns for new origination.
Turning to debit card transactions declined 7% from the fourth quarter due to seasonality and were up 3% from a year ago with double digit growth in travel and entertainment.
Credit card point of sale purchase volume continued to be strong was up 33% from a year ago, but down 5% from the fourth quarter due to seasonality.
While payment rates remain elevated balances grew 14% from a year ago due to strong purchase volume and launch and the launch of new products.
New credit card accounts increased over 80% from a year ago, and we continue to be pleased by the quality of the accounts we're attracting.
Turning to commercial banking results on slide 11.
Middle market banking revenue increased 8% from a year ago, driven by higher deposit and loan balances as well as the impact of higher interest rates.
Asset based lending and leasing revenue increased 17% from a year ago, driven by higher loan balances.
<unk> net gains from equity securities and higher revenue from renewable energy investments.
Noninterest expense declined 6% from a year ago, primarily driven by lower personnel and occupancy expense due to efficiency initiatives and lower lease expense.
After declining during the first half last year average loan balances have grown for three consecutive quarters and were up 6% from a year ago.
Revolver utilization rates have increased but are still well below historical levels.
Loan demand has been driven by larger clients, who are increasing borrowing due to the impact of inflation on material and transportation costs.
As well as to support inventory growth.
We're also seeing new demand from some clients, who are catching up from underinvestment in projects and capital expenditures over the past couple of years.
Turning to corporate and investment banking on slide 12.
Banking revenue increased 4% from a year ago, primarily driven by higher loan balances and improved Treasury management results.
Average loan balances were up 18% from a year ago with increased demand across most industries.
Given primarily by capital expenditures and growing working capital needs.
Commercial real estate revenue grew 9% from a year ago, driven by the higher loan balances and higher revenue and our low income housing business.
Average loan balances were up 17% from a year ago and originations in the first quarter outpaced volumes from a year ago and loan pipelines continued to be strong.
Market revenues markets revenue was down 18% from a year ago, primarily due to lower trading activity in residential mortgage backed securities and high yield products.
Average deposits in corporate investment banking were down $25 3 billion or 13% from a year ago, driven by continued actions to manage under the asset cap.
On slide 13 wealth and investment management revenue grew 6% from a year ago, driven by higher asset based fees on higher market valuations and higher net interest income from the impact of higher interest rates as well as higher deposit and loan balances.
As a reminder, the majority of women advisory assets are priced at the beginning of the quarter. So first quarter results reflected market valuations as of Jan one.
And second quarter results will reflect the lower market valuations as of April one.
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 <unk>.
Average deposits were up 7% 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, both revenue and expenses declined from a year ago, driven by the sale of our student loan portfolio and divestitures of our corporate Trust services business and Wells Fargo asset management.
These businesses contributed $791 million of revenue in the first quarter of 2021, including the gain on sale of our student loan portfolio and the accounted for approximately $400 million of the decline in expenses compared with a year ago, including the goodwill write down the sale of our student loan portfolio.
We will now 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 then press star one please.
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Once again, please press star one and record your name and if you would like to ask a question at this time. Please standby for your first question.
Our first question comes from Scott <unk> of Piper Sandler you May go ahead.
Morning, guys. Thank you for taking the question.
Mike I appreciate the commentary on reiterating the expense guidance for the full year was just hoping given sort of the lumpiness between the seasonality in <unk>.
The comp expenses and then some of the operating losses, if you could maybe give a little bit more of a fine point on that trajectory in other words, how much could we or should we expect things to come down in the second quarter and then is it going to be just a progressive decline through the end of the year, how will things ebb and flow in your mind.
Yeah, great. Thanks, Scott.
As I as I said in our remarks, we had about $600 million of seasonal expenses in there related to four one K and stock comp and all the all the associated stuff in the first quarter. So that that starts to fall away and then obviously the other piece in there that I mentioned was.
It was operating losses and that can be a little lumpy as you go throughout the year, but when you sort of take a step back as you saw last year as well as we execute our efficiency initiatives you generally don't get all those benefits starting day, one and so youll continue to get more and more impact throughout the year. So you should expect the expense trajectory to be.
Down as we go throughout the year now that now every quarter may not be down in a linear way, but nonetheless, you will see a trend downward.
And just to just to reinforce what we said in our remarks.
For the full year is achievable. Despite the fact that we add the higher operating losses.
In the quarter and then I'll just reiterate the other piece of the guidance. We gave on NII. We do think as we said in January we thought operate NII would be up about 8%. So we're almost doubling that to kind of the mid teens as we look throughout the year, both given due to the loan growth we've seen in <unk>.
Well as the substantial move in rates.
Perfect. Thank you and then just maybe a follow up I think you guys talked in the past about.
Expectations for expenses to decline next year as well just given how last thing some of these inflationary pressures seem to be do you see any risk to that outlook or another down year in cost next year.
It's Charlie.
I would say.
Yes.
A couple of things I think it is still the way we think about the way we want to plan for the year for sure as we sit here today.
<unk>.
On inflationary.
Pressures I would say and it's still early and still think things will still continue to evolve.
But our own experience here is that the wage pressures that we've seen today are not as great as they were in the fourth quarter of last year.
They still exist.
But they do seem to be slowing.
And obviously the fed is going to as I said going to do everything they can to bring that down.
And so as we sit here today by the time, we get to the year next year I think we'll be in a very very different position relative to where inflation is and so we're still very focused on.
Use the word efficiency, but we're really focused on running the place better.
And that's what these expense reductions actually result.
Perfect Alright, Thank you guys very much.
Sure.
The next question comes from Steven Chu Bank of Wolfe Research. Your line is open Sir.
Hi, good morning.
So want to just start off with a question on NII in excess liquidity deployment, specifically I was hoping you could just speak to your appetite to deploy some of the excess liquidity that you guys still retain and where reinvestment yields are currently just given spread widening in MBS in particular, and what securities you might look to purchase.
Given some of the sensitivities on the duration side.
Yes, Thanks, Steve It's Mike.
The first when it comes to deploying liquidity, it's going to be loans for our strategy. If you think about the waterfall and so as.
As we see more loan growth, that's where it's going to go.
First and obviously, that's the preferred path anyway, and then based on what we see there.
He will decide.
If we're going to grow the securities portfolio throughout the year I would say our the guidance. We gave for NII does not assume that we grow the securities portfolio in any substantial way.
So that will that will have to see how that goes based on what we see from a loan growth perspective, and then you can you can see where yields are.
Cross across the both treasuries and MBS, which are the two primary.
Asset classes, we have it in the portfolio and I think obviously, we're now investing at higher rates.
Then we've seen certainly in a while and.
Thats additive as we go forward.
Got it and just one follow up relating to deposit betas, specifically, certainly a big area of focus given the more aggressive.
Pace of fed tightening as well as Q T. I was hoping you can just speak to your relative stickiness of your deposit base versus last cycle given the liability optimization you guys have been executing under the asset cap for a number of years now and is there a credible case in your view that deposit betas could in fact be lowered this.
Cycle, just given some of that favorable deposit remixing.
Yes, I think I think you highlighted the right the right point as you look at what we've had to do over the last couple of years to manage on the asset cap, we've really pushed away some of our most interest rate sensitive deposits during that time and so we've seen the.
<unk> leased rate sensitive deposits on the retail side and consumer side.
Grow as a percentage of the overall deposit base and so thats definitely.
Health.
Lower the average betas that will see relative to what we saw in the last cycle.
I think our expectations as you sort of think about the different slices of the deposit base.
It really changed much.
Over the last couple of months I think as we look at the first 100 basis points. We don't think deposit rates are going to move that much.
Which is pretty similar to what we saw.
Last go around and then I think on the consumer side, you'll have slower betas and youll have higher betas on the wholesale side, but likely given our position we will we will lag a little bit on on pricing given given the asset cap and what we've got to do to continue to manage that.
And the only thing I would add is that I think a lot of.
It also has to.
It also depends on.
What's the other alternatives.
Our folks are out there.
Certainly on the consumer side.
And when you look at.
The environment that we're heading into and the volatility that we will see.
I think that is.
That's a very different kind of environment and if you're in a.
In a in a.
Very stable.
Market.
Rates are just moving up relatively slowly.
I think.
It is different in that respect as well.
Alright, that's great if I, if I could just squeeze in one more quick one would just be remiss if I didn't ask about given some of the fee income commentary.
But you guys had highlighted particularly some of the headwinds on both mortgage as well as wealth management, how we should be thinking about the right jumping off point for <unk> fee income just given a lot of volatility in a few of those line items in the quarter.
Yeah, a couple I'll give you a couple of points there. So as you think about the advisory assets.
If you look at what's happened in both fixed income and equity markets in terms of the valuation at the at $3 31 being down I.
I think roughly 5% to 6%.
There's probably not a bad place to start the modeling on.
Advisory assets.
Given the fact that.
A large chunk of them are billed in advance based on that value.
On the mortgage business, we will see a step down given the <unk>.
Pretty abrupt slowdown in the refinance market in particular, we still expect.
We still expect to have decent volumes in the purchase.
In the purchase market, but.
Fred's will definitely our gain on sale margins will definitely be.
Impacted given theres still a lot of excess capacity in the system now I would just keep that to keep that in context of the backdrop that we.
We laid out in terms of the growth in NII as you look through the rest of the year. So even if you start to see a little bit of pressure on those line items.
The growth in NII.
Rob will position us pretty well throughout the rest of the year. Yes. This is Charlie and the only I would just add to that I think when you think about.
How we are.
Citizen and the quote and in my remarks.
We are positioned going into an environment like this.
As we feel very positive about where we stand.
And mortgage banking income is going to decline because rates are going up and we're going to make it much more on the increase in rates than we will on the.
The decline in mortgage banking income.
Our continued focus on reducing expenses credit is still exceptionally good.
And certainly we'll be into the next quarter based on everything that we see and possibly beyond even though at one point they will go up.
And so while we're not sure what the overall economic environment will look like.
<unk>.
That doesn't change our point of view on the fact that we are well positioned for it.
Yes, I would just add just a reminder, as I said in my script, Steve too on the impact of the reduction.
Non sufficient fund balance fees and some of the overdraft changes we made to start to see the impact that in the second quarter as well.
Got it thanks, so much for taking my questions.
Okay.
The next question comes from John <unk> of Evercore ISI. Your line is open.
Good morning.
On the on the expense side.
I appreciate you, helping us out with the 61 5 billion in terms of the reiteration of the guide on the operating cost side, how do you feel about that $1 3 billion expectation given the.
The pressure on the number in the quarter and then separately I guess also on the cost savings I wanted to see how youre feeling about the $3 3 billion in gross saves and $1 6 billion net earnings.
Changes to that expectation.
So I'll just I'll take the first part Mike and maybe you take the second on the first one.
The things that we saw in the first quarter are.
Very specific to remediation.
And so yes.
What we saw in the first quarter really has nothing to do with.
What we'll see in the next series of quarters.
And so those kind of stand on their own and it is not something that gets built on from there.
Yeah, and as you look at the efficiency.
Hopefully this was implied in.
What we the guidance, we gave but we're executing well on the efficiency program that we've got.
And as I've said, a number of times over the last couple of quarters, it's not a it's not a static program like this is something that we are.
We're embedding in the DNA of how we run the place and it continues to evolve and we feel good about we feel good about executing on that.
Okay, and then on the capital side I know the CET one decline of 90 basis points. This quarter. You also mentioned the FCB surcharge could increase you did flag on lower levels of buyback expected for the second quarter. Maybe can you talk about your thoughts on capital return beyond the second quarter, just given how things are shaping up.
And your and your earnings outlook.
As you can get updated thoughts there. Thanks.
Yes, I mean I'll start Mike and then you can chime in I think so I think we're just trying to do is just.
We do have the reality of the impact on OCI during the quarter and so you see where CET one is.
Our quarter.
Dividend is about $1 billion a quarter or so so we do have.
Plenty of room inside there.
For any other first further changes to OCI or the.
The ability for us to grow <unk>, which.
We wanted to do as loan growth continues to.
So the demand that we're seeing.
And so I think just where we are specifically in the second quarter.
It will depend on where rates come out and then beyond that.
We'll still obviously, we are going through CCAR.
But we still should have capacity.
Figure out what we want to do with the excess capital that the company generates.
And as earnings capacity grows as NII grows and we go through the year and we execute on our efficiency program.
And we're still operating under the asset cap U.
I think youll see us up.
Be prudent, but but we've got plenty of flexibility to as.
As we look through the rest of the year.
Okay, great. Thanks for taking my questions.
The next question comes from Ken Houston of Jefferies. Your line is open Sir.
Great. Thanks, good morning.
Couple of follow ups on the <unk>.
Cost side so Mike.
The business sales from last year and kind of the stranded costs on the transition agreements can you walk us through again, how much of that was in the first quarter and then.
How does that kind of decline and does that also you've built into your full year expectation for our cost numbers.
Yes.
What we said.
Ken as you look at the first quarter is about $400 million of expenses fell away.
In the quarter.
<unk> exited the business exited.
And the remainder in so it's about $300 million of that was from the ongoing run rate of the business is about $100 million was.
A charge, we took last year for the student loan business, but.
And the remainder fault either under the TSA, which are in place today and likely run most of the year if not into early next year, but remember theres revenue on the other side of that.
And then you have the stranded costs. So the numbers, we laid out at the end of the fourth quarter of last year, our haven't changed.
And as the TSA.
<unk> roll off you know, we'll we'll do our best to you.
Highlight that if it's meaningful and then we're going to continue to work on the stranded costs and get them out, but that will take a little bit of time as we as we said last quarter.
Right, Okay, and then just two little things on net interest income.
Did mentioned that you had the <unk> sales.
This quarter and I think related lowered net interest income plus you did show the decline in premium and I'm wondering if you can just help us understand.
How much that <unk>.
Sales took out of NII and are you still expecting those to go out through the year and then how do you expect premium am to trend from here. Thanks, Mike.
Yes.
The combo of PPP PPP loans and <unk>.
It came down sequentially or linked quarter about 178 million and that was the impact on.
On revenue there in NII.
We'll reiterate that.
In the Q when it when it comes out.
Look at premium <unk> for mortgage back.
You can look at the slide for reference when you have time I know, it's a busy day today, but it came down roughly a little over $100 million and $110 million $15 million decline in the quarter.
That will continue to decline as we pay slow.
Throughout the throughout the year.
So it's come down quite a bit since where we were last year.
Okay. Thanks, Mike.
Thank you. The next question comes from John Mcdonald of Autonomous Research. Your line is open.
Yeah, Hi, Mike just on the fee income front you made a couple of comments already about the core fee lines, what about some of the more volatile bonds on the capital market side.
I think the venture capital came in a little bit better than expected in a tough market this quarter.
What should we be thinking about in terms of investment banking and trading and maybe the norwest venture line.
Yes, as you know predicting investment banking fees and market fees as a.
Is fraught with.
Lots of them lots of issues.
But I think look the it's clear that on the investment banking side.
Some of the capital market, particularly on the equity side has slowed quite a bit this year given some of the volatility we've seen.
Our pipeline really hasnt.
Changed much it's still pretty strong.
For where we stand coming into the quarter and so some of that realization of that pipeline is just somewhat market dependent.
And dependent on when some deals timing of some of the deals closing so we'll see.
The market.
Market revenue markets revenue.
Dependent on the volatility that we see and the demand we see and so I think as others have gone through this well.
We will benefit from some of that as we go through it but that's hard to predict exactly where we'll end up and then our norwest venture looking if you can.
Go back a number of years and you look at Theres. Some number there is some stability to that line. When you look at over the last three or four three or four years I think when you look at some of what happened this quarter.
We did have we did have a bunch of realized.
<unk> like business being sold or going public in one or two cases.
Some of the investments and so that was really good to see that that's still continuing despite some of the market volatility.
And I think we'll see how it how it goes I think we won't do it.
It's hard to hard to imagine we will see some of the peaks that we saw last year in that revenue line item, but.
I do expect we will continue to.
See some good performance across the across those businesses.
Okay. Thanks, and also on the NII any comments you could make about your expectations for the cadence of the NII improvement throughout the year and maybe a little bit of what you are baking in on premium am and maybe how much benefit you get from on a spot basis like a hike of 25 or 50 bps just any framework there.
Thanks.
Yeah, no. So so a lot of it is going to be dependent on how fast the fed moves.
As you know is when the fed moves the impact of that is media you start realizing that the day after.
And so obviously the expectations there have changed quite a bit so that'll be that'll be the case I think in the Q.
We give you the the shocking numbers on 100 basis point moves and those are pretty close to what you should expect for the first.
Few rate rises.
Terms of the impact and again, it's pretty immediate.
Most of it.
And the premium am Mike you assume that that comes down throughout the year.
<unk> has two yes, I mean, absolutely it'll continue to come down as we see rates go up and prepay slow sorry about that but yes, I think youll start to see that come down.
I think it'll be it's a little bit dependent upon again.
How things progress, but it's not unreasonable to think as we look at the next quarter or so.
We're in the ballpark of what we saw from on a linked quarter basis this quarter.
Got it I guess I was wondering did you improve the assumptions for that is that part of the NII upgrades or is that more just rates.
Okay, Yeah, a little bit of that's baked in that's baked into the into the increase in NII that we gave to them.
Okay. Thank you.
The next question comes from Ebrahim <unk> of Bank of America. Your line is open.
Good morning.
I guess first question Charlie you've in the past talked about the 15% out of D. C. As meeting the acid captain lift and some level of higher rates. We are getting a lot more in terms of higher rates than we expected six months ago.
Can you just doing rough math in terms of Halloween, you've talked about expense outlook mid teens NII growth do you think it's conceivable that we hit 15% our OTC at some point over the next four to six quarters, even without the asset cap being lifted.
I don't want to talk about a timeframe yet because I think what we've consistently said and we'll stick to that is we will get to 10% and then we'll talk a little bit more about the 15% in <unk>.
Try and hone a little bit more on timing, but I do think it is.
Fair to assume that the rate rises that we're seeing are far more than we would've thought was necessary to get to 15%.
Got you.
So I think.
The question of.
The asset cap not still being with us.
So I think that's just that is that is the reality and so it's quite possible that the rate rises will be more of a benefit than we would have hoped in terms of offsetting that but I think we should just wait until we get to 10%, but certainly.
These rate rises that we're seeing in the asset sensitivity that we have.
Certainly.
Meaningful positive for us and more than we would've expected.
I appreciate that response and just one quick question on credit Mike When you think about another quarter of sizable <unk> we've seen.
If you heard yesterday talking.
Talking about just.
Putting a higher weight on our SAS case scenario.
Give us a sense in terms of your outlook for the economy and how that leads to.
Loan losses, those where they are today versus I think it would be once Houston was about 95 basis points, just any thought process around how you're thinking through that would be helpful.
Yeah. This is Charles I'll tell I'll take a stab at it first.
I think it is.
I think understanding what's in our seasonal assumptions as it is something which is important as hard as it is to predict.
It does give you a sense for how we're thinking about things and how our loan book.
And other items play out in that reserve calculation, but it is very hard to compare across companies because we have different scenarios we.
Put different probabilities on different things and.
The way the conservatism and models is different across company I think what we've seen consistently.
Consistently.
In our reserving levels as we've been on the more conservative side relative to others that might just be a view of a more conservative.
It is a set of assumptions or something which is embedded in our models or the way. We think about just the potential impacts of COVID-19 and now the potential impacts of a slowing economy.
So I would say overall, Idaho, but sitting here today. If you were to look at our the way we look at the assumptions that go into it.
I think we were already assuming.
A.
A reasonable percentage of probability on the downside.
And so that Hasnt changed.
But we feel better about some of the assumptions, we made relative to Covid and we've added some assumptions relative to inflation.
Net net net that's what drives the reduction in terms of where we are.
And I still think we're we feel very comfortable.
And hopefully or.
At the more conservative end of what would come out of our seasonal calculations.
That's helpful. And then should we then still assume that the reserves probably tick.
Lower over the next few quarters at least absent a big change in the macro.
Yes, I think it's it's all dependent on the macro at this point.
Seasonal requires you to take a look at based upon.
What we are.
The full amount of the losses embedded in the portfolio relative to what you see is.
The macroeconomic outlook in specific performance so.
If our outlook.
It's better.
Reserves will come down if it gets worse, we'll go up and stays the same it will it'll be alone there.
Got it thank you for taking my questions.
Thank you. The next question comes from Betsy <unk> of Morgan Stanley . Your line is open.
Hi, good morning.
Hey, Betsy.
I had another semi technical question here, but on the NII outlook I get your point that you should see improvement pretty near term from the rate.
Environment I'm, just thinking about what you put in your release for the yield.
On loans, where at least this quarter loan yields came down a bit and I know part of that's probably day count, but we saw some declines in ROTC mortgage on first and second lien and also on the auto side.
And I just wanted to get a sense and also in C&I right. So I just wanted to get a sense what was playing into that.
<unk> and.
Then how quickly that could revert.
As we go through this year.
Yeah, Hey, Betsy it's Mike.
Tried to take a shot at that I think on the on the <unk> mortgage side, what Youre, what youre seeing is the impact of the <unk> loans and so they're coming to the impact of it is coming down so that creates a little bit of noise I think there relative to.
The yield there as you look at the as you'll get the rest of the on the C&I book.
I'm going to get the Directionally the percentage, but call it.
Two thirds of the C&I book in that neighborhood.
Is floating rate.
You know, maybe plus or minus a little bit there but.
But.
So that starts to react pretty.
Obviously direct pretty quickly to rates moving.
And you know in any given quarter, you see a little bit of noise.
On that Youll be youll start to see that as rates go up.
Okay, it's not like it's hedged out and that's why we saw what we thought QQ.
No.
Okay and then the other message I'm getting from you. This morning is that this rate improvement youre expecting to drop to the bottom line is that fair.
Well I think we reiterated our expense guidance for the year in NII is going be a lot better.
Thats whats in your question I'm not sure I understand.
Well, Mitch Youre answering youre getting youre.
Youre getting an uptick in rates and given the fact that your guidance on expenses is holding steady it seems like youre going to drop all that rate hike to the bottom line.
Well I mean, yes, we're going to make more money on NII. We went through the specifics on how noninterest income will likely come down, but not obviously not nearly as much as the benefit that we'll get as you look out over NII and <unk>.
Charge offs still.
We will remain at low levels for the foreseeable future, even though those will go up at some point and yes.
<unk> expenses will continue to come down.
For us to meet the $1 five number so.
Yes, I mean, it feels like it.
You know at least a mid singles uptick on consensus EPS, that's what it feels like to me at least but I mean, I know it got drop all the NII of the bottom line I get something closer to a high single.
<unk> uptake on consensus Etfs, but.
Hey, guys, just yet, but I would just make sure you look at.
I tried to lay out a little bit of what's going to happen on noninterest income.
I think the charge offs are at all time lows you see that the delinquency numbers, so unless there's something on the commercial side of the wholesale side.
Not aware of.
We feel that when we talk about how we feel I think it is.
The economies of the economy, we are positioned well for this kind of environment.
But we also people should just make sure that they are conscious of.
The movement in all the line items.
And then on the customer remediation charge that you took this quarter I guess, that's the other kind of question that I've been getting is.
It's one timey, but it feels like it's happened a lot. So how much more is left.
It's really hard to answer and I understand.
The frustration and.
I'd say every quarter. We go through this we say we want to make sure that we've got everything but.
We are.
Yes.
We have to make sure that when we look at these remediation.
They are aligned with what makes sense for the customer and that we've captured all the portfolios in some of our in some of these remediation required us to go back and recreate a scenario from 10 15 years ago.
And so that's part of the complication that we see.
<unk>.
And so we're not going to say that there is no more but theyre very case specific.
And at some point they will be behind us, but we have to do what we have to do in <unk>.
At least in the big scheme of things relative to the benefits that we'll see from things like NII. These arent overwhelming and we understand.
How this fits into the guidance that we've given on.
Full year expenses.
Okay. Thank you.
Thanks. The next question comes from Matt O'connor of Deutsche Bank. Your line is open.
Hi, I guess, just following up on the regulatory line of questions and as usual all I got.
Awesome questions are tough to answer but.
Well, you've acknowledged you're making significant progress, but regulators have acknowledged.
<unk> the fundamentals are clearly moving in the right direction in a meaningful way.
Alright, and the prepared remarks, we still say.
Move to continue to close these gaps over the next several years.
And I guess the question is like is this.
Cautionary language or are there still things that you are implementing on a daily and ongoing basis too.
Addressable.
The legacy issues I guess I thought you had implemented kind of the fixes and it's.
But we'll see.
Oversight and execution situation, but.
But maybe you could just talk to that.
Yes, I don't I don't recall, saying.
<unk>.
The words that that you just use I think we have been tried to be very clear that we have a lot of ongoing work to do.
That we.
We feel very good about the frameworks that we have in place.
But we are as you.
Once you develop the framework the implementation of the frameworks.
Takes a significant amount of time.
We continue to do that and as we.
Develop stronger controls inside the company, we will potentially buying things that then has to get fixed and remediated. Because this has many years of.
Of of.
Work that we're doing.
Doing at this point.
And as the regulators look at the amount of time that it takes to do it at the things that we find as we put these controls in place.
And just some of these legacy things that continue to remain out there I just think it's prudent that we expect to have things.
I think we say, it's possible or likely but.
There was something specific we would say yes.
<unk>.
But I think it is that's just that's the reality of the situation that we're on and so it is.
Where we find ourselves as and I'll speak for ourselves not the regulators.
We are.
<unk> has made significant progress from where we were when we got here.
But there is still a significant amount of more work to do.
Okay, and then just a follow up on a different topic and I apologize if I missed it but you did talk about slowing buybacks in the second quarter, partly range, partly loans, obviously, you bought back a lot this quarter.
Did you get the magnitude that you expect to buy back or remind us your targeted capital at least until the next CCAR comes out. Thank you.
Yes, Matt I'll take that as we've said a few times in the past we plan to run run.
The CET one ratio somewhere between 100, and 150 basis points over our Reg minimum which right now is nine 1%.
And I think as we look forward given the way. The framework works is we'll have plenty of flexibility to do what we think is prudent on buybacks as as we go throughout the rest of the year.
Okay. Thank you.
Thank you. The next question comes from Erika Najarian of UBS. Your line is open.
Hi, Good morning, my questions have been asked and answered thank you.
Thank you thanks, Eric.
Thank you. The next question will come from Charles Peabody of Portales Partners. Your line is open.
Yes, most of my questions have been asked but let me ask one question about how you manage your mortgage banking operation.
Because you're one of the few large banks that still has a relatively balanced origination and servicing.
Syed.
Historically servicing was kind of viewed as a balanced two origination when originations into well servicing would do well, but that hasnt been the case recently in your recent history and so can you talk about how you're managing it and why there isn't a balanced two two those two pieces.
Yes al.
This is Charlie and Mike and then you can type in I think we think about our mortgage business in the context of the whole company not as a separate independent entity that has to stand by itself.
And so when we think about the interest rate risk position.
The entire company, that's where we think about what potentially happens on the production side versus what happens in the MSR.
Management of the MSR is is difficult it's got some very different types of risks.
Bedded in it.
And all you did was look at those two as offsets you could be getting yourselves as to what the value of the servicing is.
So.
As I said net net net when we look at the position of the company.
I would look at the reduction of mortgage banking income not being offset by the MSR, but being offset by the rest of.
The benefit that we'll get as a company in NII.
And just as a follow up when you gave guidance about a material step down in mortgage banking in the second quarter were you talking strictly on the origination side or as a whole entity.
As a whole think of the mortgage banking banking income line is.
What we were referring to.
And remember included in there is the fact that the MSR is fairly well hedged.
So it's basically it's the whole, but its also whats really driving it as mission is origination.
Thank you our final question for today will come from Gerard Cassidy of RBC capital markets. You May go ahead.
Thank you good morning, Charlie and Mike you both referenced in your comments about the excess capacity mortgage banking.
Youre anticipating are waiting for some of the excess capacity to come out.
Originations of course for the industry has come down a higher rates I wonder if some of the metrics you guys are monitoring and keeping an eye on to show you that that capacity is coming out of the system.
Well I think as you think about the industry as a whole.
It's hard to look at any specific metrics per se, but I think where youre going to see that first is likely a gain on sale margins as people start that does start to normalize as excess capacity comes out right. So I think that's probably one of the areas I would I would look at and listen I think people just listen everyone in the industry looks around it.
The amount of volume being down substantially they look at the amount of expense that they have.
People, then rationalize the expense that they have and that naturally changes the competitive dynamics about where people are pricing.
So.
We're focused on making sure that we've got the right level of expense relative to the revenue and volume that we're seeing and that's exactly what everyone else does.
Very good and Mike just following up on your gain on sale margin.
So your margins what would you consider normal.
Or are they for you guys today.
Well I don't we don't disclose the margin itself.
As you sort of look forward, but.
Normal normal varies right as you sort of look through the cycle in the mortgage business and so I think we're certainly.
If you start thinking about primary secondary spreads.
That's one indicator of sort of where gain on sale margins will go I think and we're now back to.
What is likely more historical levels right around 100 basis points or so when you look at when you look at that and that's that's.
So I think youre kind of back.
A more normal level, there and then I think as excess capacity goes out like Youll start to see the gain on sale coming back up. So I think it's hard to it's hard to say exactly what normal will look like there as we go through this cycle.
Okay, and then just as a follow up question.
Thank you alluded to the possibility that the stress capital buffer. Following this year's CCAR could be a little higher for you folks is there can you give us some color what is making you think that way.
It's just the severity of the <unk>.
Of the <unk>.
Variable that went into it.
Alright.
Obviously, it's a bit of a black box in terms of what exactly what the answer is and so we're.
We do our best to try to look at like how that might impact us and how the how the fed might look at it but it.
It's really based on the severity of the scenario that played through.
Great appreciate the color. Thank you.
I appreciate it.
And I think Thats. The last question. So we know it's a really busy day for everyone. So we thank you for spending the time and we'll talk soon.
Thank you for your participation on today's conference call at this time all parties may disconnect.