Q2 2022 Wells Fargo & Co Earnings Call
Welcome and thank you for joining the Wells Fargo second quarter 2022 earnings Conference call.
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After the Speakers' remarks, there will be a question and answer session.
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Please note that today's call is being recorded.
I would now like to turn the call over to your host John Campbell Director of Investor Relations. Sir you may begin the conference.
Good morning, Thank you for joining our call today, where our CEO , Charlie Scharf, and our CFO , Mike Sena Masimo will discuss second quarter results and answer your questions. This call is being recorded.
Before we get started I would like to remind you that our second quarter earnings materials, including the release financial supplement and presentation deck are available on our website at Wells Fargo 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, very much John good morning.
Some brief comments about our second quarter results, the operating environment and update you on our priorities I'll, then turn the call over to Mike to review second quarter results in more detail before we take your questions. Let me start with some second quarter highlights.
Earned $3 1 billion in the second quarter. Our results included a $576 million impairment of equity securities predominantly in our venture capital business due to market conditions.
Revenue declined as growth in net interest income driven by rising interest rates and higher loan balances was more than offset by lower noninterest income as market conditions negatively impacted our venture capital mortgage banking investment banking.
Wealth management advisory businesses.
We continued to execute on our efficiency initiatives and our expenses declined from a year ago, even with inflationary pressures and higher operating losses.
We had broad based loan growth with both our consumer and commercial portfolios growing from the first quarter and a year ago.
Credit performance remains strong our allowance reflected an increase due to loan growth.
While we are monitoring risks related to continued high inflation, increasing interest rates and a slowing economy, which will impact our customers consumers and businesses had been resilient so far.
When looking at simple averages across our entire portfolio consumer deposit balances per account increased from first quarter and a year ago and remained above pre pandemic levels overall, our consumer deposit customers health indicators, including cash flow payroll and overdraft trends.
Are not showing elevated risk concerns.
However, we're closely monitoring activity by segment for signs of potential stress and for certain cohorts of customers. We have seen average balances steadily decline to pre pandemic levels.
Following the final federal stimulus payments early last year and their debit card spend has also been declining.
Overall debit card spending was up 3% compared to a year ago, when consumers receive stimulus payments and inflation appears to be impacting certain categories of spending, including a 26% increase in fuel driven by higher prices, while discretionary categories like apparel and home improvement spending.
We're down double digits driven by fewer transactions.
Credit card spend increased 28% from a year ago.
Above the industry trend driven by the new products, we launched last year with double digit increases across all spend categories. However, spending while still strong startup to slow in may and June .
Consumer credit card utilization rates.
Remain below pre pandemic levels payment rates remained strong and delinquency rates remained low our small business portfolio continues to perform well in the aggregate in both delinquencies and losses, leading indicators such as payment rates deposit levels utilization and revolving debt.
Trends do not yet indicate signs of stress.
Loan demand from our commercial customers remains strong with broad based balanced and commitment growth.
Our commercial customers credit performance remained strong with exceptionally low net charge offs and non accrual loans were at their lowest level in over 10 years. However, we are monitoring early warning indicators across portfolios, including cash flow activity credit line utilization rates and industry fundamentals for inflation impacts.
Now let me update you on progress we've made on our strategic priorities.
Our work to build an appropriate risk and control infrastructure is ongoing and remains our top priority, but we also continue to invest in our businesses to better serve our customers and to help drive growth.
This week, we launched our fourth new credit card offering in the past year Wells Fargo autograph.
Our latest card reflects our momentum in growing our consumer credit card business with new accounts up over 60% from a year ago.
We're focused on delivering competitive offerings and our new reward card provides three times points across top spending categories, including restaurants travel and gas stations. This.
This is the first of several rewards based card we plan to introduce.
We continue to improve the digital experience in the second quarter with the relaunch of intuitive investor our automated digital investing platform. We simplified the account opening process and created a faster and better experience for both new and experienced investors.
During the second quarter, we began rolling out Wells Fargo Premier, which provides differentiated products and experiences focused on strengthening and growing our affluent client relationships.
We are working towards offering one set of products and services that are tailored to the needs of these customers regardless of where they sit within our individual businesses, we will be rolling out more enhancements in the coming quarters to provide a more compelling offering for our premier clients.
We started to rollout overdraft policy changes late in the first quarter, which included the elimination of fees for non sufficient funds and overdraft protection transactions additional changes will be rolled out in the second half of this year, including providing customers who overdraw their account with a 25 hour grace period to cure.
A negative balance before incurring an overdraft fee, giving early access to eligible direct deposits and providing a new easy short term credit product. We expect these changes will help millions of consumer customers avoid overdraft fees and meet short term cash needs and we continue to review other ways, we can help.
Consumers manage their finances.
We also continued to invest to better serve our commercial customers and early in the second quarter, Tim O'hara joined our corporate investment bank from Blackrock as head of banking Tim's expertise and insights will help us maximize our potential and achieve even greater partnership and strategic dialogue with our corporate and institutional.
Vince any complements the strong leadership team in our markets and commercial real estate businesses, who have helped us navigate recent market volatility.
We believe we have a significant opportunity to serve our existing commercial customers with corporate and investment banking products in a way that works within our existing risk tolerance. We also believe that for us to be successful as a company, we must consider a broad set of stakeholders and our decisions and actions last week we.
Once that Otis Raleigh will be joining wells Fargo from the Rockefeller Foundation as the head of social impact leading community engagement and enterprise philanthropy, including the Wells Fargo Foundation, we continue to move forward in the area of ESG with the announcement of our 2030 reduction targets for greenhouse gas emissions <unk>.
<unk> financing activities in the oil and gas and power sectors.
As homeownership remains out of reach for too many families. We announced an effort to support new home construction renovation and repair of more than 450 affordable homes across the U S. In collaboration with habitat for humanity and rebuilding together. We also launched our special purpose credit program to help minority.
Homeowners refinance mortgages that wells Fargo. Currently services, we continue to support our small business customers through this time of uncertainty, including launching the small business resource navigator, which connects small business owners to protect II to potential financing options and technical assistance.
Through community development financial institutions across the country.
We are also helping women entrepreneurs by doubling our support for women owned businesses through the connect to more program with complementary Mentorship opportunities, we published our inaugural diversity equity and inclusion report.
Which highlights the meaningful positive results, we've made on our <unk> initiatives for example in the U S. Our external hiring of individuals from racially or ethnically diverse populations increased by 27% in 2021 compared to 2020 and approximately one third of all internally promote.
Executives last year were racially or ethnically diverse as I've said in the past advancing D. Eni at Wells Fargo is a long term commitment not a project and we continue to pursue many of the initiatives and the report and look for ways to deepen our impact.
Let me just make some summary comments before turning it over to Mike.
The federal reserve's commitment to an aggressive rate hike cycle as a means to team high persistent inflation continues to fuel market volatility and is expected to slow the economy, which will impact our consumer and commercial customers. Despite the economic environment I remain optimistic about our future credit quality remains strong and we.
Expect net interest income growth to continue given rising interest rates, which should more than offset any further near term pressure on non interest income 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 in the second half of this year.
And then we will discuss our path to 15%.
This year's Federal reserve stress test confirmed our strong capital position and our ability to support our customers and communities. While while also continuing to return excess capital to shareholders through dividends and common stock repurchases as we previously announced we expect to increase our third quarter common stock dividend by 20%.
The <unk> 30 per share subject to approval by the company's board of directors at its regularly scheduled meeting later this month I will now turn the call over to Mike.
Thanks, Charlie and good morning, everyone.
Net income for the quarter was $3 1 billion or <unk> 74 per common share which included strong growth in net interest income as we are beginning to see the positive impact of higher interest rates.
Our results included a $576 million impairment of equity securities predominantly in our venture capital business due to the market conditions, which drove a total loss from equity securities of $615 million in the second quarter.
Call it a year ago when the markets were strong our results included $2 7 billion of gains on equity Securities.
While credit quality remains strong our results included a $235 million increase in the allowance for credit losses due to loan growth. This fall of six consecutive quarterly decreases in the allowance, including $1 1 billion in the first quarter and $1 6 billion a year ago.
We highlight capital on slide three our CET one ratio was 10, 3% down approximately 20 basis points from the first quarter as declines in OCI and dividend payments were largely offset by our second quarter earnings. Our CET. One ratio also reflected actions we took the proactive.
<unk> managed our level of capital and risk weighted assets as well as reduce our ci sensitivity by moving more securities to held to maturity and hedging securities in our available for sale portfolio.
Additionally, we did not buyback any shares in the second quarter, but as Charlie highlighted the recent stress test results confirmed our capacity to return excess capital to shareholders through dividends and common stock repurchases. We will continue to be prudent and considered current market conditions, including interest rate volatility potential loan and risk weighted asset growth as.
Well as any potential economic uncertainty with respect to the amount and timing of share repurchases over the coming quarters.
Our 10, 3% CET, one ratio remained well above our required regulatory minimum plus buffers.
As a reminder, based on the recent federal stress test our stress capital buffer for October one 2022 to September 32023 is expected to be three 2%, which would increase our regulatory minimum plus buffers by 10 basis points to nine 2%.
Turning to credit quality on slide five our.
Our charge off ratio remained near historical lows and was only 15 basis points in the second quarter.
As we've previously discussed losses are not expected to remain at these low levels and we are closely monitoring our commercial and consumer customers for signs of stress and.
And we remain very disciplined in our underwriting.
Commercial credit performance remained strong across our commercial businesses with only two basis points of net charge offs in the second quarter, which included net recoveries in our commercial real estate portfolio.
We also had net recoveries in our consumer real estate portfolios in total consumer net charge offs declined slightly from the first quarter to 33 basis points of average loans as lower losses in auto and other consumer loans were partially offset by higher credit card losses.
Nonperforming assets decreased $878 million or 13% from the first quarter.
Our levels of consumer non accruals were driven by a decline in residential mortgage non accrual loans due to sustained sustained payment performance of borrowers after exiting COVID-19 related accommodation programs.
Commercial non accruals continued to decline and as Charlie highlighted were at their lowest levels in over 10 years.
Our allowance for credit losses at the end of the second quarter reflected continued strong credit performance with an increase that was due to loan growth.
On slide six we highlight loans and deposits.
Average loans grew 8% from a year ago and 3% from the first quarter.
Period end loans grew for the fourth consecutive quarter were up 11% from a year ago with increases in both our commercial and consumer portfolios.
I'll highlight the specific growth drivers when discussing operating segment results.
Average loan yields increased 19 basis points from a year ago, and 27 basis points from the first quarter, reflecting the benefit of higher rates.
Average deposits increased $10 billion or 1% from a year ago with growth in consumer banking and lending offsetting declines across our other operating segments. The.
The decline in average deposits from the first quarter reflected seasonality of tax payments as well as outflows from commercial and wealth clients.
Our average deposit cost increased one basis point from the first quarter driven by corporate investment banking.
As I previously highlighted we would expect deposit betas to accelerate as rates continue to rise in customer migration from lower yielding to higher yielding deposit products would likely increase as well.
Turning to net interest income on slide seven.
Second quarter net interest income increased $1 4 billion or 16% from a year ago and $977 million or 11% from the first quarter the.
The growth from the first quarter was primarily driven by the impact of higher rates, which increased earning asset yields and reduced premium amortization from mortgage backed securities. We also benefited from higher loan balances and one additional day in the quarter.
We started the year expecting full year net interest income to grow by approximately 8% compared with 2021.
Last quarter, we raised our guidance to an increase in the mid teens with.
With the market now expecting not only more rate hikes, but also larger ones. We currently expect net interest income in 2022 to increase approximately 20% from 2021.
And as a reminder, net interest income will ultimately be driven by a variety of factors, including the magnitude and timing of fed rate increases deposit betas and loan growth.
On slide eight noninterest income.
This quarter noninterest income.
This quarter, we included highlighting noninterest income to show that the decline from both the first quarter and a year ago was primarily driven by two cyclical businesses.
Mortgage banking, which has slowed in response to higher interest rates and our affiliated venture capital and private equity businesses, which a year ago generated elevated gains but recognized impairments in the second quarter of this year due to significantly different market conditions.
While all other noninterest income included both positive and negative impacts it was actually up slightly from the first quarter the.
The decline in all other noninterest income from a year ago was primarily driven by the impact of last year's divestitures.
Turning to expenses on slide nine.
Non interest expense declined 3% from a year ago as expenses related to divestitures came out of the run rate and we continue to make progress on our efficiency initiatives.
Operating losses increased $273 million from a year ago, primarily driven by increased litigation expense, which included a recovery in the second quarter of last year.
And higher customer remediation expense predominantly for a variety of historical matters.
Customer remediation matters are complex and take a significant amount of time to resolve and quantify the full impact.
While we've made progress we have more to do to resolve the remaining items.
We're halfway through the year, while we had higher operating losses than we expected revenue related expenses are trending lower than expected.
Our results in the first half of the year also reflected the progress we're making on our efficiency initiatives with lower head count and reductions in both professional and outside services expense and occupancy expense we expect.
To continue to make progress on our initiatives <unk> initiatives.
Putting all these factors together, we still expect our full year 2022 expenses to be approximately 51 5 billion as lower revenue related expense is expected to offset higher operating losses, but as a reminder, we have outstanding litigation regulatory matters and customer remediation and the related expenses could be significant and are hard to predict.
Which could cause us to exceed our $51 5 billion outlook.
Turning to our operating segments, starting with consumer banking and lending on slide 10.
Consumer and small business banking revenue increased 17% from a year ago, driven by the impact of higher interest rates and higher deposit balances.
Our deposit pricing has been stable, but we expect deposit betas to increase over time.
As Charlie highlighted deposit related fees were impacted by the overdraft policy changes, we started to roll out late in the first quarter, which included the elimination of fees for non sufficient funds and overdraft protection transactions.
Additional changes will be rolled out in the second half of this year, which will further reduce deposit related fees.
Home lending revenue declined 53% from a year ago, and 35% from the first quarter driven by lower mortgage originations and compress margins given the higher rate environment and continued competitive pricing in response to excess capacity in the industry.
After increasing over 150 basis points in the first quarter mortgage rates increased over 100 basis points in the second quarter.
The impact of higher rates also reduced revenue from the re securitization of loans purchased from securities securitization pools the.
The mortgage market is expected to remain challenging in the near term and it's possible that we have a further decline in mortgage banking revenue in the third quarter.
We are making adjustments to reduce expenses in response to lower origination volumes and we expect these adjustments will continue over the next couple of quarters.
Credit card revenue was up 7% auto revenue increased 5% and personal lending was up 7% from a year ago, primarily due to higher loan balances.
Turning to some key business drivers on slide 11.
Our mortgage originations declined 10% from the first quarter with growth in correspondent, partially offsetting the decline in retail originations.
Finances, as a percentage of total originations declined to 28%.
Average home lending loan balances grew 2% for the first quarter driven by the fourth consecutive quarter of growth in our nonconforming portfolio, which more than offset declines in loans purchased from securitization pools or <unk>.
Turning to auto origination volume declined 35% from a year ago and 26% from the first quarter due to increased pricing competition credit tightening tightening actions and an ongoing industry supply pressures.
Turning to debit card, while debit card spend increased 3% transactions were relatively flat from a year ago as increases in travel and entertainment were offset by declines in apparel and home improvement.
Credit card point of sale purchase volume was up 28% from a year ago with the largest increases in fuel travel and entertainment. The increase in point of sale volume and launched the launch of new products helped drive a 19% in credit card, 19% increase in credit card balances from a year ago. We remained disciplined in our underwriting of new credit card accounts.
Turning to commercial banking results on slide 12, middle market banking revenue increased 27% from a year ago, driven by higher net interest income from the impact of higher rates and loan balances.
Asset based lending and leasing revenue increased 8% from a year ago, driven by higher loan balances.
Noninterest expense increased 2% from a year ago, primarily driven by higher operating costs.
<unk> initiatives drove lower personnel expense with head count down 9% from a year ago.
Average loan balances have grown for four consecutive quarters and were up 13% from a year ago utilization rates continue to increase but they are still not back to historical levels clients have increased borrowings to rebuild inventory and to support working capital growth both of which have been impacted by higher inflation.
We also had momentum from adding new clients in middle market banking and similar to prior periods loan growth was driven by the larger clients.
Average deposits declined 2% from a year ago, driven by actions to manage under the asset cap deposit pricing has been relatively stable, but we expect deposit betas will continue to increase.
Turning to corporate and investment banking on slide 13.
Banking revenue increased 4% from a year ago, primarily driven by stronger Treasury management results, given the impact of higher interest rates as well as higher loan balances.
Investment banking fees declined reflecting lower market activity in $107 million write down on unfunded leveraged finance commitments due to the market spread widening.
Average loan balances were up 20% from a year ago with broad based loan demand is driven by a modest increase in utilization rates due to increased working capital needs given inflationary pressures.
Commercial real estate revenues grew 5% from a year ago, driven by loan growth and higher interest rates average loan balances were up 22% from a year ago with the disruption in the capital markets, increasing demand for bank financing and line utilization.
Markets revenue increased 11% from a year ago, primarily due to higher foreign exchange and commodities trading revenue as clients position themselves for rising rates quantitative tightening and growing recessionary concerns as well as higher equities trading.
Average deposits in corporate investment banking were down 14% from a year ago, driven by continued actions to manage under the asset cap.
Theres been more devices deposit pricing pressure in corporate banking than we've seen in commercial banking.
On slide 14 wealth and investment management revenue grew 5% from a year ago as the increase in net interest income due to the impact of higher rates and higher loan balances more than offset the declines in asset based fees driven by lower market valuations as well as lower retail brokerage transaction activity.
As a reminder, the majority of whim advisory assets are priced at the beginning of the quarter. So second quarter results reflected market valuations as of April one.
And third quarter results will reflect the lower market valuations as of July one.
The S&P 500, and fixed income indices declined again in the second quarter and approximately two thirds of <unk> of our advisory assets are in equities. So there will be another step down in our asset based fees next quarter.
Average loans increased 5% from a year ago, driven by continued momentum in securities based lending.
Average deposits declined 1% from a year ago and were down 7% from the first quarter as clients reallocated cash into higher yielding alternatives.
Pricing increased modestly.
Slide 15 highlights our corporate results, both revenue and expenses declined from a year ago and were impacted by the divestitures of our corporate Trust services business and Wells Fargo asset management, and the sale of our student loan portfolio.
These businesses contributed $580 million of revenue in the second quarter of 2021, including the gain on the sale of our student loan portfolio and they accounted for approximately $375 million of the decline in expenses in the second quarter compared with a year ago, including the goodwill write down associated with the sale of our student loan portfolio.
The decline in revenue and corporate was also due to lower equity gains and our affiliated venture capital and private equity businesses.
In summary, while our net income in the second quarter declined driven by lower venture capital mortgage banking results, our underlying trends reflected our improving earnings capacity with expenses declining and strong net interest income growth from rising rates and higher loan balances as.
As we look ahead to the second half of the year, we expect the growth in net interest income to more than offset any further pressure on noninterest income, while we expect credit losses to increase from historically low levels, our consumer and commercial customers are not showing any meaningful signs of stress.
As I highlighted earlier, our expense outlook for the year is unchanged at approximately $51 5 billion.
Subject to the risks to the outlook discussed earlier.
Finally, our stress test results demonstrated our capacity to return excess capital to shareholders, including the expected 20% increase in our third quarter common stock dividend subject to board approval.
We will now take your questions.
At this time, we will now begin the question and answer session.
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Please standby for our first question.
And our first question today will come from Ken Houston of Jefferies. Your line is open Sir.
Thanks, Good morning, guys appreciate the.
Continuity of the expense guide and also the potential variability Mike I was just wondering if you could expand on that obviously the operating losses are hanging.
Higher this year than they had been so just I'm just wondering how you start to get.
Sense of what those look like going forward and then also just the underlying as you mentioned coming in better because of revenue just any sense of all just all how your net saves are looking underneath the surface as well. Thank you.
Yes, Thanks, Ken.
I'd start with the efficiency program that we've been talking about now for the better part of the year and a half and all of that is tracking as we thought it would.
So the core driving efficiencies through the core.
Business lines and operating groups is sort of working the way we thought.
And when you look at.
When you look at what's happened this year as you pointed out operating losses are higher than what we assumed.
At the beginning of the year.
And those things can be unpredictable at times, just as we work through the backlog.
The items as you know the accounting standard we work with though right. If we knew about something now we would we would accrue for it and if we could estimated we would accrue for it.
But we're just flagging continuing to flag that we still have a pipeline a pipeline of stuff to work through.
And then as you as you highlighted as we think about this year.
The increases in the operating loss line have been offset.
Youre largely offset by the lower revenue related expense and so we still feel good about that.
$51 5 billion dollar number that we set out at the beginning of the year.
We're going to continue to work through the pipeline of items.
<unk>.
As significant in tops, we will we will be sure to highlight it as we go forward.
And as a follow up I know as you guys talk to your recent copper season, it's hard to get a crystal ball with so many moving parts as you think about 2023, but can you just help us try to do we start to think through some of the pushes and takes in Kenya continued to push us towards getting costs down.
Next year, thanks, guys.
Hey, Ken This is Charlie let me take that.
The way, we think about it is we.
Sittin' look towards next year, we certainly know we have some increases to contend with such as the full year impact of inflation.
Inflationary pressures that we see this year and we know we've got some increases in FDIC insurance premiums.
But as we start thinking about next year and we're really just starting the budget process, nor mindset going into it is that we have significant opportunities to become more efficient.
And it's just more of the same in terms of what we've been talking about and this has nothing to do with getting <unk>.
Getting efficiencies out of the risk related work it assumes that all of that investment continues.
But we do go into this process.
With the expectation that we want to see net expense reductions.
Now just usual caveat that excludes.
Revenue related expenses, which could go up or some of this lumpiness that we've talked about just as we think of that as we think about that core expense base.
We do continue to see opportunities and we'd like you to see it as well.
Thank you. The next question comes from John Mcdonald of Autonomous Research. Your line is open.
Hi, good morning, guys.
I wanted to ask about capital it looks like you're entering.
Now next quarter with over 100 basis points buffer to your pro forma Reg minimums, how should we think about where youll manage capital to and your potential buyback capacity.
Going forward and given that you pause for FCB, partly because of FCB.
Uncertainty will you get to some level of buybacks likely moving forward here. Thank you.
Hey, John It's Charlie why don't I start and then Mike can.
<unk>, yes.
Thank you.
No question.
Clarity of SCB for Us at this point does really help.
As we sit here today, and we look at what's happening in spreads and what's happening.
With the 10 year was at $2 92, right now.
We do want to be a little bit just conservative in terms of how we think about.
Managing the capital base, so just to be I think to be clear as we sit here today.
We're very happy with the amount of capital that we have.
Including as we think about that.
10 basis points increase.
That will impact us, we certainly have capacity to buy shares back.
At this point.
As I think Mike alluded to we just probably want to wait a little bit just to see what happens in terms of the volatility in spreads.
And rates.
Before we start to do that.
But we certainly.
At what point, we'll do it well.
Exactly when that is.
Yes, maybe I'll just add one or two things John I think.
Charlie highlighted we feel good about where we are I would just point out we are not our G. SIB score is going to stay the same as we go into next year as well. So we don't have another uptick as we go into beginning of next year. So so thats good.
And at this point, we don't feel like we need to build capital from where we are to build a bigger buffer.
And then we'll just be prudent on buybacks as we go through and through the next few quarters.
Okay, and Mike Mayo can ask a follow up on the NII.
Our revised outlook, what kind of cadence do you see between the next two quarters. It seems like you'd have a big step ups. Both this coming quarter in the third quarter and then again in the fourth.
And then within that NII.
Equation.
You still have this funding gap between loan growth being very strong and deposit growth slowing up is there still plenty of cash to use to fund the loan growth. Thank you.
Yes sure.
I think ultimately the exact.
Yes.
Progression over the next couple of quarters will be a function of how how the fed moves on rates, but.
But I would think of it as somewhat of a radical step up quarter to quarter. So.
You won't see some outsized result in one versus the other.
We go and you'll continue to see a little bit of loan growth come through we think that probably moderates a little bit from what we saw in the first half of the year, but you'll see some around loan growth.
There as well as it is its desktop and as you say I think the industry has seen deposits come down a little bit.
The latest version of the fed fed data and you can see that in our results as well.
Now for us, it's been a little bit.
You can see the period end balances in each of the segments that have been a little bit of a reduction in.
In each of them with the lowest percentage reduction being in the consumer space.
Good thing.
As you know over the last couple of years, we've brought down.
Much of our wholesale funding that we've got out there and so we've got plenty of plenty of capacity to.
Provide liquidity or do you get the liquidity, we need to continue to support clients.
So that loan growth funding is coming from your cash balances and other sources of liquidity that you have.
Yes exactly.
Okay. Thanks.
Thank you. The next question comes from Steven Chu Bank of Wolfe Research. Your line is open Sir.
Hey, good morning.
Wanted to start off with a question just clarifying some of the NII guidance, Mike because you noted that it's a ratable step up.
Implied in the guidance implies about a $12 billion run rate at least in the back half for.
For NII on an FTE basis is it reasonable for us to assume or expect that the exit rate for the year is going to be north of $50 billion I just wanted to make sure to clarify that.
Well, Steve I know you are really good at modeling this stuff. So I'll, let you do the modeling, but I think as you pointed out we're going to see step ups as we go through the next as we did this quarter from last quarter.
And that'll that'll continue into the third and fourth quarter.
And know exactly what.
It's hard to use one quarter as you know to just run rate for the rest of the for the following year.
But certainly the exit rate is going to be a lot higher than even where we are today and then we'll have to just see what the environment's like at that point you know.
How to think about whether that's a clean run rate.
Build off of or are there other things that are getting away and as you can see over the last even over the last 3456 weeks whatever it's been.
The amount of volatility that's out there on the long end and what happens with loan growth does it keep at the same pace and so theres a lot of factors I think that go into <unk>.
Into what 2023 would look but as you pointed out our exit rate will be pretty healthy.
Thanks for that Mike and just one follow up also on the NII Guide just wanted to get a better sense as to what's being contemplated in terms of deposit beta deposit paid out and re pricing just came in much better than peers. This quarter, you've cited the benefits of the deposit and funding optimization you've executed these past few.
Years, just wanted to get a sense as to how youre thinking about that deposit trajectory.
That's underpinning some of the NII guidance.
Yes.
I think thats.
We're not expecting balances to grow much from where they are and I think we will see what happens.
If we see continued.
Outflows of deposits, but.
As you pointed out like our mix of deposits as we came into this environment sets us up pretty well and you can see that in the results so far where the consumer deposits are much bigger percentage of the overall pie than they were just a couple of years ago.
You sort of think about beta so so far.
These.
Basically progressed as we thought in each of the segments and so we really haven't seen much variation to what we thought at this point in the rate cycle now.
Fed does raise rates 75 basis points at the next meeting now youre, starting getting to get into territory that we didn't see the last rate cycle rate rising rising cycle and so we're going to start to see betas increase from there.
And I think thats exactly at what pace, and where you need to be defensive or not in the wholesale side or the commercial side, we will see and we're pretty nimble and are able to react to it.
But so far everything has progressed as we thought it would.
And so we're going to keep a pretty close eye on it as we go over the next few months and I think that all this quarter and into the fourth quarter I think will give us a lot of interest interesting data points to know how to they know how to think about it over a longer period of time.
Okay, great color, thanks for taking my questions.
Thank you. Our next question come from Scott <unk> of Piper Sandler Your line is open.
Good morning, guys. Thank you for taking the question.
Just as it relates to revenues overall, so the NII trajectory, obviously quite strong in a sense. It seems mostly self evident for now but I was hoping you could discuss please the sort of the.
Fee trajectory in a bit more detail I guess, we're kind of hovering in a 7 billion or $7 5 billion dollar a quarter range. If we exclude some of that noise from the equity marks the securities gains et cetera in your mind or are we sort of at a low and can we can we grow from that base I know you touched on mortgage maybe coming down and then we've got wealth, but just sort of puts and takes as you.
That meant you could please yes.
Yes, sure. Thanks, Scott I'll, just bring it through some of the key fee.
<unk> lines, just to give you a sense of some of the dynamics right. So on the deposit side.
It's been been pretty we saw a step down in the quarter largely as a result of the changes we made in overdraft fees. We will see we will see a little bit more step down as we go through the year, probably more of a fourth quarter thing that a third quarter thing.
We implement the.
Additional changes there, but with theirs.
Other than that Theres, a lot of stability generally to that to that line based on underlying activity.
See what happens in the market and how that drives the investment advisory.
In asset based fee line Thats.
It's going to be key to see what happens in the equity and fixed income markets and as we bring more stability enters into the market that really supports that.
Fee line that as you know thats our.
That's our single biggest line item as you look at the fees.
Investment banking.
It's really going to be market driven but.
Our fees were pretty low, including the small mark that we had on in leveraged finance and so it's hard to see that going too much lower but that's really going to be driven by the activity levels card spend we're seeing still good although it slowed maybe a little in May and June we're still seeing really good activity in the card space and people are out spending.
So that's helpful.
Mortgage banking as I as you highlighted I think is likely going to come down a little more in the third quarter, but it's off a much smaller base that you can still have pretty good you can have decent sized percentage declines there and but it's still it's really small dollars at this point.
And then we will see as the market progresses, and how that impacts the equity security side, but.
I think hopefully hopefully we're getting more stability here, but some of it will be dependent upon what we see in the markets.
Alright, Thats perfect. Thank you very much and if I could switch gears, just a bit back to the CCAR and the STB I guess, it's possible I had misinterpreted.
You guys remarks over the last few quarters, but.
I sort of felt like you guys were maybe prompting us for.
Possibly somewhat worse outcome in terms of where the STB would.
Would flush out and Youre in your mind, how did that that CCAR.
That FCB just because it.
Budged right so.
How did that all flush out relative to what you guys had kind of been anticipated.
Yes, what we said a couple times was that we thought it was possible that it was going to increase and it did.
Now you have to keep in mind like we only have so much visibility into the underlying drivers of what causes it to go up or down in any in any given year now there's a lot of stuff is public but there's also a lot of a lot of the modeling techniques that arent quite.
Quite easy to understand and so so I would say we were pleased with the result.
We've spent.
As many do probably we spend a lot of time on.
Trying to understand the drivers of the risk of the balance sheet and do our best.
We have positioned ourselves for good outcomes and so we were pleased that where it came out.
Okay.
Alright, perfect. Thank you guys very much I appreciate it.
Thank you. The next question comes from John <unk> of Evercore ISI. Your line is open.
Good morning.
Hey, John Good morning.
On the just on the deposit front just to go back to that I just want to confirm so from here.
Best estimate now is the overall deposit balances are relatively stable in the back half of the year or do you think you could see some incremental declines.
Just as betas are rising.
I think you can certainly see a little bit more decline from here potentially I think thats.
That's not an unreasonable expectation exactly timing and.
How thats going to progress I think it's hard to hard to predict with any real degree of accuracy just given the environment. We're in right now, but I think it's.
It's possible they come down a little bit more from here.
Okay, Alright, Thanks, Mike and then on the credit front.
I wanted to get your thoughts on the likelihood of Av.
Reserve build I know you added to the reserve for loan growth this quarter, but in terms of an overall build of the reserve as you know from a seasonal perspective.
Respective assumed look your economic scenarios.
What did you see this quarter with seasonal scenarios.
Warrants a sizable build in and I guess longer term as this plays out and we.
So the fed continue with the tightening what do you view as a potential.
A level that you may have to bring the reserve to as a pandemic level.
Too high and you can help us with the magnitude there.
Well as you think about the process, we go through which I think it's similar to most.
And a lot of ways, you're really looking at a number of scenarios that you need to be thoughtful about it include in your modeling.
And we've now for a number of quarters in a row have has had a significant weighting on the downside scenarios already.
And some of those scenarios are pretty severe right and so you've got weightings on.
What some might term Lyle recessions more severe recessions you.
Create a lot of labels for them, but it's a number of scenarios that have different severities of downside.
And so we feel at this point that we've captured.
What we can look at and see or anticipate at this point based on on all the factors that we need to evaluate in our current reserve.
I'll just point out also as you look at.
US in the position we're in yet we didn't take down all of the reserves that we put up during COVID-19 and so as you sort of look through each of the underlying asset classes. We feel we feel what we have today is appropriate.
It's hard it's hard to see in the near term.
Hi.
Increasing them to the level that we had back in the pandemic.
So I think Thats, a hard thing to see at this point, but I think we'll have to make sure as things evolve throughout the next couple of quarters.
We will have to incorporate that but but again, we already have a pretty pretty significant waiting on those downside scenarios already.
And it's a very as you might imagine a very robust conversation that we go through each quarter to evaluate how we feel about it and at this point, we feel it's appropriate for what we can see over the life of those loans.
Got it alright, just one more related to credit quickly the $107 million write down and an unfunded leveraged finance commitments.
That you took.
Is there a risk of future marks there is that primarily just predicated on market spreads and then separately. What is your can you remind us what's your total leveraged loan exposure both in terms of commitments and outright outstandings.
Yes.
You guys think of these as unfunded commitments not funded right. So as you sort of think about them don't think about them outstandings thinking about them as unfunded commitments is number one.
And you really have to over time think about term loans versus high yield a little bit differently than on.
The high yield side, we don't disclose we haven't disclosed the actual number but it's really small.
In the scheme of the balance sheet and the term loan side, which generally has a little bit more stability to it unless volatility to it as the.
The bigger part.
All of these all of these deals are subject to further spread widening given the environment. We're in for sure.
We at the end of the quarter took our best used our best judgment too.
Market, where we thought the deals would clear and we'll see how it we'll see how that goes over the coming coming months.
Okay, great. Thanks, Mike.
Thank you. The next question comes from Erika Najarian of UBS. Your line is open.
Hi, Good morning, I, just had one more follow up question and Mike I apologize. If this is the umpteenth question on NII.
I appreciate all your color in terms of what's driving the NII guide of 20% I'm wondering if you could better quantify the deposit beta that you would expect by year end on a cumulative basis I. Appreciate that you said it would accelerate.
But given that some of your peers have given specific guidance.
Given how much the quality of your deposit base has changed for the better over the past several years I'm wondering if you could give us a sense of what that data range that you're assuming by year end on a cumulative basis.
Pins that guide.
Yes, Eric.
I think that's a really hard thing to give a pinpoint number on at this point in the cycle to be honest with you and.
And if you think about it.
And it's just there's so many moving pieces right now I think between and particularly as you sort of get to the year end and the pace of rates in.
What exactly is the fed going to do and when are they going to do it and so I think there's a lot that goes into that that trying to get a $1. One number is a hard thing to.
To say with a lot of confidence in my view.
I think what we can say, though is as you look at the.
Next couple of rate rises I think youre going to start to see more acceleration.
On the retail on the consumer side the core.
The court rates haven't changed much for the big for the Big banks at this point, yet so youll start to see that happen over the next couple of rate rises it will the betas will still be pretty small.
That will start to pick up depending on how fast the fed goes by by year end and then I think on the other side of the spectrum on the corporate investment bank and those deposits, whether it's in the Fi space or the large corporate space Youre seeing those betas pick up a lot already and so those will continue to accelerate.
And so when you look at cumulative beta is you really have to look at and you start to compare different banks, you're really going to have to look at the mix of the deposits.
The CIB deposits are just a much smaller piece of the pie for us right now.
And those are those will probably move faster.
Then even evenly model, but it's a small piece of a piece of it. So I think we will see how it goes and we'll give you as much insight as we can but I think trying to predict cumulative betas by year end is.
His heart.
Yes, I understand thanks, so much.
Thank you. The next question comes from Ebrahim <unk>. Your line is open.
Hey, Good morning Bank of America.
Good morning.
Just following up on that Mike. So I appreciate you don't want to get pinned.
Pin down on deposit beta, but is it fair for us to assume just given the mix shift in deposits given how do you manage the balance sheet during the pandemic.
Could see deposit beta can you stack in line or maybe even lower and then move to the last cycle.
Well I think.
Sure.
As you think about each asset each type of deposits.
To date, they are tracking pretty close to what we saw last cycle, but then look at the mix of our deposit base and Thats whats changed.
Pretty substantially since the last go around and so.
Beta stayed the same as last cycle byproduct given our mix has changed you would see a lower average deposit beta.
But theres a lot going to play out as we go through the rest of the year by each of the underlying products.
That's fair just wanted to make sure we one missing something because that appears will probably yet expecting a higher beta than last cycle. So just wanted to hear you talk through that.
And.
As a follow up and I know these are extremely tough in terms of when you think about the market.
With market valuation on your equity investments, but give us a sense of just where the market side in terms of taking these markdown should we anticipate some more negative marks in a world where there's no big turnaround in equity markets over the next few quarters, just wanted to make sure like expectation to level set for that line and how that impacts season PNR.
Yes sure.
Again, it really all depends on what happens in the public equity markets, which is in part driving.
Those declines if we see if we see some stabilization that's constructive if we see.
Much deeper declines that we will have to evaluate how that impacts. These these portfolio investments and.
Obviously as the market starts to rally that's even more constructive so I think the public equity markets and will be a good guide too.
How to think about whether or not we have to evaluate whether theres more reductions here or not.
Got it and it looks like we are tracking to a 15% drop see maybe by the end of the year.
That was a statement I've been expecting this one thanks for taking my questions.
<unk> I'm glad you I'm glad you made it a rhetorical.
Thank you. The next question comes from Gerard Cassidy of RBC capital markets. Your line is open.
Thank you good morning, Charlie Good morning, Mike Mike can you give us some color on you guys had some good success in the quarter and generating gains from trading activities and your debt securities can.
Can you just share with us what drove that and what your expectations might be in the next quarter or two.
Yes, I mean on the trading side. It was really good performance in our macro fixed income businesses commodities, FX, a little bit of rates and so I.
I think thats what contributed to it.
And we will see obviously the continued performance there subject to what we see happening in the markets. It is not.
We're not out there taking.
Any kind of incremental risks than we normally take its really helping clients.
Facilitate.
The flow that they've got there and so we'll see how that how that goes and as you can see it's a relatively smaller number for us versus maybe some others.
As you think about the.
The securities portfolio I wouldn't assume there'll be continued gains there I think we did do a small some small remixing of our securities portfolio. Some of it was <unk> some of it was.
Our <unk> optimization I think.
Selling some umes's buying genius, where spreads were pretty tight at the time, we did it.
Save an art of UA, you don't give up much yield and there are a few other minor optimizations, we did there.
Very good and then as a follow up question.
When it comes to your professional and outside services expenses.
Can you frame out for us how much of that is tied to <unk>.
Current working with the regulators to lift the asset cap and the cease and desist order and you know when that day. Eventually arrives will the professional and outside services numbers really have kind of a meaningful downward move because you resolve that issue.
This is Charles let me just.
Take a shot at this first listen I think we have.
The work, we're doing on all of the risks and infrastructure work, which supports the regulatory matters.
Our own head count it's professional.
It's a bunch of technology work.
It really cuts across a whole series of lines.
And I just don't really think it's.
The right time for us to start even talking about where those saves could come from.
And it's just genuinely not on our radar screen in terms of what we're thinking about where it's going to go.
<unk>.
Or anything like that so I'd, rather just a further question at this point.
No problem understood and then Mike just coming back to your comment about the mix of deposits and this is a rhetorical question as well.
As we see for the first time in 15 years consumer deposits in a higher rate environment will make guys. Like you guys stand out maybe over some of your peers. So good luck with that thank you.
Thanks, Greg.
Thank you. The next question will come from Betsy <unk> of Morgan Stanley . Your line is open.
Hey, good morning.
Hi, Betsy.
Charlie I think you recently mentioned that you are in the process.
Strategically thinking about where mortgage fits in and I guess I wanted to understand what kind of.
Yes framework Youre assessing mortgage lender.
What youre thinking about that.
Sure, Yes, and that was by the way not meant to be a new comment that's something that we've been doing.
Ever since I got here, and we brought a new management, including Christy FERC, who runs the business.
Yeah.
I mean, if you just go back and look at how big we were in the mortgage business. We were a hell of a lot bigger than we are today.
And so we have been all along just reassessing what makes sense for us to do how big we want to be both in the context of what our focus should be in terms of our primary focus should be on service service serving our own.
Customer base, and then to the extent that we have efficiencies when it makes sense for us to do other business, but I guess my point was we're not interested in being extraordinarily large in the mortgage business just for the sake of being in the mortgage business.
We're in the home lending business, because we think home lending is an important product for us to talk to our customers about.
And that will ultimately dictate the appropriate size of it and so I would just when you look at how much we're originating versus the size of our servicing business the servicing business over time will.
Becomes smaller.
And I think thats.
Smart and good thing for us for many reasons.
And that as I said, we're just going to we're going to focus on.
Products that makes sense for us in the context of where we can make money over the cycles, given all the complexities and all the requirements that banks have not necessarily everyone else have and make sure we're getting the right returns for it yes.
Yes.
Migration towards originate and retain and the mortgage servicing line goes.
Goes away as an income statement item because it becomes non.
Cereal.
Or is there some.
Middle ground that Youre looking to no yes.
Listen we're still.
I would still assume that a substantial amount of our mortgage production would be.
Eligible for sale.
And whether it's.
Through the agencies or through public market. That's all all options that we would want to continue.
And so we will still be originating mortgages across the spectrum.
Some of which will keep on balance sheet, when it makes sense and others of which will sell in we will have.
<unk>.
Again, if you just look at how much we originated historically versus.
What we're originating today it will naturally just come down over time.
And then two other questions. One I think you recently announced the change in your consumer had.
Could you speak through rationale for that and what the what the.
Wish list is for your new head of consumer.
Yes, so Mike Weinberg, who had come in to run our home lending businesses.
Put a whole series of things in place, including if you look at the leadership across all of our card business, our home lending business or personal.
Lending business and our auto business all of those Thats, an entirely new management team plus new heads of I can go through all the other functions as well.
And Mike put that in place and we've talked about it and he wanted to do something different.
And so we're lucky enough to have a gentleman named clever Santos who joined us.
A year and a half to two years ago.
Background with the use of capital one prior to that and Mckinsey prior to that and <unk> work extremely closely together and just thrilled to have him in that role and so I think.
I wouldn't expect to see significant changes in the things that we've spoken about.
We're focused on continuing the product build out.
On the credit card side again, focusing on customers that are broader customers in the franchise.
Building, our customer service around that.
Building out our digital capabilities and all the other parts of the business, which is work that we have underway. So I don't anticipate any material changes from where we are just puts continued trends of the things that we've been talking about.
Alright, and then just lastly on wealth.
It's an important part of your offering.
I'm wondering what you're doing to strategically enhance that offering to your clients be it either through product or how you're structured integration with consumer.
Your <unk> platform and solutions could you just give us a couple of bullet points on what's going on there.
Sure, Let me start, Mike and Mike and Mike and I are both very involved in these conversations with Barry and his team.
I think if you look at our wealth business its run entirely different today than it was several years ago, we had separate platforms. Historically here between our brokerage business. We had two different private banks that operated under two different brands.
We had our bank channel and then completely separately, we had a digital platform and we had a platform for advisors that wanted to go independent.
The digital platforms and the advice.
The platform for independent Advisors advisors had very little investment in it and those were run.
All of those business they were run as separate businesses with separate product platforms and.
And separate technology.
So what we've done is we now have one set of.
Our products and service capabilities that all of those product lines have access to and we've combined the entire field.
Field.
Under one leader and we're investing in our digital capabilities and we're investing in the capabilities of those that want to go independent so if they want to do that they can stay here as oppose to elsewhere.
We are building out capabilities across all the dimensions from the investment capabilities to the banking capabilities are.
Our lending capabilities offering trust in the other.
Areas of distribution that didn't have access to those in the past.
And so it's.
It's a huge set of changes.
Which also bring with it a set of <unk>.
<unk> and the backend, which we're going to we can.
Moving towards common platforms.
And it's it's something we're really excited about and we're just at the beginning of seeing the benefits of it I think it's one of the things that.
We will make us appear to.
For our financial advisers to be an extremely attractive place to be whether they want to be an employee and work for wells Fargo.
Or they want to be independent and access our capabilities.
Okay and that change to moving to common platforms, what's the timing of that.
Yes, it's not a it's not a technology move I think he's talking about platforms in terms of the overall sort of the way we operate the business. So there isn't it isn't dependent upon a big technology conversion Betsy so okay and then.
I'll just highlight one last thing.
His prepared remarks talked about wells Fargo Premier that's.
Step one in really helping provide a more.
<unk> and holistic.
Service offering to our affluent clients in the consumer business in the wealth piece is going to be a big part of that.
And we already have 500, plus advisers in the branch system to do it we already have a great investments platform.
And so were we.
We're in the early days, but built.
Building out a differentiated service offering there as well, which will be a big part of the wealth businesses going forward.
Okay, and Thats in conjunction with consumer business correct, Yes, I would say just expand it even further Betsy it's really a combination of.
The advisors and the products that Berry has to offer.
Our wealth management business.
It is also leveraging the lending products that clever is now responsible for including credit card and including mortgage and potentially auto and some other things there in integrated offering.
With Mary's Bank customers, who are affluent so.
It's an offering across all of our product set directed in a much more segmented way than we've ever done in the past.
So we're extremely excited about it and we'll be talking more about things that were capabilities, that's going to be rolling out throughout the year alright. Thank you.
Thanks.
Thank you. The next question comes from Vivek <unk> nature of J P. Morgan Your line is open.
Thanks for taking my questions. Charlie just wanted to follow up on your question on your comment about loan growth likely to moderate from the first half any color on that what do you think drives that moderation which categories.
Hey, Vivek, it's Mike.
Maybe I'll take a shot at that like we've just seen.
Just don't think what we've seen in the second quarter, we will we will continue to.
It happened at the same pace, we may get surprised and there'll be a little better than we think but.
I think at some point, we just feel as you look at any of the uncertainty that might be there or other factors that are causing.
Clients to use their lines today that just may moderate as we go through it I wouldn't look at it as some big warning of anything to come it's just.
We're being a little we're being a little prudent in terms of the way, we think about that growth rate and maybe we'll be surprised on the upside a little bit.
It's just what we're seeing right now.
So youre not seeing any signs like set up late in the quarter or anything already starting to show some slowdown some conversations with clients about indicating that is that not not not that I would say is our super significant at this point, but.
You can go category by category and say, Okay. We will spending in the card space continue to increase at the same pace given some of the uncertainty in the economic environment, We will see maybe.
Commercial real estate certainly given what we're seeing in the real estate market there.
Here's like it'll slow down a little bit as we get in the second half of the year somewhat driven by what we're seeing in the capital market side of that business as well and so with the slowdown in deals happening in rates rising that's just as a natural.
A natural slowdown there and so I just think ego.
Asset class by asset class. It's just it just feels as though we will see a little bit of moderation as we go through the rest of the year.
Okay.
And one minor one Mike for you hung loan loss number that you gave us was that the gross mark or is it net of fees.
The loan the leveraged finance one vivek.
Yes.
That's after fees.
Okay. So then what's the gross smartphone back.
I don't I don't have exact number in front of me, it's not it's not it's not materially different.
Okay.
Alright, thank you.
Thank you we have time for one more question today and that will come from Matt O'connor of Deutsche Bank. Your line is open Sir.
Hi, I was wondering if you could remind us the targeted customer with a credit card of you lean into that business then.
Do you think about maybe slowing from your expansion plans there just given all the recession Parker shares.
Yes. This is Charlie.
First of all our targeted customer those that we want to have a broader relationship with.
What we have said is that as we've rolled out.
This new product set.
When you look at the credit quality of the borrowers.
<unk>.
And the spenders that we have been.
Giving our new cards to the credit quality.
Is actually stronger than it had been historically.
And it's still is either on target or stronger than we would have modeled for when we rolled the product out.
It's just we're not competing on credit terms were not competing.
In any way shape or form.
Terms of that we just one of our quality offering and we would expect to be at to be a high quality.
Our card customer.
We can.
Do other things with across our franchise.
And just any disclosure on FICO scores in terms of the overall portfolio or a customer that we are growing our meeting in person.
I think you can get some of that in the Q that you'll get a little deep into the queue, but you can get some of that in our distribution tables in the queue.
Okay I'll look further effects.
Alrighty, everyone. Thank you very much we appreciate everything and we look forward to talking to you all take care.
Thank you all for your participation on today's conference call at this time all parties may disconnect.