Q3 2022 Wells Fargo & Co Earnings Call
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[music].
Welcome and thank you for joining the wells Fargo's third quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during this time simply press star one.
If he would like to withdraw your question Press Star two.
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.
Good morning, Thank you for joining our call today, where our CEO , Charlie Scharf and our CFO Mike.
We will discuss third quarter results and answer your questions.
This call is being recorded.
Before we get started I would like to remind you that our third quarter earnings materials, including our release financial supplement and presentation deck are available on our website at wells Fargo and 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 third quarter results the operating environment and update you on our priorities I'll, then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start with the third quarter highlights.
Our solid business performance this quarter was significantly impacted by $2 billion or <unk> 45 per share in operating losses related to litigation customer remediation and regulatory matters, primarily related to a variety of historical matters. As you know we have been and remain focused on <unk>.
<unk> our earnings capacity to see the positive impact of rising interest rates driving strong net interest income growth and our continued focus on improving operating efficiencies, resulting in lower expenses, excluding operating losses.
Quality remains strong and we continue to invest in our technology platforms digital capabilities and delivering additional products to our customers and clients.
While we are closely monitoring trends with economic conditions expected to weaken given inflation geopolitical instability energy price volatility and rising interest rates, our customers continued to be resilient with overall strong credit performance and solid cash flow.
When looking at simple averages across the entire consumer portfolio deposit balances per account decreased from the second quarter, but were still higher than a year ago and remained above pre pandemic levels. However, we continue to closely monitor activity by segment for signs of potential stress and for certain cohorts of customers.
We've seen average balances steadily decline and are now below pre pandemic levels and their debit card spend continues to decline. This is a continuation of what I referenced last quarter, but it's important to note that this remains a small percentage of our total customer base.
We're all our consumer deposit customers health indicators, including cash flow payroll and overdraft trends are still not showing elevated risk concerns debit card spending remained significantly above pre pandemic levels and was up 3% in the third quarter compared to a year ago consistent with the second quarter increase.
Entertainment and fuelled spending had the largest increases from a year ago, but the recent decline in fuel prices drove fuel spending to decline compared to the second quarter apparel and home improvement spending declined from both a year ago and second quarter.
Credit card spend remained strong in the third quarter up 25% from a year ago with double digit increases coming across all spending categories spending was up modestly on a linked quarter basis remember a significant portion of this growth is from our new products, which continued to have strong credit profiles.
Period end commercial loan balances were stable compared to the second quarter with continued growth in commercial banking offset by declines across our businesses and corporate investment banking.
<unk> performance remained strong with net charge offs and non accrual loans continuing to decline from exceptionally low levels clients do tell us do tell us that they continued to be impacted by persistent inflation rising interest rates and tight labor market and while credit quality remains strong were actively monitoring inflation.
Set of industries, and taking proactive actions where warranted.
Now let me update you on the progress, we're making on our strategic priorities, we continue to vote to devote significant resources to implementing an appropriate risk of default framework across the company and this remains our top priority.
We continue to make progress.
And are executing on our plans, but significant work remains as a reminder, though I'm confident in our ability to complete the work. It remains a significant body of work and the primary focus of the company. We have set high standards for success given the longstanding nature of much of our work. We have said that we remain at risk of steadfast until it is complete.
<unk> expenses in the quarter reflect these ongoing risks and our efforts to resolve them as we continue our work to put our historical issues behind us and to address issues that are identified as we advance our risk control infrastructure work outstanding issues that still remain that will likely result in additional expense.
In the coming quarters, which could be significant.
We are working to close these as quickly as possible and we remain committed to doing the right for our customers and working closely with our regulators and others to resolve these matters, we recognize the importance of moving forward and the expenses in the quarter are representative of these efforts at the same time, we're implementing changes to better serve our customers.
Investing in our businesses to help drive growth as.
As part of the announcement, we made early earlier this year to limit overdraft related fees and give customers more options to achieve their financial goals, we implemented extra day Grace period of the third quarter, which provides consumer customers an extra business day secured negative balances and avoid overdraft fees. We also began to rollout.
Payday, which provides consumer customers, who are who receive eligible direct deposit the ability to access funds up to two days earlier than scheduled further reducing the potential to incur overdrafts, notably while this enhancement was rolled out only six states in the third quarter. During the first two weeks of offer.
This enhancement, we provided customers early access to $2 billion in funds from $1 3 million eligible direct costs.
And we're on track for a fourth quarter rollout of an easy to access short term credit products that will give qualifying customers another option to meet their personal financial needs. These actions build on services that we've introduced over the past several years, including offering an account that does not charge any overdraft fees, we now have <unk>.
Over $1 6 million of those clear access banking accounts up 57% from a year ago and as I mentioned last quarter, we developed a new integrated banking lending and investment offerings that is geared towards the more complex financial needs of our affluent clients called Wells Fargo premiere during the quarter, we introduced <unk>.
As Barbara Premier across our entire branch footprint initiated a branded digital experience amongst marketing programs to help affluent customers learn more about how we can better serve them.
We'll continue to build the wells Fargo premiere offering in the coming quarters in the third quarter. We continued to launch new ACI, providing our commercial and corporate clients more flexibility and helping them drive efficiencies. For example, we launched a new real time payment API, allowing clients to send digital request to payor that can be.
Proved to easily send a real time credit trends.
We also launched the virtual card API, which enables clients to create configured virtual cards for <unk> vendor payments and purchases, but our CIB markets businesses, we're accelerating our investment into our electronic trading capabilities across multiple asset classes to better meet the evolving needs of our clients, which is helping to dry.
Strong gains in trading volumes and were selectively adding talent and our investment banking coverage and product areas as we focus on leveraging our strong existing relationships to build our fee based businesses.
We also continued to make progress on the environmental social and governance work that is underway at wells Fargo in the third quarter, we published our latest ESG report, which highlights the progress we made in 2021 on our ESG efforts. We consider this work the sustained long term commitment and belief wells Fargo is well positioned to make a difference.
We issued our second sustainability bonds in the amount of $2 billion that will finance projects and programs supporting housing affordability economic opportunity renewable energy and clean transportation during.
During the third quarter, which we officially launched the new Grant program in Houston, San Diego in Milwaukee to help improve racial equity came home in home ownership and we have more markets coming before the end of this year. This was part of the $60 million commitment, we made or abuse early this year through the Wells Fargo Foundation to wealth off.
<unk> restored through homeownership for work.
This effort aims to create 40000 homeowners of color.
Access.
40000, homeowners a color across eight markets by the end of 2025.
We announced a $1 million donation to provide urgent released a florida. Following the aftermath of Hurricane Dorian. In addition, customer accommodations and employee support are available to those directly impacted by the storm.
In summary.
Continued high inflation has got the federal reserve aggressive with rate hikes, leading the housing market to slow rapidly and the heightened uncertainty about the economic outlook and geopolitical events caused the financial markets can be volatile.
However, labor demand remains robust consumer balance sheets remained healthy and customers had capacity to borrow wells Fargo is positioned well as we will continue to benefit from higher rates and ongoing disciplined expense management.
Both consumer and business customers remain in a strong financial condition and we continued to see historically low delinquencies and high payment rates across our portfolios. We are closely monitoring risks related to the continued impact of high inflation and increasing rates as well as the broader geopolitical risks and we do.
We expect to see increases in delinquencies and ultimately credit losses, but the timing remains unclear.
As we look forward, we remain bullish on our business opportunities are higher operating margins and strong capital ratios have prepared us for wide range of macroeconomic scenarios in the third quarter, we increased our common stock dividend by 20% and our CET one ratio was 10, 3%.
110 basis points above our current regulatory minimum including buffers.
We will continue to prudently manage our capital levels to be appropriately prepared for slowing economy and market volatility. Finally, I know many of you are interested in our 2020 through expectations and our and on our next earnings call. We plan to provide our 2023 expense and net interest income outlook as well as more color on our path.
To an over the cycle, 15%, our OTC I will now turn the call over to Mike.
Thank you Charlie and good morning, everyone net income for the quarter was $3 5 billion or <unk> 85 per diluted common share.
Charlie highlighted our results included $2 billion or <unk> 45 per share of accruals primarily related to a variety of historical matters.
Accruals drove our total expenses higher however, if you exclude operating losses, our expenses would have declined as we continued to execute on our efficiency initiatives.
Revenue grew in the third quarter driven by higher net interest income while noninterest income also increased from the second quarter.
Our effective income tax rate for the third quarter was 22%.
We highlight capital on slide three.
Our CET one ratio was 10, 3% down six basis points from the second quarter as the 21 basis point decline from a OCI as well as the impact from dividend payments was nearly offset by our third quarter earnings.
Our CET one ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to nine 2% at the start of the fourth quarter as our new stress capital buffer took effect.
As a reminder, our G SIB surcharge will not increase in 2023.
We did not buy back any common stock in the second or third quarters, and we will continue to be prudent regarding the amount and timing of any share repurchases.
Turning to credit quality on slide five.
Credit performance remained strong with only 17 basis points of net charge offs in the third quarter.
However, as expected losses are slowly increasing from historical lows and we expect them to continue to normalize towards pre pandemic levels over time as the federal reserve continues to take actions to combat inflation.
We are closely monitoring our portfolio of potential risks and our continued continuing to take some targeted actions to further tightened underwriting standards.
Commercial credit performance remained strong across our commercial businesses with only 6 million of net charge offs and net recoveries in our commercial real estate portfolio for the third consecutive quarter.
We also had net recoveries in our consumer real estate portfolios.
However, total consumer net charge offs increased $72 million from the second quarter to 40 basis points on average loans driven by an increase in net charge offs in the auto portfolio.
Higher loss rates on certain auto loans originated primarily in the latter part of 2021 contributed to the linked quarter increase in charge offs and delinquent loans in the auto portfolio.
Lower loan balances also impacts the loss rate, which started we started taking credit tightening actions earlier this year, which have improved the quality of 2022 originations.
As a result of these actions increased pricing competition and continued industry supply chain constraints, the third quarter origination volumes were down over 40% compared to a year ago.
Nonperforming assets declined again in the third quarter and were down $411 million or 7% from the second quarter and down 20% from a year ago.
While commercial non accruals continued to decline lower levels of consumer non accruals were the primary driver of lower nonperforming assets due to a decrease in residential mortgage non accrual loans from the impact of customers sustained payment performance after exiting COVID-19 related accommodation programs.
Our allowance for credit losses increased $385 million in the third quarter, primarily reflecting loan growth and a less favorable economic environment.
On slide six we highlight loans and deposits.
Average loans grew 11% from a year ago and 2% from the second quarter.
Period end loans increased for the fifth consecutive quarter of growth slowed as expected with commercial loan balances holding relatively stable from the second quarter, while consumer loans grew driven by credit card and first lien residential mortgage loans, partially offset by continued declines in our auto portfolio.
I'll highlight the specific growth drivers when discussing our operating segment results.
Average loan yields increased nearly 100 basis points from a year ago, and 76 basis points from the second quarter, reflecting the higher rate environment.
Average deposits declined 3% from both a year ago in the second quarter with declines across our deposit gathering businesses.
Compared with the second quarter wealth and investment management had the largest decline by dollar amount as clients look for higher yielding alternatives declines.
Declines in our commercial businesses were driven mostly by outflows of non operational deposits, which can be more price sensitive and are a less stable source of funding.
Outflows in consumer and small business banking were driven by continued customer spending and increased outflows from customers seeking higher yielding products.
Our average deposit cost increased 10 basis points from the second quarter of 2014 basis points.
Pricing has been consistent with our expectations with deposit costs, holding relatively stable and consumer banking and lending while trending higher across other businesses.
As rates continue to rise, we would expect deposit betas to continued increase in customer Mike customer migration from lower yielding to higher yielding deposit products to also increase.
Turning to net interest income on slide seven.
Third quarter net interest income increased $3 2 billion or 36% from a year ago, and $1 9 billion or 19% from the second quarter.
The growth from the second 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 benefit from higher loan balances and one additional day in the quarter. These benefits were partially offset by higher funding costs.
In the first nine months of this year net interest income was up 19% compared with a year ago. We currently expect full year 2022, net interest income to be approximately 24% higher than a year ago with fourth quarter 2022, net interest income expected to be approximately $12 9 billion.
Turning to expenses on slide eight the increase in noninterest expense from both a year ago and from the second quarter was due to the higher operating losses that I highlighted earlier, excluding operating losses. Other noninterest expense was down 5% from a year ago as we had lower revenue related compensation expenses related to divestitures.
Yours came out of the run rate and we continue to make progress on our efficiency initiatives.
Excluding operating losses, our expenses would have been down on a year over year basis for six consecutive quarters.
Another way you can see the impact of our efficiency initiatives is to lower head count, which has declined for nine consecutive quarters and was down 6% from a year ago. We've also reduced professional and outside services expense by 10% and occupancy expense by 4% during the first nine months this year.
The higher level of operating losses in the third quarter will cause us to exceed our $51 5 billion dollar expense outlook for 2022, which included $1 3 billion of operating losses for the full year.
We currently expect our fourth quarter other expenses, excluding operating losses to be approximately $12 3 billion.
As Charlie highlighted outstanding litigation customer remediation and regulatory matters still remain.
That will still remain and will likely result in additional expense in the coming quarters, which could be significant.
Turning to our operating segments, starting with consumer banking lending on slide nine.
Consumer and small business banking revenue increased 29% from a year ago, driven by the impact of higher interest rates and higher deposit balances.
Deposit related fees were impacted by the overdraft policy changes, we rolled out earlier, this year, which eliminated non sufficient funds and some other fees.
The extra day Grace period launched at the beginning of August and early pay day begin in select states in mid September . So we would expect our deposit related fees declined further in the fourth quarter.
Industry mortgage rates have increased over 300 basis points since the beginning of the year and ended the quarter at the highest level since 2007, driving weekly mortgage applications as measured by the mortgage bankers Association to a 25 year low at quarter end.
As a result, our home lending revenue declined 52% from a year ago, driven by lower mortgage originations and gain on sale margins as well as lower revenue from the re securitization of loans purchased from securitization pools.
While the mortgage market adjust the lower volumes, we expect it to remain challenging in the near term and it's possible that we have a further decline in the mortgage banking revenue in the fourth quarter when originations are seasonally slower.
We continue to remove excess capacity to align with the reduced demand and expect these adjustments will continue to over the next couple of quarters.
Credit card revenue was up 8% from a year ago due to higher loan balances, which benefited from higher point of sale volume and new product launches.
Auto revenue declined 5% from a year ago, driven by loan spread compression and partially offset by higher loan balances.
And personal lending with 9% from a year ago due to higher loan balances driven by growth in origination volumes.
Turning to some key business drivers on slide 10.
Mortgage originations declined 59% from year ago, and 37% from the second quarter with declines in bulk correspondent and retail originations.
Refinances as a percentage of total originations declined to 16% in the third quarter.
Average home lending loan balances grew 2% from the second quarter driven by growth in our nonconforming portfolio.
I already highlighted the drivers of the decline in auto auto originations, so turning to debit card, while debit card spend increased 3% from a year ago spending declined 2% from the second quarter.
As Charlie highlighted credit card point of sale purchase volumes were up 25% from a year ago with the largest percentage increases in fuel and travel average balances were up 21% from a year ago, reflecting the strong point of sale volume, which also benefited from the launch of new products with new accounts up 11% we will.
<unk> remained disciplined in our underwriting of new credit card accounts.
Turning to commercial banking results on slide 11, middle market banking revenue increased 54% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances.
Asset based lending and leasing revenue increased 27% from a year ago, driven by higher net gains from equity securities.
Higher loan balances and higher revenue from renewable energy investments.
Noninterest expense increased 9% from a year ago, primarily driven by higher operating costs and higher operating losses.
Average loan balances have grown for five consecutive quarters and were up 17% from a year ago.
Line utilization rates were fairly stable relative to the second quarter inflation in our customers' continued efforts to rebuild inventory and supply chain challenges remain drove the growth in asset based lending and leasing.
Loan growth in the middle market banking continued to come from larger clients, which more than offset declines from smaller clients.
Turning to corporate and investment banking on slide 12.
Banking revenue increased 28% from a year ago, driven by stronger Treasury management results, reflecting the impact of higher interest rates as well as higher loan balances.
<unk> banking fees declined from a year ago, reflecting lower market activity.
Compared with the second quarter the increase in investment banking fees was due to the write down of unfunded leverage finance commitments last quarter.
Commercial real estate revenue grew 29% from a year ago, driven by higher loan balances the impact of higher interest rates as well as improved commercial mortgage backed securities gain on sale margins.
Markets revenue increased 6% from a year ago, reflecting volatility in strong client demand in equities rates and commodities and foreign exchange trading.
Average loans grew 19% from a year ago with broad based growth across our businesses to fund clients working capital needs, but the pace of growth slowed in the third quarter with average balances up 3% and period end loan.
One 3% from the second quarter.
On slide 13 wealth and investment management revenue grew 1% from a year ago as the increase in net interest income driven by the impact of higher rates offset the decline in asset based fees driven by lower market valuations.
As a reminder, the majority of women advisory assets are priced at the beginning of the quarter. So third quarter results reflected the lower market valuations as of July one.
And while the S&P 500, and fixed income indices declined again in the third quarter. The decrease was not as steep as the second quarter decline. So while there'll be another step down in asset based fees in the fourth quarter will be less significant than the third quarter decline.
Expenses decreased 4% from a year ago due to lower revenue related compensation.
Average loans increased 3% from year ago, driven by continued momentum in securities based lending.
Slide 14 highlights our corporate results.
Both revenue and expenses were impacted by the divestitures last year of our corporate Trust services business and Wells Fargo asset management.
These businesses contributed 459 million of revenue and accounted for approximately $305 million of expense in the third quarter of 2021.
Revenue also declined from a year ago due to lower equity gains and our affiliated venture capital private equity businesses and given current market conditions, we don't expect equity gains to improve in the fourth quarter <unk>.
Expenses increased from a year ago due to higher operating losses.
In summary, although the high level of operating losses, we had in the quarter significantly impacted our results. The underlying results in the quarter continued to reflect our improving earnings capacity. We had strong net interest income growth from rising rates and if you exclude operating losses. Our expenses would have declined as we continued to execute on our efficiency initiatives.
Both our credit performance and capital levels remained strong we.
We will now take your questions.
At this time, we will now begin the question and answer session. If you would like to ask a question. Please first on mute your phone and then press Star one please record your name at the prompt.
If you would like to withdraw your question you May press star two to remove yourself from the question queue.
Once again, please press star one and record your name if he would like to ask a question at this time. Please standby for our first question.
And our first question for today will come from John Mcdonald of Autonomous Research. Your line is open Sir.
Thank you good morning, guys, Mike I wanted to ask on the expenses.
First in terms of the operating losses, I know, it's tough to answer but should we think of the op loss accrual this quarter as you reassessing.
You might have to pay in the future or you got hit with some stuff that you didn't expect and you've already paid up you know.
Is there some combination of those how should we think about what the what happened this quarter with the op loss accrual.
Hey, John It's Charlie.
So I guess the way I would describe it is I mean, I think you all know the.
The accounting rules on when you accrue things are are pretty clear based upon generally when you know something.
A pretty good sense that something.
This is going to be done at those probable and you can put an estimate on it.
And so.
As we've said we've tried to be very very transparent that there.
That we do have things.
That will be lumpy.
That could be significant.
It's in our best interest to get as much behind us as quickly as we possibly can and that's what we've been trying to do both with our work.
But also the financial impact of these things and that's what you're seeing in the quarter.
Okay, and then maybe Mike I could follow up on the non op expense outlook for <unk> three in the fourth quarter implies up from the 12, one this quarter maybe.
Maybe just some context of what's driving that is it seasonality and then can we think of that jumping off point of the fourth quarter as well.
Beginning of Annualizing that for next year, and what would be the roughly the puts and takes for thinking about next year from the fourth quarter. Thanks.
Yes, no. Thanks, Thanks John .
I think when you think about the change from third quarter to fourth quarter. It really is just some seasonal things I think if you go back over a long period of time, you just see year end accruals related.
A bunch of different items that sort of.
And up in the fourth quarter, and so Theres no no story there other than other than that I think we can.
Continue to be on track on the on the efficiency work that we laid out at the beginning of the year and so youll see some of that come through those numbers as well in there as it relates to 2023.
Charlie said in his remarks, we will lay that out in more detail in January .
Okay, maybe a broader comment just on efficiency and where you are relative to your longer term targets.
Yes, no I think we're right on track.
On the plan that we laid out John .
We would deliver about $3 3 billion of impact in 'twenty two.
To in that.
We're on track to do that.
Charlie and I, both said a number of times.
Not done and I think there's still more opportunity.
We're going through those conversations.
We go through our budget process, now and continuing to unpick, the onion around where theres more opportunity. So so I think those all could that program will continue to evolve, but we still feel we've got more opportunity to drive incremental efficiency and we're on track for the things we laid out and John the only thing I would add is I know, it's on a lot of People's minds.
Yes.
Is that.
From our standpoint, there's nothing new in our thinking from what we've talked about last quarter.
In terms of where the opportunities are and how we're thinking about the future.
And we just do think that it makes sense.
When we get to the end of next quarter, when we talk about our path to a 15% sustainable through different cycles. Aro TCE. That's also an opportunity to talk more specifically about expenses and how that fits in including what it looks like for next year and so by that point, we will have finished our our our budget process.
I understand all the puts and takes and we had a really good position to talk about it.
Got it okay. Thanks.
Thank you. The next question will come from Scott <unk> of Piper Sandler Your line is open.
Good morning, guys. Thank you for taking the question.
I guess I wanted to ask broadly on NII.
Once the once the fed stops raising rates can you sort of discuss.
Broadly how and for how long you could maintain positive NII momentum.
Well, Scott I think there's a lot that needs to play out for us to answer that with any.
Any degree of accuracy right in terms of what we're seeing in the economy loan growth, what's happening with deposits and so forth, but but the only thing I would point out that you do need to keep in mind as you think about it is there will be a lag on deposit pricing.
It happens in every cycle happened in the last cycle and will happen again here once this once the fed stops.
Stops raising rates you will see a lag before deposit pricing stops going up and that's just normal and to be expected as it relates to overall NII at that point I think there's a lot of what ifs that need to go into that scenario.
And as we all have seen even over the last few days some of those expectations continue to evolve so.
But I would keep in mind as you think about that the deposit pricing lag.
Yes, Okay makes sense. Thank you and then just returning to the.
The operating losses for a second just to help put the couple of billion in third quarter charges in context, just given the magnitude of charges that.
Well, it's had already taken.
At this point, what is pushing pushing those losses, so high and what could keep them high going forward and I guess I ask within the backdrop of I know you guys weren't really there when these issues took place, but just given how high they have been for for so many years, just curious like what's keeping them at such a level.
Yes, Scott this is Charlie I'll take a shot at it and Mike Please feel free to flip in.
Listen I think again, if you go through.
Things that we've said in the past and go through our disclosures.
We have open regulatory matters that do relate to the past.
We do have litigation.
That relates to a series of those things, which we do.
No cover a lot of it.
In our disclosures.
And the other thing, which I just as we continue to make progress and move forward and build the control environment, we do find things ourselves that do relate to.
The.
Sure.
The environment that we've had in the past and those things have to be remediated. So.
As I've said earlier, we would like to get both just both operationally and financially these things down as quickly as we can.
No.
The accounting rules dictate.
When you when it's appropriate to take the charges in.
We just again want to try and be as clear as we can.
We're not surprised I mean, when you say not so great or we don't like the charge for sure.
But it is just the reality of the position that we're in to get these things behind us.
Tried to be clear the remarks that.
This isn't the end of it but we would like to.
Move as quickly as we can on everything thats remaining to get behind us.
Okay.
One thing overall and I think even even with these.
These costs and the charges, we're continuing to make sure that we invest in the underlying businesses too I.
I think Charlie highlighted a little bit of that in his remarks, but we've got to keep making sure that.
We're adding people, where we need to we are building out the capabilities, where we need to and we've talked about some of those opportunities in the past, but we are also.
Doing that as well as executing on the efficiency agenda to make sure the earnings capacity of the company continues to get better.
Yes.
Okay perfect. Thank you guys very much I appreciate it.
The next question will come from Ken Houston of Jefferies. Your line is open Sir.
Thank you good morning, Charlie and Mike.
Charlie I want to ask you a follow up on your comments about protecting your capital in an uncertain environment going back to the CCAR. When you. When you correctly stated you've got you've got a lot of excess room a lot of flexibility just wondering how you expect that <unk> to traject relative to where you want to keep it and what does that mean in this environment.
Or the prospects of doing share repurchase or do you just is it a build it and just keep it and be protected environment. Thank you.
Yeah, maybe I'll start Ken and then Charlie can add anything I think our thinking hasn't changed much since last quarter, we don't feel like we need to build from here.
As you know, we've got about 110 basis points of cushion over our Reg minimum buffers.
<unk> and.
I think as you sort of look at the environment. We're in we just want it we want to be continue to be prudent about how and when we do we do buybacks I think even if you think about the third quarter and look at the rate volatility we saw in the last three weeks of the quarter.
And even in the last number of days of the <unk>.
Fourth quarter now in the beginning we've seen quite a bit of volatility happening and so it's just all of those things that go into the calculus. We do every quarter to look at where the risks and opportunities are and make sure that we're just being smart about about managing it.
Only thing I would add is I think.
As Mike said, we feel very good about the growing earnings capacity of the company.
And certainly as we sit and look forward based upon what we actually see.
We feel very good about the position that rent we just also.
Those comments trying to point out with no debt.
When it comes to managing capital, we should be extremely conscious of what the risks are that are around us.
There are swings in OCI.
That has impacted many of us.
There are.
These geopolitical risks out there, which.
Something could trigger something which could ultimately have a broader impact on the economy and those are all reasons, just given where we sit today to be more conservative on capital rather than less conservative.
And so combination of those things with our own issues just lead us to say, let's just see how those things play out.
And that for.
This environment that we're in is probably the best use of that capital.
And a follow up just in terms of other uses of that capital just a question of you.
The reserve a little bit this quarter and alluded to the potential for a greater uncertainty just can you help us understand.
We have now in our scenario weightings in terms of your reserve and.
Charles Your point in your prepared remarks just.
Things might turn but it's just unclear to say how so how do you contemplate how do we get a better sense of what that might mean for our reserves and how your view on potential losses has changed.
That's a hard one to answer I would say when we set our when we go through the process to set reserves I think we do what.
Everyone else does with the seasonal calculations, which is we have we have a series of scenarios that we look at.
Better.
Economically driven.
Based upon economists.
Of.
What will happen to a series of <unk>.
Variables that will impact.
Our our credit.
We then go through and figure out what we think the right weighting is for those depending on as we sit here in the environment and then models produce a bunch of results.
So there are just there's so many factors that go into it.
There's a lot of science behind it but there is also judgment that sits on top of that relative to valuate. These things in.
Whether the models are ultimately rate, we think that.
On a relative basis, just the way we think about things.
Extent, you can bill we'd be conservative you're trying <unk>.
But it's got to be fairly formulaic driven.
I'd say as we sit here today we're.
We're not assuming we say differently I think.
I think the comments that we're making about the risks and the environment.
Factor into how we weight the different scenarios.
And so we do have weightings.
The.
The different downside scenarios.
I think thats, yes muscle.
Russell <unk>.
Maybe I'll just add we've said this now for the last couple of quarters, we've had a pretty significant weighting on the downside scenarios for awhile and Havent changed that I think you if you.
Look at what we've built over the during Covid I guess, a couple of years ago now relative to where we are today we have.
We haven't we haven't released all of all of that that build that happened and so all of what Charlie talked about goes into the conversation and so at this point, we still feel very comfortable with with where we are.
Understood. Okay. Thanks, guys.
Yes, the only thing I want to just be clear about and that is again, we try and be.
And you have to be forward looking and.
And so we tried to be very realistic.
About what potential outcomes are.
But at the same time, if our view deteriorates.
On the level of risk out there.
That could that could change and so getting back to the capital comment I do think it's kind of weird.
I'll run through the income statement and.
<unk>.
For that level, it's hard to predict from our perspective, we do have to.
The way, we think about reserving and the way we think about capital are very much the same.
Alright. Thank.
Thanks again.
Thank you. The next question comes from Ebrahim <unk> excuse me <unk> of Bank of America. Your line is open.
Hey, good morning, I guess just.
Quick follow up on credit I think from a fundamental standpoint, one are there any areas in particular that I think you've talked about seeing some weakness in the auto lending in the past or Danny areas within the portfolio seeing any.
Any change of crack on credit, although youre being a little bit more careful and extending news.
New lending and also.
Charlie you, Mike if you can talk about just your exposure within the C&I book, though.
<unk> responses.
You have a lead on that book and whether any of that comes back to create some.
And I just wanted to <unk> over the coming quarters. Thank you.
Sure maybe I'll take a shot and I'll start on the last piece I think youre, referring to leverage financial bridge.
Bridge the bridge book.
It's very immaterial in terms of any impact this quarter. So nothing no story there in terms of.
Any.
Significant in the quarter.
As it relates a little bit more broadly on credit.
For the most part the portfolio is performing really well right and if you go look in the commercial bank.
Customers are still in really good shape on average same thing in the in the corporate investment bank.
And then on the consumer side.
Charlie pointed out a lot of the health indicators still look really good we're not seeing systematic stress youre, certainly seeing a little bit more.
Stress on the lower end wealth spectrum, which isn't a big part of the portfolio for us.
And so so overall so far so good in terms of the the.
Performance.
To date.
I would say that.
We spend a lot of time on the wholesale side looking at inflation sensitive industries.
As I mentioned in my remarks and just.
Try and get ahead, where we can we don't see problems, but we're just trying to be very very forward looking and on the consumer side we are.
We're just we're digging through all of the information that we have to look for signs of stress.
If you were to change the scale in like low the scales up significantly.
Chart to see.
Very very small impact on some payment rates.
But we saw.
Impacts to the lower end consumer several quarters ago and those haven't progressed.
As quickly.
As we would have thought so.
Again, it's just.
Don't have our heads in the sand when you sit here and yet we've listened to the fed and.
Take them at their word and what Theyre doing is extremely powerful.
And so things will slow.
But we're just we're trying to be prudent and the only and the last thing I would just say as you know.
Some of our products I would say, we're tightening up on the edges.
Again, just to be prudent of some of the higher risk categories that have multi.
Multiple risk layers to them not a big part of our production.
And any of our products, but just trying to be.
Be smart relative to who could be impacted but at the same time continuing to be in the markets and providing credit.
Got it and just a quick follow up Mike what I was referring to on the CNI book is the disclosures around exposure to financials, except X banks.
So when I'm thinking about like asset management real estate finance.
Did that we should worry about in the work there is some uncertainty I don't help private equity holding up in this environment of higher rates, that's what I was getting at.
Oh, sorry, yes.
If you look at the Q there is some breakdown of those exposures and you can see that in.
At this point those are all performing really well.
Both in the asset backed finance space as well as the <unk>.
Scripture finance space, and so nothing to call out.
But thank you.
The next question will come from John Kerry.
Evercore ISI your line is open.
Good morning.
I know you mentioned that you're still seeing substantial opportunity on the efficiency side.
<unk> for improvement and all of that.
Can you talk about.
Gross cost saves I know you increased the target from $8 billion to $10 billion.
Yes.
Year early this year in January can you talk about the potential of that.
Could that number move higher yet again this year as you look at all the opportunities in front of you.
Yes.
I'm sure, we'll provide more guidance on that or more disclosure on that in January so I'll leave any specific remarks, there, but I'd just go back to like what you know what we've been saying we're not done on the efficiency journey.
As we execute on the stuff that's in front of US we continue to find more opportunity really across most parts of the company.
And so I think that will continue to evolve.
Okay, Mike Thanks, and then.
In terms of the mortgage expectation.
Indicated that you could see some incremental downside pressure there can you maybe help us size up the magnitude.
You can see in the fourth quarter in terms of the incremental decline.
Yeah, well I mean, if you look at the consumer banking and lending segment, we've got the mortgage banking income there.
It was like a little over a couple of hundred million dollars per quarter. So even a even a relatively substantial percentage decline is a pretty small dollar decline in these days given the run rate.
But I think if you look at what happened this quarter, we probably came in a little bit better than what we guided in July .
Spreads were a little bit better in August than what we had forecasted.
But they came back down in September and so we would expect that to continue so so while I think there could be some downside there.
It's off a pretty low run rate at this point.
Got it okay. Thank you and then just one more follow up on the balance sheet and I'm sorry, you had pointed to this already but in terms of the deposit.
Pressure on deposit balances can you talk about maybe how we should think about.
Potential incremental declines in deposits as we see the impacts of the.
The rate hikes continue to take hold.
Well I think one one I think youre going to continue to see pricing increase from here as we as we have said now for a while.
And so youll see pricing go up as rates continue to increase.
And then on the deposit side all of it's somewhat natural breakeven.
The environment, we're in so as.
As I pointed out in the in my remarks in the World. We saw the biggest dollar decline in our wealth business, which as you know.
Clients moving to higher yielding cash alternatives now we're also seeing more broadly clients move into cash there and a couple in a couple of areas where we've seen.
Cash alternatives grow substantially not just as they migrate away from deposits. So that's a piece of it.
And then I think on the rest of the book.
What we're seeing on the consumer side is a lot of spending not as much people much migrating away from us So maybe theres, a little bit of that but but it's really people out there spending and then on the corporate investment bank, which are going to be some.
Some of your most rate sensitive deposits.
We're seeing the activity we expected to see which is there is some clients you know moving into other.
Other other alternatives, but we still see.
Many clients are staying in cash with us as well so I would expect that theres going to be there could be some further further declines as we go.
Got it okay. Thanks, Mike I appreciate the color.
The next question comes from Erika Najarian of UBS. Your line is open mis.
Hi, good morning.
Just another question on expenses, if I may.
Yes, I guess the market what the market is telling us.
So long as the core expenses are.
Alex the market teams have been working on.
So no higher op losses.
And as we look forward.
Charlie and Mike as we think about the budgeting process for next year, Yes, I think the suite.
Operating losses to be.
Improving to be a small contributor too.
Hum.
Expense improvements going forward, even off of that original $1 3 billion extra Kingstone I'm just wondering as we think about the budget all continue to contemplate.
Adjustments on the core.
Meaning.
Cutting corners.
Operating losses for expenses, excluding operating losses.
<unk> expenses, excluding operating losses, I think I think your investors are expecting op losses do you see that.
Meaningfully even from that $1 3 billion original number I'm wondering if youre contemplating.
Contemplate on the core.
So let me let me take a shot at it I would say that first of all I just want to remind what we said in our prepared comments that we just didn't want to be as transparent as we can that we would.
<unk>.
That is quite possible and we said I think likely higher.
Likely.
We will have more significant potentially significant.
Losses related to some of these historical matters. So we just want that to be on the radar screen.
No question, excluding that our losses are still high.
What I would just encourage people to think about us.
I personally wouldn't model, then coming down until we actually see them coming down.
Again, as we go through and build the control environment.
We're going to find things and we need to get that behind us and I think that should be very much of a of.
Shelby proposition because again, we know what you know and you don't see it when it happens.
We've got a little bit of advanced notice because we see all the work that we're doing but we continue to need to work through those things and on the rest of op expenses is as we've said we know we're going to provide more specific guidance for that in the fourth quarter relative to next year and also talk about how it plays into 15% sustainable Aro TCE.
Our budget hotels, which I also want to thank the point because.
I think this is important to everyone on the one hand, everyone. Once we all want our expenses to go down.
Because of what it does to earnings but we are extremely I mean, even though we live in these two worlds, which is where we're rectifying these issues from the past which are both.
Building, the risk and control work, that's necessary and all the regulatory work and fixing the expense structure, but we also very much.
Have no intention of falling behind in our businesses and so the two paths of conversations that we have through the budget processes. What are we investing in.
And where are we going to see efficiencies in.
We obviously have to make sure that.
We're getting the appropriate amount from each of those categories.
Overall, there is no question that our efficiency ratios are not where they want them to be so directionally that just tells you how we're thinking about how where that goes but.
When we finish the process, we'll provide more clarity, but just know that we're thinking about both sides of that equation, but understand what the where we should be more long term.
No I think that makes sense and I think the conversation with investors Charlie uncertainty.
The next step for Wells Fargo in terms of you know excel.
The accelerated investment spend.
Next question. Please obviously a ratio.
That makes sense and my follow up question maybe is for.
Mike.
I'll squeeze into two parts. My second question. The first is could you tell us what unemployment ratio your ACL ratio today contemplate.
And second if you could just give a comment on where you see deposit betas trending relative to your previous expectations now that we have added 100 basis points onto the expectation for fed funds since we talked to you last in our quarterly earnings setting.
Yes, well, let me take the first one first so if you if you would look at if you look at our Q. We do give you a kind of a weighted blend of the economic scenarios.
And we give you a few data points unemployment rates one of them as of the end of June the weighted.
Thanks for letting the right one the radar <unk> number for the end of this year was four 1%.
Growing two 6%.
At the end of 2023, and we will update that based on third quarter in the Q when we get there.
On the second part of your question.
The second can you just repeat the second part of it Eric I'm sorry about that.
That data is.
On deposit betas.
Changed as we contemplate 2023, given that we added 100 basis points of the fed funds outlet.
Spoke to you last quarter.
Quarterly earnings.
Well I think so.
So far the beta as it played out the way we expected them to do at this point in the cycle.
And I think as rates continue to go up we would expect them to increase and that was part of the.
The playbook and the analysis, we had done going into the environment.
And that can be expected right and if rates are going to go up even higher than than we originally thought then the betas will continue to go up with that.
And so I think it's largely at this point playing out the way we thought it would.
Thank you.
The next question comes from Matt O'connor of Deutsche Bank. Your line is open Sir.
Good morning.
For an update on your rate positioning.
And thoughts on.
What.
Here are what's expected or how youre thinking about there.
Protecting yourself from.
Actually lower rates or what your perspective is on that.
Yes.
Still have you know we're still asset sensitive.
It is where we stand today and so that will continue to get the benefit as rates.
Rates go up but as you suggest I think most.
Most banks are thinking about not just about today, but also about the other side of when rates start to peak and come back down and I think the expectations around that have changed quite substantially.
No.
Certainly since the second quarter, but even even throughout the third quarter and into where we stand today those expectations have changed a lot. So so I'd say at this point, we are spending a lot of time.
Thinking about that.
That question and how we want to.
Protect part of the balance sheet.
When rates would start to decline, but but we haven't we haven't done anything.
In a material way at this point.
Okay Gotcha.
The next question will come from Betsy <unk> of Morgan Stanley . Your line is open.
Hi, good morning.
Good morning.
Two questions one on loans.
How should we think about how much more room. There is for you to grow loans within the context of the asset cap realizing that.
No T likes there is a constraint so you can't.
Got to you know maybe the.
Level as a percentage of total assets or total earning assets that you could before.
See I know, it's a long time ago, but I'm just trying to understand what what running room. You think you would have no loan book to grow that.
Yeah, Betsy I think as we've said I think even last quarter. You know we've got we've got room to continue to grow and be there for clients and we've got levers to pull if and when we think we need to create more capacity to do that.
And so at this point, we're comfortable that we're going to be able to continue to be there for clients and there is always discretionary stuff that you can do in certain pockets of your loan portfolio.
And so I think we've got we feel comfortable at this point that we can still be there.
Okay.
And then separately on the OCI pull to par can you give us a sense as to you know what we should put in the model for how long that should take.
How long what part of that should take.
The.
The underwater AFI stock right like if rates were flat with quarter end <unk>.
You've got to feed when do you start to accrete back.
Yeah, Yeah, how long does it take to accrete back to OCI.
Mix a while.
So you guys you know I think I think we mentioned and this came up last quarter and the expectations really haven't changed much in.
It will take a while to come back it will come slowly back a year by year.
As the maturity of the bonds get shorter okay.
Alright, now I was just wondering because we've seen some.
Portfolio restructurings at other places and didn't know if you had put hedges on that would've changed the pace because obviously, it's no mean.
Full to the capital outlook I was just wondering if there was any color there, but I guess not alright. Thanks.
Thank you. The next question comes from Charles Peabody of Portales Partners. Your line is open.
I wanted to follow up on the deposit beta question.
As I'm sure you're aware.
<unk> is talking to the tea back committee and trying to get some advice on a treasury buyback.
I was curious what your thoughts are about how that would affect liquidity close potentially out of money market funds into the banking system and therefore, how that might affect your deposit beta assumptions next year.
I think cause and effect and how that will play into deposit betas would be a really hard question to answer.
I mean that will you know if that comes.
Some spare that'll be one of many different factors that will go into.
What do you expect from deposit levels, and therefore betas over time so.
I wouldn't attempt to try to put some math behind that at this point.
But.
Yes at the very least would you view it as a net positive or.
In isolation.
Or is it a non event in isolation.
I mean, it really depends on what it is and how big in size and so I think it could be it could be that full range. It could be a non event or matter, but I think until you have better clarity, it's hard it's hard to say.
Assuming the trillion dollar type of treasury buyback, which I think.
The capacity they have.
I think it's just a it's a really hard question to try to put math behind at this point.
Okay. Thank you.
Thank you. The next question comes from Vivek nature of Jpmorgan. Your line is open Sir.
Thanks.
Charlie Mike Kelly I wanted to.
Just to follow up on your comment earlier about <unk>.
Youre seeing declines in deposits before below pre pandemic levels in the second cohort.
Can you talk a little bit about that what level of balances.
Kind of cohorts, how you're talking about.
And how much of that gone down below pre pandemic levels.
Yes, I will just turn it over to Mike.
This is this is the same thing that we've talked about in the prior quarter where.
Those that entered the pandemic with.
The lowest of balances to begin with.
Where they had balances for a period of time that remains above pre pandemic levels.
And we started to see declines.
Ultimately in spend in.
Deposit levels for that group now that are averaging below pre pandemic levels, but as I said in the prepared remarks, we would've expected that.
I would have expected that.
Exacerbate and spread and it hasnt really it's still a small part of our customer base.
In fact these are these are customers generally that have 500000 to $2000 kind of average balances per month.
And there is a percentage of those customers that have seen some declines.
And there's also a percentage you know some of those customers that haven't right. So it is it is.
It is just one of the the different cohorts.
We've looked at but as Charlie said that Hasnt really started to go up in higher higher higher wealth cohorts or income cohorts.
Okay.
That sounded like from your comments that Scott that decline has happened this quarter, So I guess for Doug.
We are seeing it probably gets worse as inflation remains high.
No no. This is a continuation of a trend we saw in the second quarter as well so.
It's not necessarily accelerating in any way, but it is a continuation of a trend we've seen now for a number of months.
Okay.
Mike a little one for you.
Card delinquencies Youll give 30 plus can you.
Break that down to 30 to 89 days of the early delinquencies what those debt this quarter.
There'll be more in the Q I think we're back on that.
Okay.
Okay. My suggestion to just have it out of earnings because obviously given that we are starting to change that environment. It's an important metric to keep an eye on.
Okay. Thanks.
The final question for today will come from Gerard Cassidy of RBC, Sir Your line is open.
Good morning, Mike Good morning, Charlie.
Mike can you share with us the trends you're seeing in the commercial real estate area. You guys had very strong revenue growth of course in commercial real estate this quarter year over year.
Commercial real estate mortgage balances for slightly down.
We're hearing from different folks that the commercial real estate market starting to tighten up.
Thanks <unk>.
Being as aggressive in lending.
Any color around the risk dynamics that you might be seeing in trends, you're seeing in commercial real estate mortgage.
Sure. Let me, let me start with just whats driving some of the growth you've seen rates of balances.
Balances are up year to date and year over year.
Really driven by two things the growth in multifamily apartments.
Some growth in some industrial properties and so we're still seeing really strong demand I think even if you look at the new housing new multifamily housing starts still growing hasn't really turned like single single family homes has over the last number of months.
So really strong demand there I think when you look at the performance of the portfolio, yes. Some of the some of the categories that were most impacted by the pandemic hotels retail.
In most cases are back good cash flow values are fine.
And we're seeing that that holdup.
Pretty well you still have you still have some forward looking uncertainty in the office space.
Just given.
That hasnt really translated into significant stress yet because we still have long term leases and other things you always hear about an anecdotal issue with a property, but but it has nothing systematic yet rolling through the portfolio.
I can't speak about what others are doing but I think for us you've seen good growth this year and as you go into an uncertain environment, you just youre going to try to be smart about what you put on new new things you put on your balance sheet and we continue to do that but.
But thats in the context of seeing some good growth year to date.
Very good.
See you guys CET, one ratio is well above your required level and I think you pointed it out you're a OCI Mark drew it down by about 21 basis points would you guys consider repositioning the.
Available for sale portfolio since you're already taking the mark through your CET, one ratio what kind of dynamics would you need to see if that would make sense for you to do that.
Yeah, you always look at different ways to optimize we did.
We did do a little bit in the second quarter, where we traded out.
Mortgage mortgage.
Blanking on the name, but the mortgage backed securities for Ginnie Mae, though you get a little better <unk> treatment.
So you do we have done some little bit of repositioning over the over the time and it's something we always sort of looked at it and think that but.
But it's not something that we're contemplating in big size at this point.
Alright, thank you.
Alright. Thank you very much everyone. We look forward to talking to you next quarter take care.
Thank you all for your participation on today's conference call.
At this time all parties may disconnect.