Q2 2023 Wells Fargo & Co Earnings Call
Welcome and thank you for joining the Wells Fargo second quarter 2023 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 he 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.
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 everyone for joining our call today, where our CEO , Charlie Scharf and our CFO , Mike Sandeman CMO 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 Dot com.
I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties.
Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the form 8-K filed today containing our earnings materials.
Information about any non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can also be found in our SEC filings in the earnings materials are available on our website.
I will now turn the call over to Jonathan.
Thank you John and good morning, everyone as usual I'll make some brief comments about our second quarter results.
And then 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.
We had solid results in the quarter with revenue pre tax pre provision profit diluted earnings per share and our OTC all higher than a year ago.
Revenue growth reflected strong net interest income growth as well as higher non interest income.
Our efficiency ratio improved and we continued to make progress on our efficiency initiatives, we had modest expense growth from a year ago net.
Net charge offs have continued to increase from historical low levels, but overall credit quality was strong.
Consumer and business balance sheets remained healthy.
We increased our allowance for credit losses by $949 million, primarily driven by our office portfolio as well as growth in our credit card portfolio.
While we haven't seen significant losses in our office portfolio today are detailed loan by loan review of the portfolio has given us a sense how the next several quarters to play out. We've also considered a number of stress scenarios all of which informs our actions this quarter.
Mike will discuss this in more detail, but I want to make the point that it is very hard to look at any one statistic and determined the risk in the portfolio loss content will be driven by a combination of factors, including but not limited to property type location lease rates lease.
You will notice states loan structure and borrower behavior.
Most importantly, our CRE teams remained focused on working with our clients.
Folio surveillance and derisking to minimize loss content.
Commercial and consumer average loans.
We're up from a year ago, but were down from the first quarter as the economy has slowed and we've taken some credit tightening actions.
Credit card spending remained strong but the rate of growth has slowed from the outsized growth rates, we saw throughout 2022.
What card spending was flat from a year ago with growth in discretionary spend offset by declines in non discretionary.
Average deposits were down from the first quarter, driven by lower consumer deposits, while the declines in commercial deposits slows.
Now let me update you on progress we've made on our strategic priorities, starting with our risks and control Reggie.
Regulatory pressure on banks with long standing issues, such as ours continues to grow and.
And as such our continued intensive effort to complete the build out of the appropriate risk and control framework for company of our size and complexity is critical.
I would continue to emphasize that this is our top priority and will remain so and that while we have implemented substantial portions of the work required.
We have more implementations do as well as work to make sure. The changes operate effectively overtime as I've said before we remain at risk of further regulatory actions until the work is complete.
While we are devoting all necessary resources to our risks and control work. We're also continuing to invest in our business to better serve our customers and help drive growth.
Our consumer customers have continued to increase their use of our mobile app. We added over 1 million mobile active customers over the past year and mobile logins increased 9% from a year ago Fargo, our new AI powered virtual assistant is now live on our mobile App for all consumer customers since launching at the end.
April our customers are interacting with Fargo over 4 million times.
We've continued to make important hires bringing new expertise to wells Fargo and businesses, we are looking to grow.
We named <unk> as the new head of National sales and wealth and investment management.
The critical in our efforts to better serve clients and to help advisors grow their business. We also continued to attract veteran bankers in corporate and investment banking hiring new managing directors in our banking division in priority growth areas, including a co head global mergers and acquisitions.
Co head of financial institutions, and new heads of financial sponsors equity capital markets healthcare healthcare and technology media and telecom.
We also continue to focus on better serving our communities, we announced a 10 year strategic partnership with TD Jakes group that could result in up to $1 billion in capital and financing with Wells Fargo to drive economic vitality and inclusivity in communities across America.
The Wells Fargo Foundation awarded $75 million to habitat for humanity to build and repair was 360 homes nationwide.
Work with habitat for humanity for nearly three decades and donated more than $129 million since 2010.
Wells Fargo signed on as the first anchor funder of any dose U S home initiative to create 4 million New Latino homeowners by 2030.
We provided initial grants to startup fund launched by Fintech, Hello, Alice to improve access to credit and capital for small business owners, who are members under share groups, including women. We continued to open hope inside centers and wells Fargo branches, including six during the first half of 2023 with plans to.
Reach 20 markets by the end of this year.
The centers help empower community members to achieve their financial goals through financial education workshops, and free one on one coaching.
We published our 2023 diversity equity and inclusion report, which highlights the progress we've made in our strategy and initiatives.
Inside our company and the communities, where we live and work. However, we have more work to do to achieve enduring results that will require a long term commitment looks.
Looking ahead the U S economy continues to perform better than many expected.
And although there will likely be continued economic slowing and uncertainty remains it is quite possible in a range of scenarios will narrow over the next few quarters.
This year's Federal Reserve stress test confirmed that we remain in a strong capital position, reflecting the value of our franchise and benefits of our operating model. This capital strength allows us to serve our customers financial needs, while continuing to prudently return excess capital to our shareholders.
As we previously announced we expect to increase our third quarter common stock dividend by 17% to 35 per share subject to approval by the company's board of directors at its regularly scheduled meeting later this month.
We repurchased $8 billion of common stock during the first half of this year and the stress test results demonstrated that we have the capacity to continue to repurchase common stock regulators a signal that the Basel III endgame proposal.
Which could be as soon as this summer we will include higher capital requirements that would be skewed to the country's largest banks.
While there is some speculation that capital requirements could increase by 20%. We don't know what the impact will be to wells Fargo. However, we do expect our capital requirements will increase while any changes to regulatory capital requirements are expected to be phased in gradually over several years, we are considering the potential.
Impacts in contemplating the amount of our future repurchases.
Our balance sheet is strong with increase and remained focus.
On increasing our earnings capacity and.
And continue to like our competitive position, we remain prepared for a variety of scenarios and our steadfast commitment to our risk and control buildout, coupled with our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles, I will now turn the call over to Mike.
Thank you Charlie and good morning, everyone.
Net income for the second quarter was $4 9 billion or $1 25 per diluted common share both up from a year ago, reflecting the progress we're making on improving our performance was highlighted throughout the call.
Starting with capital liquidity on slide three.
Our CET one ratio was 10, 7% down approximately 10 basis points from the first quarter.
During the second quarter, we repurchased $4 billion in common stock and as Charlie highlighted subject to board approval, we expect to increase our common stock dividend in the third quarter.
Our CET one ratio was one five percentage points above our current regulatory minimum plus buffers that was one eight percentage points above our expected new regulatory minimums plus buffers starting in the fourth quarter of this year.
While we expect to repurchase more common stock. This year, we believe continuing to maintain significant excess capital is appropriate until there's more clarity on the new capital requirements that Charlie highlighted.
Our liquidity position remains strong in the second quarter with our liquidity coverage ratio of approximately 23 percentage points above the regulatory minimum.
Turning to credit quality on slide five.
Overall credit quality remains strong, but as expected net loan charge offs continued to increase from historically low levels and were 32 basis points of average loans in the second quarter.
Commercial net loan charge offs increased $137 million for the first quarter to 15 basis points of average loans.
Approximately half of the increase was in commercial banking, where the losses were borrower specific with little signs of systematic weakness across the portfolio.
Rest of the increase was driven by higher losses in commercial real estate, primarily in the office portfolio.
I will share some more details on the CRE office exposure on the next slide.
Consumer net loan charge offs increased modestly up $23 million from the first quarter to 58 basis points of average loans.
The increase primarily came from the credit card portfolio as residential mortgage loans continued to have net recoveries and auto losses declined.
While consumer credit performance remained solid overall, and we continue to take incremental credit tightening actions across the portfolios. We expect consumer net loan charge offs will continue to gradually increase.
Nonperforming assets increased 14% from the first quarter as lower non accrual loans across the consumer portfolios were more than offset by higher commercial non accrual loans, primarily in the commercial real estate portfolio.
Our allowance for credit losses increased $949 million second quarter, primarily from four commercial real estate office loans as well as for higher credit card balances.
We've updated slide six which highlights our commercial real estate portfolio we.
154, $3 billion of commercial real estate loans outstanding at the end of the second quarter with $33 1 billion of office loans, which were down modestly from the first quarter and represented 3% of our out of our total loans outstanding.
The office market continues to be weak and the composition of our office portfolio was relatively consistent with what we shared with you the first quarter.
As Charlie mentioned, our CRE teams are focused on surveillance and de risking which includes reducing exposures and closely monitoring at risk loans.
This quarter, we added a table to a slide that breaks down our CRE office exposure in the context of our broader CRE portfolio.
As the slide shows our office loans at the end of the second quarter were primarily in corporate investment banking and then it all.
That is also where we had the most non accrual loans and the highest level of allowance for credit losses.
Last quarter, we disclosed for the first time the allowance for credit losses coverage ratio for the office portfolio in the corporate investment bank, which increased from five 7% at the end of the first quarter to eight 8% at the end of the second quarter.
This quarter, we are also providing our allowance for credit losses for our total CRE office portfolio, which was six 6% at the end of the second quarter up from four 4% at the end of the first quarter.
As we highlighted last quarter, we are providing this data to give you more insight into the portfolio with each property situation is different and there are many variables that can determine performance, which is why we regularly review this portfolio on a loan by loan basis.
For example, we have a property that are experiencing increased vacancies, where borrowers have decided to inject equity and make investments to improve the property even in cities with more difficult fundamentals.
We also have properties that are well leased and performing but borrowers need help refinancing.
In those situations, we are working with borrowers to restructure which in many cases includes some pay down the balance.
There are also situations that result in a sale are worked out of the asset.
We will continue to closely monitor this portfolio, but but as has been the case in prior cycles. This will likely play out over an extended period of time as we actively work with borrowers to help resolve issues that they may be facing.
On slide seven we highlight loans and deposits.
Average loans were relatively stable in the first quarter and were up 2% from a year ago, driven by higher commercial and industrial loans and commercial banking.
In credit card loans.
Specific drivers when discussing our operating segment results.
Average loan yields increased 247 basis points from a year ago, and 30 basis points from the first quarter due to the higher interest rate environment.
Average deposits declined 7% from a year ago, predominantly driven by deposit outflows and our consumer and wealth businesses, reflecting continued consumer spending and customers reallocating cash into higher yielding alternatives.
While down from a year ago average commercial deposits were relatively stable in the first quarter and average deposits grew in corporate and investment banking.
As expected our average deposit cost continued to increase up 30 basis points for the first quarter to 113 basis points with higher deposit costs across all operating segments in response to rising interest rates.
Our mix of noninterest bearing deposits decline from 32% in the first quarter was 30% in the second quarter, but remained above pre pandemic levels.
Turning to net interest income on slide eight.
Second quarter net interest income was $13 2 billion up 29% from a year ago as we continued to benefit from the impact of higher rates.
The $173 million decline from the first quarter was primarily due to lower deposit balances, partially offset by one additional day in the quarter.
At the beginning of the year, we expected full year net interest income to grow by approximately 10% compared with 2022.
We currently expect full year 2023, net interest income to increase approximately 14% compared with 2022.
There are a variety of factors that we considered in our expectation for the rest of the year we.
We are assuming modest growth in loans, but some additional deposit outflows and migration from noninterest bearing to interest bearing deposits as well as continued deposit repricing, including competitive pricing on commercial deposits.
Additionally, we are using recent the recent rate curve, which is shown on the slide.
As a result as a reminder, many of the factors driving net interest income are uncertain and we will need to see how each of these assumptions plays out during the remainder of the year.
Turning to expenses on slide nine.
Noninterest expense grew a $125 million or 1% from a year ago.
At the beginning of the year, we expected our full year of 2023 noninterest expense, excluding operating losses to be approximately 52 billion.
We currently expect our full year 2023 that interest expense, excluding operating losses to be approximately $51 billion.
The increase includes higher severance expense due to actions we have taken in the play and plan to take in 2023 as attrition has been slower than expected.
Of note, we've reduced head count each quarter since the third quarter of 2020, and head count declined 1% from the first quarter and 4% from a year ago.
As a reminder, we have outstanding litigation regulatory and customer remediation matters that could impact operating losses.
Turning to our operating segments, starting with consumer banking and lending on slide 10.
Consumer and small business banking revenue increased 19% from year ago as higher net interest income.
Driven by the impact of higher interest rates was partially offset by lower deposit related fees driven by the overdraft policy changes, we rolled out last year.
We continue to reduce the underlying cost to run the business as customers customers migrate to digital including mobile.
We've reduced our number of branches by 4% and branch staffing by 10% from a year ago.
While lending revenue declined 13% from a year ago, driven by lower net interest income due to loan spread compression and lower mortgage originations.
We continue to reduce head count in the second quarter down 37% from a year ago, and we expect set staffing levels will further declined during the second half of the year.
Credit card revenue increased 1% from a year ago due to higher loan balances.
Payment rates were down from a year ago, but have been stable over the last three quarters remained above <unk> levels.
New account growth remained strong up 17% from a year ago and importantly, the quality of the new accounts continued to be better than what we were booking historically.
Auto revenue declined 13% from a year ago, driven by the continued loan spread compression and lower loan balances.
Lending revenue was up 17% from a year ago due to higher loan balances.
Turning to some key business drivers on slide 11.
Mortgage originations declined 77% from a year ago, and increased 18% from FERC quarter, reflecting seasonality.
We funded our last correspondent loan in the second quarter with our current focus being serving our bank customers as well as borrowers and minority communities.
The size of our auto portfolio has declined for five consecutive quarters and balances were down 7% at the end of the second quarter compared to a year ago.
Origination volume declined 11% from a year ago, reflecting credit tightening actions as well as continued price competition.
As Charlie highlighted debit card spend was flat in the second quarter compared to a year ago spending a fuel due to lower gas prices home improvement and travel at the largest declines compared to last year.
Credit card spending continued to be strong it was up 13% from a year ago growth rates were stable throughout the second quarter with fuel the OLED category down year over year.
Turning to commercial banking results on slide 12.
Middle market banking revenue increased 51% from a year ago due to the impact of higher interest rates and higher loan balances.
Asset based lending and leasing revenue increased 13% year over year, primarily due to higher loan balances.
Average loan balances were up 12% in the second quarter compared to a year ago, driven by new customer growth was higher line utilization.
Average loan balances of growth for eight consecutive quarters of the pace of growth has slowed.
Average loans were up 1% from the first quarter with loan growth and asset based lending and leasing driven by seasonal seasonally higher inventory levels, while middle market banking loans were flat.
Turning to corporate investment banking on slide 13.
Banking revenue increased 37% from a year ago, driven by stronger Treasury management results, reflecting the impact of higher interest rates and higher lending revenue.
The growth in investment banking fees from a year ago reflected write downs taken in the second quarter of 2022.
Funded leveraged finance commitments.
Commercial real estate revenue grew 26% from a year ago, driven by the impact of higher interest rates and higher loan balances.
Markets revenue increased 29% from a year ago, driven by the higher trading results across most asset classes.
Our strong trading results during the first half of the year were driven by underlying market conditions and also reflected the benefit of our investments in technology and talent, which have allowed us to broaden our client franchise and generate more trading flows.
Average loans were down 2% from a year ago and 1% for the first quarter. The declines in the first quarter was driven by banking, reflecting a combination of slow demand and modestly lower line utilization.
On slide 14 wealth and investment management revenue was down 2% compared to a year ago, driven by a decline in asset based fees due to lower market valuations.
Growth in net interest income from a year ago was driven by the impact of higher rates, partially offset by lower deposit balances as customers continue to reallocate cash into higher yielding alternatives. However.
However, outflows into cash alternatives slowed in the second quarter.
As a reminder, the majority of the win advisory assets are priced at the beginning of the quarter. So second quarter results reflected the market valuations as of April one which were down from a year ago.
Asset based fees in the third quarter will reflect higher market valuations valuations as of July one.
Average loans were down 3% from a year ago, primarily due to the decline in securities based lending.
Slide 15 highlights our corporate results revenue increased $751 million from a year ago, driven by the impact of higher interest rates and lower impairments of equity securities and our affiliated venture capital and private equity businesses.
In summary, our results in the second quarter reflected continued improvement in our earnings capacity. We grew revenue and had strong growth in pre tax provision profit as expected our net charge offs continue to slowly increase from historical lows in our allowance for credit losses increased we are slowly we are closely monitoring our portfolios in chicken.
Tightening actions, where we believe appropriate our capital levels remained strong we continued to repurchase common stock we will now take your questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one at this time.
If at any time, while waiting in queue. Your question has been answered you can remove your request by pressing star two.
Once again that is star one for questions at this time.
Please standby for our first question.
Our first question will come from Ken Houston of Jefferies. Your line is open Sir.
Mr. <unk>, please check the mute button on your phone.
Why do we take another one and then we'll come back to Ken certainly the next question will come from Scott <unk> of Piper Sandler Your line is open.
Good morning, everyone. Thank you for taking the question.
It was great to see the higher NII guide and the performance this quarter.
That said it seems likely that dollars of NII will will come down from here I.
I guess just broadly speaking.
Are you able to chat about what factors might be most important.
I guess sort of your ability to arrest a downward move in NII in other words.
When and why we did end up flattening out if we're ideally getting close to the end of a fed tightening cycle.
Yes, Thanks, guys, Mike I'll take that and Charlie can jump in if you want.
When you look at the.
The assumptions in.
That underpin that.
And I highlighted some of this in my script, but I'll kind of go back through them.
Got a little bit of modest loan growth in there. So that's not a big driver of sort of what we're seeing and I think you're probably seeing that from from others, where we're just not seeing that same demand that we saw a year or so ago on sort of on loans.
We're also assuming that we'll see some additional outflows.
Particularly in the consumer space as people continue to spend money and then we will see some more migration from noninterest bearing to interest bearing deposits and then deposit pricing will betas will.
<unk> will evolve over time, I think it's still very competitive on the commercial side and I think that will continue on the consumer side that will evolve. So I think you've got to look at those those combination of factors and make some assumptions around when you think they start to stabilize.
And but I think we're assuming that those trends that we've been seeing now for the last couple of quarters. We will continue at least through the year end.
Okay perfect.
Perfect and maybe if we could drill down into one of those in particular, just the migration from noninterest bearing to interest bearing.
They've come down but are still above pre pandemic levels I believe do you have a sense for.
Where and why those would would start to settle out.
Yeah, I mean, there's a few factors underneath that as you pointed out we were about 30%.
At the end of the quarter down from about 32, I think the prior quarter.
And if you go back pre Covid there were in kind of the mid <unk> mid to upper twenties, depending on when exactly when you look at it so.
And we've been trending downward.
Of that as excess deposits on the commercial side as people use up their earnings credits for the fees. They are paying you are seeing some migration there that stabilizes.
And then <unk> seen again on the consumer side people spending from there their primary checking accounts.
So those are the factors that I would look at on on when that starts to.
The slowdown in stabilized, but it's been pretty consistent at least for the last quarter or two yes.
Yes.
Okay, Alright, thank you very much Mike.
Thank you. The next question will come from Ebrahim <unk> of Bank of America. Your line is open Sir.
Hey, good morning.
So Mike Thanks for the details on the CRE book I think Charlie you mentioned that you've gone through loan by loan and identifying and I. Appreciate Hey, do you think of that nature.
Total CRE loan, but given the reso you've taken this quarter give us a sense of your visibility around.
How well reserved bank yesterday.
Knowing what we know in terms of the macro outlook and also if you can comment on just.
The rest of the CRE book, particularly as it relates to San Francisco, or California, and New York.
You have enough comfort around just apartments et cetera have been in that market. Thank you.
Yes, thanks, I'll take that Mike.
Broadly I'll start on the broader point on CRE and I'll come back to office I think.
Gone through the multifamily portfolio quite in quite a lot of detail and I think.
No what I'm talking about the broader broader portfolio first right and so you talked about apartments in some cities and so I think when you look at the broader portfolio, including multifamily it's all performing quite.
Quite well.
And I think <unk> seen certainly a slowing of growth rates in rents, but theyre not declining in most cases youre seeing good occupancy rates in many of the new construction.
That's coming online and so so overall it feels quite constructive still for multifamily and that same theme really applies to the rest of the portfolio on office. That's the place where we're certainly seeing weakness and as you think about the allowance we put up.
We do have some.
Three specific borrower.
Borrower loan loan level estimates of what we think could play out over the next quarter next couple of next few quarters and that's embedded in the allowance and then as you look at the rest of the office portfolio, we've gone through a number of stress scenarios.
And feel like at this point we're appropriately.
Our reserve to be able to deal with what could be a number of different scenarios, depending on how it plays out over time.
And I guess just a separate question you obviously have the capital.
Johnny from your standpoint, how impactful is the asset cap today.
Given the squeeze on the rest of the industrial I would think would actually be gaining market share, but does the asset cap and all the regulatory issues I'm not going to ask you to give us a timeline, but is that still a meaningful challenge in terms of your ability to take market share.
Well I mean, you can look at the size of our balance sheet and see where it is relative to the asset cap, which is truly a $9 52 I think.
Yes, that's the actual cap member, which is a daily average over a couple of quarters. So.
Relative to we're operating today, we feel like we still have plenty of balance sheet to serve our customers and it is not standing in the way of that.
Isn't always been the case, but I think thats, where we are today, but putting just the pure economics of the asset cap aside.
It is something that when we look at the work we have to get done.
Fact that its there is a statement of.
And the reality that we still have more work to do and so it's critical that we continue on our road to complete that work and so that's the way we're thinking about it today.
And maybe I'll just add one thing when you look at some of the growth opportunities. We have Charlie highlighted some of the investment banking hires were making.
In large part we already have the exposure out too.
The client base there. So now it's about making sure we got the right people to go after the fee opportunity not necessarily extending a lot more balance sheet.
Health management and the growth opportunity there same same theme.
And even in the card space as we look at the.
The refreshed product line is doing really well, we've got more to come there.
And I think we've got plenty of room to.
To support many of the growth opportunities, we have even if we didn't.
Put out more have more exposure to support it.
Please go ahead. Thank you.
Thank you. The next question will come from Steven <unk> of Wolfe Research. Your line is open Sir.
Good morning, So wanted to start off with a question just on the NII outlook, certainly encouraging to see the guidance increase but you noted Mike that it does contemplate a modest level of loan growth and.
Just parsing some of your other comments, where you alluded to credit tightening signs of slowdown in the broader economy. What gives you confidence around some inflection in lending activity, especially given the flattish loan growth that we've seen this quarter.
Yes, well.
I think we're seeing we're certainly seeing growth in card. So I think we would we would expect that to continue.
And then in the rest of the portfolios.
We see a little bit of growth in the asset based lending and leasing business in the commercial bank.
Motor markets kind of flat, but at least this quarter.
And then you can see the consumer items. So I think we're hopeful that we'll see some growth as we got into second quarter, but as always Steve will we tried to do with guidance is give you guidance that.
It doesn't necessarily require every assumption to go go in our favor.
So the bigger drivers of uncertainty around NII for the rest of the year continue to be the same ones that we've been talking about now for the last couple of quarters, its really going to be deposits and deposit pricing. The loan the loan story will matter, but not not anywhere near to the same degree.
No. That's helpful color and just a follow up on expanse you cited the head count reductions and higher severance costs driving some upward pressure this year.
But just wanted to better understand how we should be thinking about the exit rate on expense once the head count actions that you cited are fully captured in the run rate and whether there's any plans maybe redeploy some of the NII windfall to reinvest back into business as we think about some of the potential benefits and the higher NII guidance you cited.
Yes, I think our our focus on expenses really hasnt changed over the last quarter or two as we've talked about now for a while we're going to continue to be very disciplined around the expense base. I think we're very much focused on making sure we execute and achieve the efficiencies that we've talked about.
And as we get to you.
And we'll sort of look at it.
After we do our work around the budget for next year, we'll go back through all the ups and downs like we normally do and give you some perspective there but.
Really the really the thinking around it hasnt changed.
And let me just add.
Okay.
I think when we laid out.
Our expense guidance.
We've got a series of questions about how we think of.
The variability of that number in the.
The environment and will the rest of our results impacted net debt number and I think as we.
We look at.
How were performing.
I think we.
<unk>.
It wouldn't be hard for us to make a bunch of decisions to hidden expense number.
But to the point is we our results have been relatively strong.
And so we are doing a series of things.
I don't I don't think about it as one time expenses, but we have there is a fair amount of subjective expenses that relate to business development product enhancements.
Enhancements and things like that that we do have the ability to.
Each year each quarter look at how we're performing and decide how much we want to spend and so as we look forward.
<unk>.
We're going to wait and see as we go through our budgeting process and we do a series of scenarios in terms of how things could play out next year, and then make that determination.
But as Mike said I think we do separate out the fact that we continue to believe that there are.
<unk> continued opportunities to drive efficiency throughout the company, we're not going to lose sight of that and that is separate from how much do we want to spend away from that.
And we'll talk more about that towards the end of the year.
Helpful color. Thanks, so much for taking my questions.
Thank you. The next question will come from John <unk> of Evercore ISI. Your line is open Sir.
Good morning.
Wanted to see if we can get to some of your updated thoughts on buybacks here you can see Q1 to 10 seven.
You indicated the 4 billion buyback in <unk>. When you expect to continue to buyback from here, but obviously Basel III end game is a factor and I heard you on.
You said youre contemplating buybacks as you look out from.
From here, so could you maybe help frame that for us what that could mean in terms of the pace of repurchases. Thanks.
Not really any more than I think thats I think what we said is.
As much clarity as.
We want to give at this time I think we are.
We have.
The substantial excess capital above.
The regulatory requirements.
And regulatory buffers and on top of the level of buffers that we have talked about running at.
<unk>.
And so we think that's prudent given the fact that it's likely that capital requirements are going up.
The reality to answer the.
Some of the timing in terms of the ability to answer the question from everything that we read is the same thing that you read its likely that we will learn later this month or early next month exactly what the proposal is and based upon that it will help us inform exactly.
Exactly how much room, we have for buybacks.
But there.
There are.
Most of the scenarios that we see there is room for us to continue the buyback program in a prudent way.
And still build required capital to whatever levels, we would have to require to be required to build them at.
And keep the kind of buffers that we want to keep so there are a bunch of moving pieces here and so it just it doesn't make sense to put any more numbers on it until we actually see what those proposals are.
Okay. Thank you that's helpful and then separately on the NII side.
Again I appreciate the updated guide for 'twenty three of the 14% maybe can you talk about.
When you're looking forward curve.
What could be the forward curve implications for NII as you look further out into 2024, if we do reach out.
Funds of around 4% implied by the forward curve, how much of a headwind to NII could that be for you and maybe also if you could just talk about the near term deposit trajectory. I know you mentioned still continued decline somewhat if you can help frame that target up thanks.
John I'm not going to give you much clarity on 2024, but I think the things you should think about obviously are going to be right on the on the commercial side.
Betas betas on the way up a pretty high betas on the way down are pretty high.
And the consumer side really hasnt moved much at this point.
And so you sort of have to go into your modeling looking at each of the components, a little bit a little bit differently.
And as we and I think many others have talked about over time like once rates peak there is likely some lag of continued repricing for for a while after rates peak and so you've got to think about all of all of how that goes in your model and then I think as I said in my script I think.
We've seen pretty consistent.
Performance across deposits over the last couple of quarters.
We're not seeing big shifts in behavior at this point and so we'll see how that goes over the coming quarters, but but theres still a lot of uncertainty in the assumptions that you go through that you have here and so you've got to you've got to make your best judgment on what you think is going to happen, but as you get closer to to.
At the end of the rate cycle, you've probably seen a lot of the.
Mix shift and repricing happening already and so what we will see how that goes.
And can I just add thank you yes.
Even just more broadly.
Just to be clear about we don't.
We're not looking specifically at giving guidance in terms of 2024, yet but at the same time just more broadly speaking, we are and have been out earning in NII.
And we've been very clear about that as we talk about getting towards our 15% of our OTC targets.
It's in a more normalized environment.
But at the same time, there are series of things.
We expect it to be able to do as we look forward a big part of it is growing the fees in the business as Mike spoke about we're not constrained by the asset catheter in our existing businesses.
And a lot of the things that we're doing whether it's in our wealth business weather.
Its in the card business.
Other it's in the corporate investment bank or middle market as well.
We do expect to see the fruits of that labor at the same time, we continue to stay very focused on expenses.
And then the other thing I would just remind everyone is there's lots of conversations around charge offs and things like that but.
Remember we are all required.
When we think about seasonal.
To be as forward looking as we possibly can you all know how we come up with a different scenarios.
And so the level of reserving that's been running through our P&L I think this is the fifth consecutive quarter. We've added to reserves, which is what's impacting the EPS of the company.
Has been based upon an environment, which at some point will be very different than what the expectation is sitting here. So I think you add all those things together and I.
I think it's important to think about all of those things as opposed to just NII itself.
Next question, operator, certainly we'll move on to Betsy <unk> of Morgan Stanley . Your line is open.
Hi, good morning.
Hey, Betsy.
Just two follow ups one on the reserve build in commercial real estate that I know you discussed a bit already I just wanted to understand how much of that was coming from.
You know really California, we all know there was a property that traded on California Street that total net discount. So I'm just wondering how much of it is.
California.
Office versus anything more broader based.
On that thanks.
Yes, but it's not isolated California, I think you see weakness in.
And a lot of cities these days and it really comes down to property specific stuff and even in California. We've got as many examples where clients are actually reinvesting in buildings, even if lease rates are.
Low or even empty in some cases as they are going into a workout. So.
So I think it really depends on building borrower and all the things we've already talked about in the script and it's less it's less focused on just California, and I just want to reemphasize, what Mike is saying and we've talked about this in the prepared remarks, which is.
We've all spent a bunch of time going through.
A very detailed review of the office portfolio.
The other day, we went through just a whole series of.
Things that we're seeing and I, just really want to make the point at which I said in my script, it's not theirs.
It is a very big mistake to think about loss content by looking at just where the property is again, we have examples in cities that are struggling where the structure of our loan is quite good the underlying property has very high lease rates.
For an extended period of time.
And then we can have a loan in a market, which is doing well, but for whatever reason that property is a specific issue in that property there are bunch of <unk>.
Potential termination dates in the shorter term.
So that's the level of detail that we've used to look at to come up with what we think the appropriate.
The level of reserving is.
And I think we've tried to.
B as well.
There was diligent as we can and stressing.
The scenarios that we see play itself out so that when we look at ourselves and we understand with seasonal reserving requires us to do that's what we're trying to accomplish that.
So would you and I think we all know like for the most part the commercial real estate loans are bullets, right, where the stress comes at that to.
The role.
And I guess I'm wondering.
Is this reserve add.
Black thing.
Entirety of the pre book.
Four.
That entirety overall rate risk or is this like a two year forward and part of the reason for asking the question just trying to understand if theirs.
How much risk there is for further increases in <unk> related reserve belt.
Yes, Mike I'll start and then either either.
Chime in or give your opinion, we have tried to take into account all of the risks, including refinance risk that exists in the portfolios looking at the current rate environment.
Cap rate expectations and things like that.
<unk>.
Is it possible that we have to add something in the future because we've learned more as time goes on we would never say no.
But again.
What we're trying to do is be holistic in the review of the portfolio based upon everything that we know.
And just as you can imagine when we sit in the room with the people.
That run the real estate business and all of the risk people. There is a range of opinions or people in there that would say we just it's hard.
To see losing this amount of money based upon what that individual things all of the underlying assumptions will play themselves out as.
And then there are others, where we say, we actually want to stress the scenario because it is possible and we have to give waiting to that and so that's how we come up with what this is but again, we're trying to.
Again, I don't know.
We're trying to be forward looking we're trying to be holistic and all of the risks that exist.
And part of the reason to show you those that additional disclosure. We made is so you can see exactly where the issues are relative to the rest of the office portfolio and the rest of the CRE and isolate just the the level of reserving that exists which is at this point is.
<unk>.
Got it.
I understand thank you.
Okay. Thank you. The next question will come from Gerard Cassidy of RBC capital markets. Your line is open.
Thank you good morning, guys.
Mike can you share with US you touched on this a little bit in response to one of the earlier questions, but when you guys are looking at your balance sheet and you're measuring your treasury functions on your assets and liabilities can you share with us what you're thinking for the second half of the year or into next year in terms of how you're managing that and how that may be different.
How are you positioned the balance sheet a year ago.
Yeah Gerard shortage.
Not that different right on the margin you may be making decisions.
To add a little duration here or there, but I'd say, it's marginal at this point.
And we really havent changed substantially how the how the balance sheet is positioned.
Very good and then just to follow up I know you guys have given some good details here on working through the commercial real estate portfolio.
Mike I think you said in your prepared remarks.
Some cases.
<unk> been able to get additional payments or equity investments from new borrowers to <expletive>.
Secure maybe a potential problem can you share with us some of the other work out solutions, you're using so you can get through this.
This period of adjustment that we're seeing in commercial real estate.
Yes sure.
Theres plenty of little structural enhancements you can make to feel better about it and then are there also and a lot of cases getting some partial pay downs and then you look at in your trading those for refinancing in term and I think he would give people a little bit more time to work through the.
This sets of issues.
I think we try really hard not to.
<unk> issues down the road and so if there are real issues that we need to deal with we tried to deal with them in the moment.
But there are a number of structural enhancements that we sort of work on with borrowers to get ourselves comfortable.
That we're setting alone up for for success.
Very good thank you.
Thank you. The next question will come from Erika Najarian of UBS. Your line is open.
Hi, Thanks for taking my question.
I wanted to ask a question on how you're interpreting the OCC and federal statement that they put out on June 29.
Encouraging lenders.
To find short term or temporary alone accommodation solution to their borrowers.
Is that really anything new or is that just standard operating procedures.
<unk>.
Or can you just sort of help.
You know.
A solution set that would allow you to work with your borrowers and perhaps delay classification.
Deterioration classification reclassification to GDR.
Yes, it's Mike I'll take that <unk> doesn't exist anymore, but the classification, but but the guidance is very similar to what was issued originally back I think in 2009, Hasnt really changed much and doesn't really change the way we have been interacting with our borrowers already.
In terms of really being proactive to work with them to find solutions to help them.
Work through what can be difficult circumstances in some cases.
And it doesn't it doesn't it.
It doesn't give you any leeway for how you classified criticized loans or other our other classifications. So.
The intent is related to just be clear that.
People should continue to work with borrowers to find solutions, which is what we do all the time anyway.
Got it and just a follow up question here.
Thank you for the disclosure again.
On slide six.
With $22 billion of your loans in CIB I think investors are wondering what is the average loan size there.
Yes, I don't think Thats, something we give and there was a wide range averages, sometimes theyre very misleading and so so there's a wide range and what really matters is not the loan size. It really matters what merely managers are all the variables Charlie talked about earlier in terms of what's happening with that property.
So I think that would be.
I think I would focus there.
Got it and just squeezing in one more question and before I ask this expense question.
I think your investors very much appreciate it that youre not just given whatever you had to hit an expense number and you're reinvesting back into the company.
This is Allen I'm wondering is have you disclosed how much of the.
$800 million increase in the outlook for this year.
Chuck you do it.
Brian .
We didn't give an exact number but that is by far the single largest piece of it that's part of it and there are some other exit costs for properties as we.
Some lease space and other things, but that is the San Francis by far the largest piece.
Got it thank you.
Thank you.
Thank you. The next question comes from Matt O'connor of Deutsche Bank. Your line is open.
Good morning, I wanted to follow up Charlie on some of your prepared remarks, you talked about there is still some things that you're implementing to address regulatory issues.
I'm wondering if you could give a couple of examples of what still needs to be done in terms of implementation and when do you expect that to be completed.
Listen I think.
As we've said there's a lot of work to do it is multi years.
Worth of deliverables.
What we've what I've said is that we have implemented.
A lot, but we still have more to do and.
But I say that I, just want to be clear I'm speaking of.
Everyone generally things I'm speaking about one of the consent orders, which has the asset cap. We're thinking about all of the work that we have to do related to all the consent orders and the work to build the control environment.
And there is a lot getting done.
But ultimately what matters.
You don't get in a for effort in this it's about getting things over the finish line on time and getting them done to the with the.
Quality that our regulators and we expect from each other and so as you know we've been very careful not to put data out there.
We have to do our work and then our regulators have to take a look at it and see if it's done to their satisfaction. We don't want to get ahead of that process.
But we continue to move forward.
And I understand that.
You can't speak for them signing off on what you've done but.
In terms of you accomplishing what you want to accomplish where are you on that kind of process like whether you want to frame it from an earnings perspective.
<unk> basis.
Hum.
The way to frame that acknowledging there's a lot to do and what you've done a lot, but how far along are you.
In terms of what you can control on implementing these things.
Yes, no listen I appreciate the.
Your desire to have me answer those questions but.
Again, all that matter it does.
Our view of accomplishing the work doesn't matter what matters is that our regulators.
Look at it and save sent to their satisfaction. So I really don't think it's helpful or productive.
Go beyond what I've said at this point, but again I do if I do understand and appreciate why you're asking.
Understood fair enough. Thank you.
Thank you. The next question comes from Vivek <unk> of J P. Morgan per line is open.
Hi, Thanks, a quick one.
Mike Charlie can you give us the maturity schedule.
Percentage or amount of.
Your office CRE loans that are maturing in the second half and into 2024.
Not not specifically Vivek, we don't disclose that but you should assume these are standard course loans in the commercial real estate space, which are generally three to five year loans.
Okay.
And you haven't really been originating much in the last couple of years. So I guess, we could go back to.
I'm looking at when when did you slow down the origination of New office CRE, Mike was it two years ago was it three it makes any color on that.
Yes look I think you have to you have to remember that we've been refinancing.
Existing facilities, along that time period so.
But I think if you if you take the if you take the portfolio and assume some kind of basic average life based on what I said I think you'll get a pretty good sense of.
The.
Proximate maturity schedule.
Okay.
And how about multifamily what's the average life of those loans.
Maturities, there I I recognize you'll comment.
Comments of those are in much better position.
Given all the factors you already signed it.
Slightly longer few years longer than CRE than office.
Okay.
Alright, thank you.
And our final question for today's call will come from Charles <unk> of <unk> Partners. Your line is open Sir.
Good morning.
Most of my questions were already asked.
But just wanted to follow up on the consent order issues, if I recall correctly and please correct me if I'm wrong, there's six consent orders remaining in three of them.
Remember deals somewhat with the mortgage banking operation.
I know starting last fall you you started the planning effort to simplify and downsize that.
<unk> been executing on that this year can.
Can you give us a sense of what it is you need to do in mortgage banking.
Related to those consent orders.
Yes, Charles it's Mike. So so first of all they're nine public consent orders out there that are that are all there. So you can you can see those the but when you look at the mortgage ones I think for each of the consent orders is actually quite clear in terms of what needs to happen to.
So I would I would just point you back to the documents themselves, which which can give you a pretty good sense of what it what it is and each one's a little bit different.
Follow up then.
Do you talk to the regulators about the progress youre, making in mortgage banking on a monthly basis or quarterly basis semi annual or do you do do present something at the end how does the interaction with regulators.
Our regulators co.
We talked to our regulators all the time.
At all at all parts of the company at all levels of the company and so you should you should assume we're actively engaged consistently with our regulators all the time.
But the one thing I would add to that is.
But again there.
They are here they are onsite, we talked to them literally all the time right no I understand that.
Specifically related to the progress Youre, making.
Could you just give me a second.
We talked to them about everything.
And given the importance of the consent orders you can assume it's about the work that's going on in the underlying consent order, but having said all of that.
What matters is the work that they do at the end of the consent order after we submitted to them.
And so they can be up to speed on what we're doing they can know how we feel about the progress that we're making.
But at the but when we submit a consent order to them they come in and do their holistic review.
And so that's really where their determination is made about whether or not it's done to their satisfaction. So again that just gets to the question. The reason why I wanted to be very careful about not drawing any conclusions from our view on our worker any interim comments, we might get from them.
What really matters is the holistic review that they do and the process that they go through internally in the regulatory organizations.
So that was part of my first question is have you submitted anything yet on mortgage banking.
We're not we're not going to talk about that I've said that over and over and over again.
Thank you.
Okay.
Listen thank you very much everyone. We appreciate the time and we'll talk to you all soon.
Thank you all for your participation on today's conference call at this time all parties may disconnect.