Wells Fargo - Q2 2023

Transcript

Operator (participant)

Welcome, 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 speaker's 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 you 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.

John Campbell (Director of Investor Relations)

Good morning. Thank you, everyone, for joining our call today, where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, 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 wellsfargo.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 and the earnings and materials available on our website.

I will now turn the call over to Charlie.

Charlie Scharf (Chairman and CEO)

Thank you, John. Good morning, everyone. As usual, I'll make some brief comments about our second quarter results. Update you on our priorities. I'll 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 ROTCE, all higher than a year ago. The revenue growth reflected strong Net Interest Income growth, as well as higher non-interest income. While our efficiency ratio improved and we continued to make progress on our efficiency initiatives, we had modest expense growth from a year ago. Net charge-offs have continued to increase from historical low levels. Overall credit quality was strong. Consumer and business balance sheets remain 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 to date, our detailed loan-by-loan review of the portfolio has given us a sense how the next several quarters could play out. 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 determine 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 renewal notice dates, loan structure, and borrower behavior.

Most importantly, our CRE teams remain focused on working with our clients for portfolio surveillance and de-risking to minimize loss content. Both commercial and consumer average loans were 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 remains strong, but the rate of growth has slowed from the outsized growth rates we saw throughout 2022. Debit card spending was flat from a year ago, with growth in discretionary spend offset by declines in nondiscretionary spend. Average deposits were down from the first quarter, driven by lower consumer deposits, while the decline in commercial deposits slowed. Now let me update you on progress we've made on our strategic priorities, starting with our risk and control work.

Regulatory pressure on banks with long-standing issues, such as ours, continues to grow, and as such, our continued intensive effort to complete the build-out of an appropriate risk and control framework for a company of our size and complexity is critical. I 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 implementation to do, as well as work to make sure the changes operate effectively over time. As I've said before, we remain at risk of further regulatory actions until the work is complete. While we're devoting all necessary resources to our risk 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. 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 of April, our customers have interacted with Fargo over 4 million times. We've continued to make important hires, bringing new expertise to Wells Fargo in businesses we are looking to grow. We named Barry Simmons as the new head of national sales in Wealth and Investment Management. He'll be critical in our efforts to better serve clients and 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 of global mergers and acquisitions....

Co-head of Financial Institutions, and new heads of Financial Sponsors, Equity Capital Markets, Healthcare, and Technology, Media, and Telecom. We also continue to focus on better serving our communities. We announced a 10-year strategic partnership with T.D. Jakes Group that could result in up to $1 billion in capital and financing through Wells Fargo to drive economic vitality and inclusivity in communities across America. The Wells Fargo Foundation awarded seven and a half million dollars to Habitat for Humanity to build and repair more than 360 homes nationwide. We've worked 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 UnidosUS Home Initiative to create 4 million new Latino homeowners by 2030.

We provided the initial grant to start a fund launched by Fintech Hello Alice, to improve access to credit and capital for small business owners who are members of underserved groups, including women. We continue to open HOPE Inside centers in 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 DE&I strategy and initiatives, both 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.

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 the range of scenarios will narrow over the next few quarters. This year's Federal Reserve stress test affirmed 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 $0.35 per share, subject to approval by the company's board of directors at its regularly scheduled meeting later this month.

We've repurchased $8 billion of common stock during the first half of this year. The stress test results demonstrated that we have the capacity to continue to repurchase common stock. Regulators have signaled that the Basel III endgame proposal, which could be out as soon as this summer, will include higher capital requirements that would be skewed to the country's largest banks. While there's 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 and contemplating the amount of our future repurchases. Our balance sheet is strong. We've increased and remained focused on increasing our earnings capacity and continue to like our competitive position.

We remain prepared for a variety of scenarios, and our steadfast commitment to our risk and control build-out, 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.

Mike Santomassimo (CFO)

Thank you, Charlie. 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 are making in improving our performance, which I'll highlight throughout the call. Starting with capital and liquidity on slide three, our CET1 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 CET1 ratio is 1.5 percentage points above our current regulatory minimum, plus buffers, and was 1.8 percentage points above our expected new regulatory minimum, 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 is more clarity on the new capital requirements that Charlie highlighted. Our liquidity position remained strong in the 2nd quarter, with our liquidity coverage ratio approximately 23 percentage points above the regulatory minimum. Turning to credit quality on slide five. Overall, credit quality remains strong, as expected, net loan charge-offs continued to increase from historically low levels and were 32 basis points of average loans in the 2nd quarter. Commercial net loan charge-offs increased $137 million from the 1st 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.

The rest of the increase was driven by higher losses in commercial real estate, primarily in the office portfolio. I'll 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 remains solid overall, we've continued to take incremental credit tightening actions across the portfolios, we expect consumer net loan charge-offs will continue to gradually increase. Non-performing assets increased 14% from the first quarter, as lower nonaccrual loans across the consumer portfolios were more than offset by higher commercial nonaccrual loans, primarily in the commercial real estate portfolio.

Our allowance for credit losses increased $949 million in the second quarter, primarily for 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 had $154.3 billion in 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 total loans outstanding. The office market continues to be weak. The composition of our office portfolio is relatively consistent with what we shared with you in 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 this 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 that is also where we had the most nonaccrual 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 5.7% at the end of the first quarter to 8.8% 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 6.6% at the end of the second quarter, up from 4.4% at the end of the first quarter. As we highlighted last quarter, we're providing this data to give you more insight into the portfolio, but 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 properties 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 of the balance. There are also situations that result in a sale or work out of the asset. We will continue to closely monitor this portfolio, 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 from the first quarter and were up 2% from a year-ago, driven by higher commercial and industrial loans in commercial banking and credit card loans. I'll highlight 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 in 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 from the first quarter, and average deposits grew in corporate and investment banking. As expected, our average deposit costs continued to increase, up 30 basis points from the first quarter to 113 basis points, with higher deposit costs across all operating segments in response to the rising interest rates. Our mix of non-interest-bearing deposits declined from 32% in the first quarter to 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 continue 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've considered in our expectation for the rest of the year.

We are assuming modest growth in loans, some additional deposit outflows, and migration from non-interest bearing to interest-bearing deposits, as well as continued deposit repricing, including competitive pricing on commercial deposits. Additionally, we are using the recent rate curve, which is shown on the slide. 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. Non-interest expense grew $125 million, or 1% from a year ago. At the beginning of the year, we expected our full year 2023 non-interest expense, excluding operating losses, to be approximately $50.2 billion. We currently expect our full year 2023 non-interest expense, excluding operating losses, to be approximately $51 billion.

The increase includes higher severance expense due to actions we have taken and plan to take in 2023, as attrition has been slower than expected. Of note, we've reduced headcount each quarter since the third quarter of 2020, and headcount 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 segment, starting with consumer banking and lending on slide 10. Consumer and small business banking revenue increased 19% from a 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 migrate to digital, including mobile. We've reduced our number of branches by 4% and branch staffing by 10% from a year ago. Home 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 headcount in the second quarter, down 37% from a year ago, and we expect staffing levels will further decline 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 and remained above pre-pandemic levels.

New account growth remains 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 continued loan spread compression and lower loan balances. Personal 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 the first 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 in 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 on fuel due to lower gas prices, home improvement and travel had the largest declines compared to last year. Credit card spending continued to be strong and was up 13% from a year ago. Growth rates were stable throughout the second quarter, with fuel the only 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 and higher line utilization. Average loan balances have grown for eight consecutive quarters, though 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 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 on unfunded 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% from the first quarter. The decline from the first quarter was driven by banking, reflecting a combination of slow demand and modestly lower loan 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 continued to reallocate cash into higher-yielding alternatives. Outflows into cash alternatives slowed in the second quarter. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so second quarter results reflected the market valuations as of April 1st, which were down from a year-ago. Asset-based fees in the third quarter will reflect higher market valuations as of July 1st. Average loans were down 3% from a year-ago, primarily due to 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 in 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 continued to slowly increase from historical lows, and our allowance for credit losses increased. We are closely monitoring our portfolios and taking credit tightening actions where we believe appropriate. Our capital levels remain strong, and we continue to repurchase common stock. We will now take your questions.

Operator (participant)

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 stand by for our first question. Our first question will come from Ken Usdin of Jefferies. Your line is open, sir. Mr. Usdin, please check the mute button on your phone.

Mike Santomassimo (CFO)

Why don't we take another one and then we'll come back to Ken?

Operator (participant)

Certainly. The next question will come from Scott Siefers of Piper Sandler. Your line is open.

Scott Siefers (Managing Director and Senior Research Analyst)

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, you know, seems likely that dollars of NII will come down from here. I guess, just broadly speaking, are you able to chat about what, you know, factors might be most important in just sort of your ability to arrest a downward move in NII? In other words, kind of when and why would it end up flattening out if we're ideally getting close to the end of a Fed tightening cycle?

Mike Santomassimo (CFO)

Yeah, thanks, Scott. It's Mike. I'll take that, and Charlie can jump in if you want. You know, when you look at the, you know, the assumptions that underpin that, I highlighted some of this in my script, but I'll kind of go back through them. You know, we've got a little bit of modest loan growth in there. That's not a big driver of sort of what we're seeing. I think you're probably seeing that, you know, from others where we're just not seeing that same demand that we saw, you know, a year or so ago on sort of on loans. We're also assuming, you know, that we'll see some additional outflows, you know, particularly in the consumer space, as people continue to spend money.

We'll see some more migration from non-interest bearing to interest bearing deposits. You know, deposit pricing will, you know, betas will, you know, will evolve over time. I think it's still very competitive on the commercial side, and I think that'll continue on the consumer side, but it'll evolve. I think you got to look at those combination of factors and, you know, make some assumptions around when you think they start to stabilize. You know, but I think we're assuming that, you know, those trends that we've been seeing now for the last couple of quarters will continue at least through the year end.

Scott Siefers (Managing Director and Senior Research Analyst)

Okay, perfect. Maybe if we could drill down into one of those, in particular, just the migration from non-interest bearing to interest bearing. You know, they've come down, but are still above pre-pandemic levels, I believe. Do you have a sense for where and why those would start to settle out?

Mike Santomassimo (CFO)

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. You know, if you go back pre-COVID, they were in kind of the mid-20s, mid to upper 20s, depending on when exactly when you look at it. We've been trending downward. You know, part of that is excess deposits on, you know, the commercial side. You know, as people use up their earnings credits, for the fees they're paying, you're seeing some migration there. That stabilizes. You've seen, again, on the consumer side, you know, people spending from their, you know, their primary checking accounts.

Those are the factors that I'd look at on when that starts to, you know, slow down and stabilize. It's been pretty consistent, at least for the last quarter or two.

Scott Siefers (Managing Director and Senior Research Analyst)

Yeah. Okay. All right. Thank you very much, Mike.

Operator (participant)

Thank you. The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir.

Ebrahim Poonawala (Managing Director)

Hey, good morning. Mike, thanks for the details on the CRE book. I think Charlie mentioned that you've gone through loan by loan in identifying, I appreciate the idiosyncratic nature of every sort of CRE loan. Given the reserve you've taken this quarter, give us a sense of your visibility around how well reserved the bank is today, knowing what we know in terms of the macro outlook. Also, if you can comment on just the rest of the CRE book, particularly as it relates to San Francisco or California, and your level of comfort around just apartments, et cetera, within that market. Thank you.

Mike Santomassimo (CFO)

Yeah, thanks. I'll take that. It's Mike. You know, broadly, I'll start on the broader point on CRE, and I'll come back to office. You know, we've gone through the multifamily portfolio in quite a lot of detail.

Ebrahim Poonawala (Managing Director)

Office, you're talking?

Mike Santomassimo (CFO)

No, I'm talking about the broader portfolio first, right? You talked about apartments in some cities, and so I think when you look at, you know, the broader portfolio, including multifamily, it's all performing quite, you know, quite well. I think, you know, you've seen certainly a slowing of growth rates in rents, but they're not declining in most cases. You're seeing good occupancy rates in many of the new construction that's coming online. So overall, it feels quite constructive still for multifamily. That same theme really applies to the rest of the portfolio. On office, you know, that's the place where, you know, we're certainly seeing weakness.

As you think about the allowance we put up, you know, we, you know, we do have some, you know, very specific, you know, borrower loan level estimates of what we think could play out over the next quarter, next few quarters, and that's embedded in the allowance. 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 reserved to be able to deal with what could be a number of different scenarios, depending on how it plays out over time.

Ebrahim Poonawala (Managing Director)

Got it. I guess just a separate question, you obviously have ample capital. Just, Charlie, from your standpoint, how impactful is the asset cap today, given the squeeze on the rest of the industry? I would think Wells would actually be gaining market share, but is 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?

Charlie Scharf (Chairman and CEO)

Well, I mean, you can look at the size of our balance sheet.

Ebrahim Poonawala (Managing Director)

Yep.

Charlie Scharf (Chairman and CEO)

You know, see where it is relative to the asset cap, which is, you know, $1 trillion 952, I think?

Mike Santomassimo (CFO)

It's the asset cap, yeah.

Charlie Scharf (Chairman and CEO)

Yeah, that's the actual cap, remember, which is a daily average over a couple of quarters. Relative to where we're operating today, we feel like, you know, we still have plenty of balance sheet to serve our customers, and it's not standing in the way of that. Hasn't always been the case, but I think that's where we are today. Putting just, you know, the pure economics of the asset cap aside, it is, you know, something that, you know, when we look at, you know, the work we have to get done, the fact that it's there is a statement of the, you know, the reality that we still have more work to do. 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.

Mike Santomassimo (CFO)

Maybe I'll just add one thing. When you look at some of the, you know, growth opportunities we have, you know, Charlie highlighted some of the investment banking hires we're making. In, you know, in large part, we already have the exposure out to, you know, to the, you know, client base there. 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. Wealth management, you know, and the growth opportunity there, same theme. Even in the card space, as we look at, you know, the refresh product line's doing really well. We've got more to come there.

I think we've got plenty of room to, you know, continue to support many of the growth opportunities we have, even if we didn't, you know, have more exposure to support it.

Ebrahim Poonawala (Managing Director)

Good color. Thank you.

Operator (participant)

Thank you. The next question will come from Steven Chubak of Wolfe Research. Your line is open, sir.

Steven Chubak (Managing Director and Senior Equity Research Analyst)

Hey, good morning.

Charlie Scharf (Chairman and CEO)

Good morning.

Steven Chubak (Managing Director and Senior Equity Research Analyst)

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. 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?

Mike Santomassimo (CFO)

Yeah, well, you know, I think we're seeing, you know, we're certainly seeing growth in card, so I think we would, we would expect that to continue. You know, then in the rest of the, you know, portfolios, you know, we see a little bit of growth in the asset-based lease lending and leasing, you know, business in the commercial bank. You know, middle market's kind of flat, but at least this quarter. Then you can see the consumer items. I think, you know, we're hopeful that we'll see some growth, you know, as we go into the second quarter. As always, you know, Steve, what we try to do with guidance is give you guidance that, you know, it doesn't necessarily require every assumption to go in our favor.

The bigger drivers of uncertainty around, you know, NII for the rest of the year continue to be the same ones we've been talking about now for the last couple of quarters. It's really going to be deposits and deposit pricing. You know, the loan story will matter, but not anywhere near to the same degree.

Steven Chubak (Managing Director and Senior Equity Research Analyst)

No, it's helpful color. Just to follow up on expense, you know, you cited the headcount reductions and higher severance costs driving some upward pressure this year. Just wanted to better understand how we should be thinking about the exit rate on expense once the headcount actions that you cited are fully captured in the run rate, and whether there's any plans to maybe redeploy some of the NII windfall to reinvest back in the business as we think about some of the potential benefits and the higher NII guidance you cited.

Mike Santomassimo (CFO)

Yeah, you know, I think our focus on expenses really hasn't changed, you know, over the last, you know, quarter or two. You know, as we've talked about now for a while, you know, 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. As we get to year-end, we'll sort of look at, you know, after we do our work around the budget for next year, we'll go back through, you know, all the ups and downs like we normally do and give you some perspective there. Really the thinking around it hasn't changed.

Charlie Scharf (Chairman and CEO)

Let me just add, Steven, if it's okay. You know, I think when we laid out, our expense guidance, we got a series of questions about, you know, how we think of, you know, the variability of that number and the, you know, the environment and will the rest of our results, impact that number. I think, you know, as we look at, how we're performing, I think you know, it wouldn't be hard for us to make a bunch of decisions to hit an expense number. To the point is, we, you know, our results have been relatively strong.

We are doing a series of things, you know, I don't think about it as one-time expenses, but we have a, you know, there is a fair amount of subjective expenses that relate to business development, product, enhancements and things like that we do have the ability to, you know, each year, each quarter, look at how we're performing and decide how much we want to spend. As we look forward, you know, I think 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.

As Mike said, I think, you know, we do separate out the fact that, you know, we continue to believe that there are, you know, opportunities to drive efficiency throughout the company. We're not going to lose sight of that. That is separate from how much do we want to spend away from that? We'll talk more about that towards the end of the year.

Steven Chubak (Managing Director and Senior Equity Research Analyst)

Helpful, caller. Thanks so much for taking my questions.

Operator (participant)

Thank you. The next question will come from John Pancari of Evercore ISI. Your line is open, sir.

John Pancari (Senior Managing Director and Senior Research Analyst)

Good morning. Wanted to see if we can get just some of your updated thoughts on buybacks here. You see Q1 $10.7, you know, you indicated the $4 billion buyback in Q2 when you expect to continue to buy back from here. Obviously, Basel III endgame is a factor, and I heard you on, you know, that you're contemplating buybacks as you look out from here. Could you maybe help frame that for us, what that could mean in terms of the pace of repurchases? Thanks.

Charlie Scharf (Chairman and CEO)

You know, not really any more than, I think what we said is, you know, as much clarity as, you know, we want to give it this time. I think, you know, we are, you know, we have substantial excess capital above the regulatory requirements and regulatory buffers, and on top of, you know, the level of buffers that we have talked about running at. We think that's prudent given the fact that, you know, it's likely that capital requirements are going up.

You know, the reality, you know, to answer the question, you know, just in terms of the timing, in terms of the ability to answer the question, you know, from everything that we read is the same thing that you read, it's, you know, likely that we will learn later this month or early next month exactly what the proposal is. You know, based upon that, it'll help us inform exactly how much room we have for buybacks.

You know, in, you know, there are, you know, in most of the scenarios that, you know, we see, you know, there is, you know, room for us to continue the buyback program in a prudent way, and still build the required capital to whatever levels we'd have to require to be required to build them at, and keep the kind of buffers that we want to keep. There are a bunch of moving pieces here, it just, it doesn't make sense to put any more, you know, numbers on it until we actually see what those proposals are.

John Pancari (Senior Managing Director and Senior Research Analyst)

Okay. Thank you. That's helpful. Separately, on the NII side, again, appreciate the updated guide for 2023 at the 14%. Maybe can you talk about, when you look at the forward curve, you know, what could be the forward curve implications for NII as you look further out into 2024? If we do reach a, you know, Fed funds of around 4% implied by the forward curve, how much of a headwind to NII could that be for you? Maybe also if you could just talk about the near-term deposit trajectory. I know you mentioned still continued decline. I don't know if you can help frame that, size it up. Thanks.

Charlie Scharf (Chairman and CEO)

Yeah, John, I'm not going to, you know, give you much clarity on 2024, but I think the things you should think about, obviously, are going to be, you know, as rate, you know, on the, on the commercial side, you know, rate betas on the way up are pretty high. Betas on the way down are pretty high. You know, the consumer side really hasn't moved much at this point. You know, you sort of have to go into your modeling, looking at each of the components a little bit, a little bit differently. As we, and I think many others have talked about over time, like, once rates peak, there is likely some lag of continued repricing, you know, for a while after rates peak.

You've got to think about all of how that, you know, goes into your model. Then I think, as I said in my script, I think, you know, we've seen pretty consistent, you know, performance across deposits over the last couple quarters. We're not seeing, you know, big shifts in behavior at this point. So we'll see how that goes over the, you know, coming quarters. There's, you know, there's still a lot of, you know, uncertainty in the assumption set that you go through, that you have here, so you gotta make your best judgment on what you think is going to happen.

As you get closer, you know, to the end of the rate cycle, you've probably seen, you know, a lot of the, you know, mix shift and repricing happening already, we'll, but we'll see how that goes. Can I just add?

John Pancari (Senior Managing Director and Senior Research Analyst)

Thank you. Yeah.

Charlie Scharf (Chairman and CEO)

You know, just even just more broadly, just to, you know, you know, be clear about, you know, we don't, you know, we're not looking, you know, specifically, at giving guidance in terms of 2024 yet. At the same time, just, you know, more broadly speaking, you know, we are and have been out earning an NII. We've been very clear about that as we talk about, you know, getting towards our 15% ROTCE targets. It's, it's in a more normalized environment. At the same time, you know, there are, you know, a series of things that, you know, we expect to be able to do as we look forward. You know, a big part of it is growing the fees in the business, as Mike spoke about. We're not constrained by the asset cap. They're in our existing businesses.

A lot of the things that we're doing, whether it's in our Wealth business, whether it's in the Card business, whether it's in the Corporate Investment Bank, or Middle Market as well, we do expect to, you know, see the fruits of that labor. At the same time, we continue to stay very focused on expenses. The other thing I would just remind everyone is, you know, there's lots of conversations around charge-offs and things like that. Remember, we are all required, when we think about CECL, you know, to be as forward-looking as we possibly can. You all know how we come up with the different scenarios.

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, you know, has been, you know, based upon an environment which, at some point, will be very different than what the expectation is sitting here. I think you add all those things together, and I just think it's important you think about all those things as opposed to just NII itself. Next question, operator.

Operator (participant)

Certainly. We'll move on to Betsy Graseck of Morgan Stanley. Your line is open.

Betsy Graseck (Managing Director and Global Head of Banks and Diversified Finance Research)

Hi, good morning.

Charlie Scharf (Chairman and CEO)

Hey, Betsy.

Betsy Graseck (Managing Director and Global Head of Banks and Diversified Finance Research)

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, really California. We all know there was a property that traded on California Street that sold at a discount. I'm just wondering how much of it is, California office versus anything more broader based, beyond that? Thanks.

Mike Santomassimo (CFO)

Yeah, Betsy, it's not isolated to California. I mean, I think you see weakness in a lot of cities these days, and it really comes down to property-specific stuff. And even in California, you know, we've got, you know, as many examples where, you know, 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. I think it really depends on building, borrower, and all the things we sort of talked about in the script, and it's less focused on just California.

Charlie Scharf (Chairman and CEO)

Yeah, I just want to reemphasize what, you know, Mike is saying, and we talked about this in the prepared remarks, which is, you know, we have all spent, you know, a bunch of time going through a very detailed review of the office portfolio. Just the other day, we went through just a whole series of things that we're seeing. I just really want to make the point, which I said in my script, it's not it's 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, of our loan is quite good. The underlying property has very high lease rates, you know, for an extended period of time.

Then we can have a loan in a market which is doing well, but for whatever reason, that property, it's a specific issue in that property. There are a bunch of, you know, 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, you know, what we think the appropriate level of reserving is. You know, I think, you know, we've tried to, you know, be as, you know, as diligent as we can in stressing the scenarios that we see play itself out, so that when we look at ourselves and we understand what CECL reserving requires us to do, that's what we're trying to accomplish.

Betsy Graseck (Managing Director and Global Head of Banks and Diversified Finance Research)

Would you... I mean, and I think we all know, like, for the most part, commercial real estate loans are bullets, right? Where the stress comes at the roll. I guess I'm wondering, is this reserve ad reflecting the entirety of the CRE book for, you know, that entirety of roll rate risk? Or is this, you know, like a two-year forward? Part of the reason for asking the question is trying to understand if there's, you know, if, how much risk there is for further increases in CRE-related reserve builds.

Charlie Scharf (Chairman and CEO)

Yeah, Mike, I'll start, and then you either chime in or give your opinion. We have tried to take into account all of the risks, including refinance risks that exist in the portfolios, looking at, you know, the current rate environment, cap rate expectations, and things like that. You know, is it possible that we have to add something in the future because we learn more as time goes on? We would never say no. Again, you know, what we're trying to do is be holistic in the review of the portfolio based upon everything that we know. Just as you can imagine, when we sit in the room with the people, you know, that run the real estate business and all the risk people, there's a range of opinions.

There are people in there that say, "We just, you know, it's hard to see losing this amount of money" based upon what that individual thinks all of the underlying assumptions will play themselves out as. Then, you know, there are others where we say, we actually, you know, want to stress the scenario because it is possible, and we have to give a weighting to that. That's how we come up with what this is. Again, I, you know, we're trying to, Again, I don't know, you know, just we're trying to be forward-looking. We're trying to be holistic, in all the risks that exist.

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 CRE, and isolate just the, you know, the level of reserving that exists, which is, you know, at this point, is substantial.

Betsy Graseck (Managing Director and Global Head of Banks and Diversified Finance Research)

Got it. I understand. Thank you.

Operator (participant)

Thank you. The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.

Gerard Cassidy (Managing Director)

Thank you. Good morning, guys. Mike, can you share with us, you touched on this a little bit in the 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 than how you positioned the balance sheet a year ago?

Mike Santomassimo (CFO)

Yeah, Gerard, sure. It's, you know, it's not that different, right? On the margin, you know, you may be making decisions, you know, to, you know, add a little duration here or there, but I'd say it's marginal at this point, and we really haven't changed, substantially how the balance sheet's positioned.

Gerard Cassidy (Managing Director)

Very good. 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, you know, in some cases you've been able to get additional payments or equity investments from your borrowers to, you know, to cure maybe a potential problem. Can you share with us some of the other workout solutions you're using so, you know, you can get through this, you know, this period of adjustment that we're seeing in Commercial Real Estate?

Mike Santomassimo (CFO)

Yeah, I mean, sure. It's not, you know. There's plenty of little structural, you know, enhancements you can make to feel better about it. Then you're also, in a lot of cases, getting some partial paydowns. Then you look at, and you're trading those for, you know, refinancing and term. I think you give people a little bit more time to work through the sets of issues. You know, I think we try really hard not to punt issues down the road. If there are real issues that we need to deal with, we try to deal with them in the moment.

There are a number of structural enhancements that we sort of work on with borrowers to get ourselves comfortable, that we're setting the loan up, for success.

Gerard Cassidy (Managing Director)

Very good. Thank you.

Operator (participant)

Thank you. The next question will come from Erika Najarian of UBS. Your line is open.

Erika Najarian (Managing Director)

Hi, thanks for taking my question. I wanted to ask a question on how you're interpreting the OCC and Fed joint statement that they put out on June 29th. You know, encouraging lenders, you know, to find short-term or temporary loan accommodation solutions for their borrowers. Is that really anything new? Is that just standard operating procedure that they're reiterating? Or can this sort of help, you know, you know, provide a solution set that would, you know, allow you to work with your borrowers and perhaps delay a classification, you know, deterioration of classification or a classification to TDR?

Mike Santomassimo (CFO)

Well, yeah, it's Mike. I'll take that. Well, TDR doesn't exist anymore, but that classification. But the guidance is very similar to what was issued, you know, originally back, I think, in 2009. Hasn't really changed much, and doesn't really change the way we've 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 could be difficult circumstances in some cases. And it doesn't give you any leeway for how you classify criticized loans or other classifications.

The intent is really to, you know, just be clear that, you know, people should continue to work with borrowers to find solutions, which is what we do all the time anyway.

Erika Najarian (Managing Director)

Got it. Just a follow-up question here. Thank you for the disclosure again, on slide six. You know, with, you know, $22 billion of your loans in CIB, I think investors are wondering, you know, what is the average loan size there?

Mike Santomassimo (CFO)

Yeah, I don't think that's something we give, and it is a wide range. Averages sometimes are very misleading, so there's a wide range. What really matters is not the loan size. What really matters is all the variables Charlie talked about earlier in terms of what's happening with that property. I think that would be. I think I would focus there.

Erika Najarian (Managing Director)

Got it. Just squeezing in one more question, and before I ask this expense question, Charlie, I think your investors very much appreciate it, that you're not just doing whatever you can to hit an expense number, and you're reinvesting back into the company. To that end, I'm wondering have you disclosed how much of the $800 million increase in the outlook for this year, has to do with severance?

Mike Santomassimo (CFO)

we didn't give an exact number, but the that is by far the single largest, you know, piece of it. That's part of it, and there's some other exit costs for properties as we, you know, exit some lease space and other things. That, the severance is by far the largest piece.

Erika Najarian (Managing Director)

Got it. Thank you.

Mike Santomassimo (CFO)

Thank you.

Operator (participant)

Thank you. The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.

Matt O'Connor (Managing Director)

Good morning. I want to follow up, Charlie, on some of your prepared remarks. You talked about there's still some things that you're implementing to address regulatory issues. Wondering if you could give a couple examples of what still needs to be done in terms of implementation and when you expect that to be completed.

Mike Santomassimo (CFO)

Listen, I think, as we've said, there's a lot of work to do. It is multi, you know, years worth of deliverables. You know, what we've, what I've said is that, you know, we've implemented a lot, but we still have more to do. When I say that, I just want to be clear. Everyone generally thinks I'm speaking about one of the consent orders, which has the asset cap.

Charlie Scharf (Chairman and CEO)

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. There is a lot getting done. Ultimately, what matters, you know, you don't get an A for effort in this. It's about getting things over the finish line on time and getting them done to the, you know, with the quality that our regulators and we expect from each other. You know, as you know, you know, we've been very careful not to put dates out there, because we have to do our work, and then our regulators have to, you know, take a look at it and see if it's done to their satisfaction. We don't want to get ahead of that process, we continue to move forward.

Matt O'Connor (Managing Director)

I understand that, you know, you can't speak for them signing off on what you've done, but, you know, in terms of you accomplishing what you want to accomplish, you know, where are you on that kind of process? Like, whether you want to frame it from an innings perspective or a percent basis, any way to frame that, you know, acknowledging there's a lot to do and that you've done a lot, but how far along are you in terms of what you can control on implementing these things?

Charlie Scharf (Chairman and CEO)

Yeah. Now, listen, I appreciate, you know, the your desire to have me answer those questions. Again, all that matter You know, our view of accomplishing the work doesn't matter. What matters is that our regulators look at it and say it's done to their satisfaction. I really don't think it's helpful or productive to, you know, go beyond what I've said at this point. Again, I do understand and appreciate why you're asking.

Matt O'Connor (Managing Director)

Understood and fair enough. Thank you.

Operator (participant)

Thank you. The next question comes from Vivek Juneja of JPMorgan. Your line is open.

Vivek Juneja (Equity Research Analyst)

Hi. Thanks. A quick one. Mike or Charlie, can you give us the maturity schedule? What percentage or amount of your office CRE loans are maturing in the second half and into 2024?

Charlie Scharf (Chairman and CEO)

Not specifically, Vivek, we don't disclose that, but you should assume these are standard, you know, course loans in the commercial real estate space, which are generally three to five year loans.

Vivek Juneja (Equity Research Analyst)

Okay. You haven't really been originating much in the last couple of years, so I guess we could go back to looking at when did you slow down the origination of new office CRE, Mike? Was it two years ago? Was it 3? Any color on that?

Charlie Scharf (Chairman and CEO)

Yeah, look, I think you have to remember that we've been refinancing, you know, existing facilities along that time period. But I think if you take the portfolio and assume some kind of basic average life based on what I've said, I think you'll get a pretty good sense of, you know, the approximate maturity schedule.

Vivek Juneja (Equity Research Analyst)

Okay. How about multifamily? What's the average life of those loans and maturities there? I recognize your comment. I heard your comments that those are in much better position.

Charlie Scharf (Chairman and CEO)

Yeah.

Vivek Juneja (Equity Research Analyst)

Given all the factors you already cited.

Charlie Scharf (Chairman and CEO)

Slightly longer, a few years longer than CRE than office.

Vivek Juneja (Equity Research Analyst)

Okay. All right. Thank you.

Operator (participant)

Our final question for today's call will come from Charles Peabody of Portales Partners. Your line is open, sir.

Charles Peabody (Founding Partner and Director of Research)

Good morning. Most of my questions were already asked and answered, Just I 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, and three of them, if I remember, deal somewhat with the mortgage banking operation. I know starting last fall, you started the planning effort to simplify and downsize that, and you've been executing on that this year. Can you give us a sense of what it is you need to do in mortgage banking related to those consent orders?

Charlie Scharf (Chairman and CEO)

Yeah, sure. It's Mike. First of all, there are nine public consent orders out there that are all there, you can see those. When you look at the mortgage ones, I think that each of the consent orders is actually quite clear, in terms of, you know, what needs to happen to satisfy those. I would just point you back to the documents themselves, which can give you a pretty good sense of what it is, and each one's a little bit different.

Charles Peabody (Founding Partner and Director of Research)

Follow-up. Do you talk to the regulators about the progress you're making in mortgage banking on a monthly basis or quarterly basis, semiannual, or do you present something at the end? How does the interaction with the regulators go?

Charlie Scharf (Chairman and CEO)

We talk to our regulators, all the time, at all parts of the company, at all levels of the company. You know, you should assume we're actively engaged, consistently with our regulators all the time. The only thing I would add to that is, but again, you know, they're here, they're here, they're on site. We talk to them literally all the time.

Charles Peabody (Founding Partner and Director of Research)

Right. No, I understand that, but specifically related to the progress you're making.

Charlie Scharf (Chairman and CEO)

I know. I know. Just give me a second. We talk to them about everything. Given the importance of the consent orders, you can assume it's about the work that's going on in the underlying consent order. Having said all of that, what matters is the work that they do at the end of the consent order after we submit it to them. You know, they can be up to speed on what we're doing. They can know how we feel about the progress that we're making, when we submit a consent order to them, they come in and do their holistic review. That's really where their determination is made about whether or not it's done to their satisfaction.

Again, that just gets to, you know, the reason why I want to be very careful about not drawing any conclusions from our view on our work or 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.

Charles Peabody (Founding Partner and Director of Research)

Yeah. That was part of my first question is, have you submitted anything yet on mortgage banking?

Charlie Scharf (Chairman and CEO)

We're not gonna talk about that.

Charles Peabody (Founding Partner and Director of Research)

Okay.

Charlie Scharf (Chairman and CEO)

I've said that over and over and over again.

Charles Peabody (Founding Partner and Director of Research)

All right. Thank you.

Charlie Scharf (Chairman and CEO)

Okay.

Operator (participant)

Thank you.

Charlie Scharf (Chairman and CEO)

Listen, thank you very much, everyone. We appreciate the time. We'll talk to you all soon.

Operator (participant)

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.