Wells Fargo - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered solid results: revenue $20.822B (+3% q/q, +1% y/y), diluted EPS $1.60 (+15% q/q, +20% y/y), net income $5.494B; efficiency ratio improved to 64% (from 69% in Q1).
• Notable items: a $253M gain ($0.06/share) from acquiring the remaining interest in the merchant services JV, and continued fee growth offsetting lower y/y NII; CET1 ratio was 11.1% and LCR 121%.
• Guidance: 2025 NII now expected to be roughly in line with 2024’s $47.7B (lower than prior “+1–3%” outlook), while 2025 noninterest expense is unchanged at ~$54.2B; Board approved raising the Q3 dividend to $0.45 (+12.5%).
• Stock reaction catalysts: removal of the Fed asset cap (June), expected SCB drop to 2.5%, and stronger capital return (buybacks/dividend), alongside clearer articulation of balance sheet allocation toward Markets (fee revenue).

What Went Well and What Went Wrong

What Went Well

• Fee momentum and diversification: Noninterest income rose 5% q/q and 4% y/y, driven by advisory/brokerage fees, investment banking, and card/merchant processing after the JV consolidation; “All other” benefited from $253M gain.
• Credit quality remained strong: NCO ratio fell to 0.44% (vs. 0.57% y/y), with consumer NCOs down q/q and CRE office losses easing; nonperforming assets declined 3% q/q.
• Strategic milestones and capital return: Asset cap lift; Q2 buybacks of $3.0B and plan to increase Q3 dividend to $0.45; CEO: “We now have the opportunity to grow in ways we could not while the asset cap was in place…”.

What Went Wrong

• Net interest income still down y/y: NII decreased 2% y/y due to lower rates and deposit mix, despite a sequential +2% recovery; average deposit cost was 1.52%.
• Corporate & Investment Banking (CIB) revenue down: Total revenue fell 3% y/y and 8% q/q; Markets equities revenue declined y/y as the prior-year Visa B gain rolled off; CRE revenue fell q/q with lower servicing income.
• Commercial Banking pressure: CB revenue down 6% y/y on lower NII (rates), with only modest q/q growth; efficiency ratio worsened y/y (52 vs. 48).

Transcript

Speaker 1

Welcome, and thank you for joining the Wells Fargo second quarter 2025 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 your host, Mr. John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Speaker 0

Thank you, Brad. Good morning, everyone. Thank you 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 supplements, 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 materials available on our website.

I will now turn the call over to Charlie.

Speaker 2

Thanks, John. Good morning, everyone. I'll make some brief comments about our results and update you on our priorities. I'll then turn the call over to Mike to review second quarter results in more detail before we take your questions. Let me start with some second quarter highlights. Our second quarter results reflect the progress we're making to consistently produce stronger financial results with net income, diluted earnings per share, and our return on tangible common equity all up from both the first quarter and a year ago. We continue to invest in our businesses, which has driven higher fee-based income. This growth was diversified, with each of our business segments increasing during the first half of the year.

While we've been investing, we've also continued to take a disciplined approach to expenses, and we have now reduced headcount for 20 consecutive quarters, resulting in a 23% decline from five years ago. We maintained our strong credit discipline, and credit performance continued to improve in the second quarter, with lower net loan charge-offs from both a year ago and the first quarter. Losses in both our consumer and commercial portfolios improved from a year ago. The big news during the quarter was having the asset cap removed. The lifting of the asset cap marks a pivotal milestone in our transformation, along with the termination of 13 orders since 2019, including seven this year alone. We are a far stronger company today because of the work we've done.

In addition, we've also changed and simplified our business mix, transformed the management team and how we run the company, and have been methodically investing in the company's future while improving our financial results and profile. I know this call is for investors, but I want to once again thank the over 212,000 employees at Wells Fargo who all contributed in one way or another to this milestone. Though we have tremendous opportunities, this has been a demanding place to work. We have recognized the contributions of many here by increasing compensation, improving benefits, investing in more employee learning and development programs, and by giving those employees making below $85,000 in total compensation special year-end cash awards for the past two years. With the lifting of the asset cap, we wanted to do something special for everyone who invested so much of themselves into the company in recent years.

As a demonstration of our appreciation for what we've accomplished, we gave a special award to all employees so they could own part of Wells Fargo and hopefully benefit from our future success. Everyone has been asking, what does the lifting of the asset cap mean? First, we will continue to move forward with our risk and control agenda and embed the disciplines we have built deep into the culture of the company. We are certainly in a different position with the asset cap and the many orders lifted. It is hard to convey the amount of time and effort the senior team has devoted to this work. With so much of this work completed, we can allocate our time differently and spend more time focusing on growth and the future. While we have not ignored this, the additional time we now have should prove meaningful.

As you know, though we have generated substantial amounts of capital in the years since the asset cap was imposed, we've been limited in how much we've been able to deploy to support our customers and communities. While shareholders benefited from increased stock buybacks, we would have preferred to allocate more capital to grow our businesses and the overall balance sheet. We now have the flexibility to proactively grow deposits and to allocate capital to grow loans and our corporate investment bank. Since I arrived, we've had to make difficult choices where to allocate our balance sheet given our inability to increase total assets. As we pointed out, we have turned away deposits from corporate clients. While we have not turned away consumer deposits, we've been careful not to aggressively grow consumer deposits given the limitations we were subject to.

We've also had to be cautious about loan commitments, especially given the potential for significant drawdowns of committed facilities, as we saw during the early days of COVID. We have also pointed out that we have constrained our markets-related balance sheet to allow for activity elsewhere in the company. As we look forward, we are now able to move forward more aggressively to serve consumers, businesses, and communities to support U.S. economic growth. We expect to be more aggressive in our pursuit of consumer and corporate deposits, and we will selectively look to grow loans, though we will be cautious during periods of economic uncertainty. We also see opportunities to allocate more balance sheet to our markets business to drive increased profitability. Our goal is to increase customer trading flow and financing activity without significantly increasing our risk profile.

We also have the opportunity to think more broadly about using our balance sheet as we evaluate additional opportunities. In addition to the lifting of the asset cap, we expect that changes in both the regulatory and supervisory environment will allow us to compete more effectively. We announced earlier this month that our expected stress capital buffer will decrease by 120 basis points starting in the fourth quarter, which would reduce our required CET1 regulatory minimum plus buffers back to 8.5%. We are also encouraged by the Federal Reserve's intention to provide more detail supporting the CCAR process. That detail, along with the finalization of the broader set of capital rules, will help us determine the appropriate level of capital we should hold going forward.

We are also very supportive of the review the different regulatory agencies are conducting regarding rules and supervisory constraints that go beyond safety and soundness and do not allow us to effectively serve our customers and communities. We are committed to continuing to maintain a strong capital position and are excited about using our excess capital and additional capital generation to reinvest in our franchise, as well as continuing to return excess capital to shareholders. As a reminder, we have returned a significant amount of capital to shareholders over the past five years, including reducing our average common shares outstanding by 23% since 2019. As we previously announced, we expect to increase our third quarter common stock dividend by 12.5% to $0.45 per share, subject to approval by the company's board of directors at its regularly scheduled meeting later this month.

We've repurchased over $6 billion of common stock during the first half of this year, and during the second quarter, our board of directors authorized an additional common stock repurchase program of up to $40 billion. We continue to make significant investments in our core business, which are helping to improve our returns. We continue to invest in our credit card business, not only by launching new products, but also enhancing the overall customer experience. Our commitment to delivering a seamless, secure, and user-friendly digital experience to our card members was recently recognized by J.D. Power, which ranked Wells Fargo number two in both mobile app and online credit card satisfaction. Enhancements like these have spurred new account growth and higher balances in spending from a year ago.

In our auto business, we completed the launch of our multi-year co-branded agreement as a preferred purchase financing provider for Volkswagen and Audi vehicles in the U.S. We had strong auto originations in the second quarter, and ending balances in our auto portfolio grew for the first time in over three years. In consumer small and business banking, we have continued to see momentum in the growth of primary checking accounts, benefiting from our investments in marketing, offers, and enhancements to both the digital and branch experience. We are on track to have over half of our branch network refurbished by the end of this year and to complete a refresh of the entire network by the end of 2028. We continue to optimize and better position our network, including expanding in certain locations, including Chicago, New York City, and Nashville.

We continue to enhance our digital experience, and consumer checking accounts open digitally continue to increase, and active mobile users now exceed 32 million, up 4% from a year ago. We also continue to see good momentum from Wells Fargo Premier, our offering for affluent clients. Let me highlight a few areas that demonstrate our growth. We are investing in more bankers to serve these clients and have increased branch-based financial advisors by over 10% from a year ago. The improved collaboration between our bankers and advisors has helped to drive over $16 billion of net asset flows into the wealth and investment management Premier channel during the first half of the year, up over 60% from a year ago. Deposit and investment balances from Premier clients have also been steadily increasing and were up approximately 10% from a year ago.

Turning to our commercial businesses, the investments we have been making in corporate and investment banking have continued to help drive growth, with investment banking fees up 16% during the first half of the year. We've also made steady progress, increasing our U.S. investment banking market share with our share up each of the last two years and again in the first half of 2025, driven by gains in leveraged finance and M&A. We're continuing to invest in top talent and strengthen and expand our commercial banking business. For example, in our technology banking group, we have grown our team of bankers by over 25% over the past year. We expect to continue to add bankers to this priority sector and in a number of additional markets and sectors where we have room to grow.

In addition to driving growth in our core business, our strategy also includes simplifying our businesses and focusing on the products and services that matter most to our clients. As part of the strategic focus in the second quarter, we entered into an agreement to sell the assets of our rail equipment leasing business. This transaction is expected to close in the first quarter of next year. As we look ahead, what we see regarding the health of our clients and customers has not changed. Consumers and businesses remain strong as unemployment remains low and inflation remains in check. Credit card spending growth softened very slightly in the second quarter, but is still up year over year and remains strong overall. Debit card spending growth has remained strong and consistent with what we saw in prior quarters.

Consumer delinquencies continued to improve from a year ago, and commercial credit performance continued to be relatively strong. Deposit flows for both our consumer and commercial clients were in line with seasonal trends. I've had the opportunity to meet with many of our commercial banking clients this past quarter, and many have conveyed optimism that the administration is working to level the trade playing field. They would like certainty, but prioritize a good outcome for U.S. trade above short-term certainty. Many have found ways to avoid passing the 10% tariffs onto their customers. At the same time, they are preparing for the downside and are not growing inventories or hiring aggressively and developing a contingency plan if the downside scenario occurs. As I've said before, we are hopeful that the results of the current negotiations will make our clients more competitive and help drive stronger economic growth in the U.S.

There is uncertainty, and we should recognize there is risk to the downside as the markets seem to have priced in successful outcomes. As I highlighted, now that the asset cap has been lifted, we are more committed than ever to serving our customers, supporting businesses and communities, and contributing to economic growth in the U.S. I continue to believe we have one of the most enviable financial services franchises in the world. I'm excited to continue to move forward with plans to produce industry-leading sustainable growth and returns. I'll now turn the call over to Mike. Thank you, Charlie, and good morning, everyone. In the second quarter, we had net income of $5.5 billion, or $1.60 per diluted common share, up from both the first quarter and a year ago. These improved results reflect our continued focus on our strategic priorities.

Through our ongoing investments in our businesses, expense focus, strong credit discipline, and continued capital return, we have steadily increased profitability and returns. Our second quarter results included $253 million, or $0.06 per share, from the gain associated with our acquisition of the remaining interest in our merchant services joint venture. Turning to slide four, net interest income increased $213 million, or 2%, from the first quarter, driven by lower deposit costs, one additional day in the second quarter, and higher securities yield and higher loan balances. I'll update you on our expectations for full-year net interest income later in the call. Moving to slide five, both average and period-end loans grew from the first quarter.

Period-end balances were up $10.6 billion from a year ago, driven by growth in commercial and industrial loans, predominantly in the corporate investment banking business, as well as slightly higher auto, other consumer, and credit card loans, while residential mortgage and commercial real estate loans continued to decline. Average deposits in our businesses increased 4% from a year ago. We reduced higher-cost corporate treasury deposits by 58% from last year, causing total average deposits to decline 1%. Total average deposits also declined 1% from the first quarter, as a small increase in consumer deposits was more than offset by lower commercial and corporate treasury deposits. Average deposit costs continued to decline and were down six basis points from the first quarter. Turning to slide six, non-interest income increased $348 million, or 4% from a year ago.

Results in the second quarter benefited from the gain associated with our merchant services joint venture transaction. I would note that the increase in card fees versus the first quarter reflected a change in where we recognize merchant services revenue resulting from this transaction. Revenue is now included in card fees, whereas previously our share of the net earnings in the joint venture were included in other non-interest income. We continue to have growth in many of the businesses where we have been investing, including a 9% increase in investment banking fees from a year ago. The growth in non-interest income more than offset lower net interest income, resulting in modest revenue growth from a year ago. Turning to expenses on slide seven, non-interest expense increased $86 million, or 1%, from a year ago, driven by an increase in revenue-related compensation, predominantly in wealth and investment management.

Our other expenses were relatively stable, as the investments we were making in our businesses, including the increased spending in technology and advertising, were offset by lower operating losses and the impact of efficiency initiatives. The 4% decline in non-interest expense from the first quarter was driven by seasonally higher first-quarter personnel expense. Turning to credit quality on slide eight, credit performance continued to improve and remain strong. Our net loan charge-off ratio declined 13 basis points from a year ago and one basis point from the first quarter. Commercial net loan charge-offs increased $36 million from the first quarter to 18 basis points on average loans. The losses in our commercial and industrial loan portfolio were borrower-specific, with little signs of systematic weakness across the portfolio. Commercial real estate losses decreased during the first quarter. As we have said, it will take time for the office fundamentals to recover.

Valuations appear to be stabilizing, and although we expect additional losses, they should be well within our expectations. Consumer net loan charge-offs declined $48 million from the first quarter to 81 basis points of average loans, with improvement across all of our non-real estate portfolios, while the residential mortgage portfolio continued to have net recoveries. Non-performing assets declined 3% from the first quarter, driven by lower commercial real estate non-accrual loans, predominantly in the office portfolio. Moving to slide nine, our allowance for credit losses for loans increased modestly from the first quarter, and our allowance coverage ratio for total loans has been relatively stable for the past five quarters, as credit trends have remained fairly consistent even amid macroeconomic uncertainty.

Our allowance for coverage for our corporate investment banking commercial real estate office portfolio has also been relatively stable over the past year and was 11.1% in the second quarter. Turning to capital and liquidity on slide 10, we maintained our strong capital position with our CET1 ratio at 11.1%, well above our current CET1 regulatory minimum plus buffers of 9.7%. Starting in the fourth quarter of this year, our new CET1 regulatory minimum plus buffers is expected to decline to 8.5%. As you know, the Federal Reserve has a pending notice of proposed rulemaking that would include averaging stress test results from the previous two years to determine the stress capital buffer. If that is finalized as proposed, the effective date may move to January 1, and our expected new CET1 regulatory minimum plus buffers would be 8.6%.

We repurchased $3 billion of common stock in the second quarter and have the capacity to continue to repurchase shares. Also, as Charlie highlighted, we expect to increase our common stock dividend to $0.45 per share in the third quarter, subject to board approval. Moving to our operating segment, starting with consumer banking and lending on slide 11, consumer small and business banking revenue increased 3% from a year ago, driven by lower deposit costs and higher deposit balances. For the second consecutive quarter, deposit balances grew from a year ago, even with higher outflows for tax payments in the second quarter of this year compared with last year. Debit card spending remained strong, up 4% from a year ago, consistent with the prior two quarters. Home lending revenue was stable from a year ago.

Mortgage loan originations increased 40% from a year ago as we focused on servicing Wells Fargo customers. This higher volume also reflected a stronger mortgage market from a year ago. However, the mortgage market continued to be weak compared with historical levels due to the high-rate environment. We continue to reduce headcount, which has declined 49% since the end of 2022, as we have simplified the business and reduced the amount of third-party mortgage loans serviced for others by 33% since the end of 2022. Credit card revenue grew 9% from a year ago as loan balances increased and spending slowed slightly but remained strong. Auto revenue decreased 15% from a year ago, driven by lower loan balances and loan spread compression from previous credit tightening actions. While these actions have reduced revenue, they have improved credit performance.

Auto revenue increased 2% from the first quarter, the first linked quarter increase since fourth quarter 2021. The decline in personal lending revenue from a year ago was driven by lower loan balances. Turning to commercial banking results on slide 12, revenue was down 6% from a year ago as lower net interest income due to the impact of lower interest rates was partially offset by growth in non-interest income driven by higher revenue from tax credit investments and an increase in treasury management fees. Average loan balances in the second quarter increased 1% from both a year ago and the first quarter, as clients have largely remained cautious while waiting for more clarity on the economic environment. Turning to corporate investment banking on slide 13, banking revenue was down 7% from a year ago, driven by the impact of lower interest rates.

This decline was partially offset by lower deposit pricing and higher investment banking revenue, including higher advisory fees. Commercial real estate revenue declined 6% from a year ago due to lower loan balances, the impact of lower interest rates, as well as reduced mortgage banking income after the sale of our commercial non-agency third-party servicing business in the first quarter. Markets revenue declined 1% from a year ago as higher revenue in foreign exchange and rates products was offset by declines in equities. We had a $122 million gain related to an exchange of shares for vis-à-vis common stock that benefited equities a year ago. Average loans grew 4% from a year ago and 3% from the first quarter. The increase from the first quarter was broad-based with higher balances in markets, banking, and commercial real estate.

On slide 14, wealth and investment management revenue increased 1% from a year ago as growth in asset-based fees, driven by higher market valuations, was partially offset by lower net interest income due to the impact of lower rates. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so third-quarter results will reflect higher July 1 market valuations. Slide 15 highlights corporate results. Revenue increased from a year ago, driven by the gain associated with our merchant services joint venture transaction. Turning to our 2025 outlook on slide 16, starting with net interest income, we currently expect net interest income for 2025 to be roughly in line with full-year 2024 net interest income of $47.7 billion.

While there are several moving pieces of why we currently expect net interest income to be a little lower than we discussed in April, the largest driver is that we have dedicated more balance sheet to our markets business than we originally assumed, including supporting stronger client activity in products like commodities and rates, which can have low or non-earning assets. The cost of funding this activity results in lower net interest income, while most of the revenue generated is recognized in non-interest income. Our updated expectation still assumes net interest income grows sequentially in both the third and fourth quarter of this year. We are only halfway through the year, and several key variables including net interest income remain uncertain. We will closely monitor how these assumptions evolve over the remaining of the year.

Turning to expenses, our expense outlook has not changed, and we still expect 2025 non-interest expense to be approximately $54.2 billion. In summary, our second quarter results reflected the consistent progress we've been making to improve our financial performance. Compared with a year ago, we had double-digit growth in net income and diluted earnings per share. Through revenue, including fee-based growth across many of our businesses, we maintained our expense discipline, improved our credit performance, reduced common shares outstanding, and increased our dividend. Now that the asset cap is lifted, the management team has more time to focus on our growth initiatives, and we will also have the flexibility to allocate more capital to growing our balance sheet, including deposits, loans, and trading assets. We will now take your questions. At this time, we will now begin the question and answer session.

If you would like to ask a question, please first unmute your phone and then press Star 1. Please record your name at the prompt. If you would like to withdraw your question, you may press Star 2 to remove yourself from the question queue. Once again, please press Star 1 and record your name if you would like to ask a question at this time. Please stand by for our first question. Our first question will come from John McDonald of Truist Securities. Your line is open, sir. Hi, good morning. Mike, thanks for the explanation. On the NII outlook, it's helpful, the markets piece of it.

Just on the non-markets NII, could you talk about what kind of loan growth assumptions you kind of built into the NII outlook for the back half of the year and how that connects to what you saw in terms of loan growth in the second quarter? Yeah, sure, John. Thanks for the question. When you break apart the portfolio on the consumer side, we're not on the mortgage portfolio, we expect that will likely just continue to come down just a little bit in the second half. I think you should see a little bit of growth in card, some of that seasonality in terms of what happens as you go into third and fourth quarter spending. And then we started to see some growth in auto, small, but started to see that turn.

Hopefully that will continue to grow in the second half of the year, but relatively modest in the overall balance sheet. On the commercial side, we do expect to see some modest growth as we go into the rest of the year. I think it likely comes from the same places, at least as we come into the third quarter, mostly in the corporate investment bank. Hopefully, we'll start to see some of the commercial bank customers borrow a little bit more as well. I'd say overall, still relatively modest. As you get to the end of the year, hopefully, if things play out, we'll start to see a little bit more activity more broadly. Okay. Then maybe you could just give us your thoughts in terms of total revenue.

I know you don't give total revenue guidance, but just maybe when you look at your own internal projections and budgeting, how is the revenue outlook for this year shaping up? What are the puts and takes relative to your expectations if we think about the year so far? Yeah. No, it's as you sort of break apart the pieces, we talked a bit about where NII is coming out at this point. I think when you look at the fee side, the biggest go through the biggest line items, and you look at the investment advisory fees, the market's been very supportive as you look at the rest of the year. You can easily sort of model what the third quarter looks like based on where the market's ended already, given most of the fees are already sort of certain.

As long as the market sort of holds up or grows a little potentially as you go into the fourth quarter, that should be constructive. You start breaking down deposit fees, card fees, all that stuff plays into some of the seasonal activity that we will see in the third and fourth quarter. I would say largely those things are kind of playing out pretty close to what we modeled, depending on the month or quarter, maybe a little bit better, but they are playing out largely as we expected across most of those. It is really sort of the trading line, and that will be driven by what kind of activity and volatility we see in the market. I think we have had a pretty constructive environment now for a couple of quarters, so hopefully that continues.

I think lastly, just we'll see how the year comes out on the equity securities gains that we saw. We did see some modest gains in this quarter, big improvement relative to what we saw last quarter. As the market remains constructive, hopefully that will continue as well. Okay. I guess just to clarify, Mike, you used to previously say that your NII guide assumes the asset cap remains in place, and now we relax that assumption. The outlook's a little worse. Is it just this counterintuitive mixed shift that you're going to grow the capital markets balance sheet, but it's going to come in fees? Yeah. I'll remind you first, it's been off for what, six weeks now? Five and a half weeks, six weeks? I do think it has been off for a very short amount of time.

I think what's happened as we sort of looked at, and some of this started towards the end of the first quarter, early second quarter, and we sort of talked about it in some other public forums. We've seen some increase in the activity, and that's what's causing it. That's by far the largest driver of what's causing it to move down a little bit from the low end of the range that we talked about in April. As we said, that's largely offset in fees on those because you get paid in fees for some of that activity. Yeah. Let me just add a little hey, John, this is Charlie.

Let me just add just one thing here, which is as we look forward to the end of the year, we have so far assumed, I would describe it as a very small increase in the overall size of the balance sheet. We do assume it grows above what used to be the cap, but not in any really meaningful way. When we look at where that growth is coming from, part of it is the loan growth that Mike spoke about earlier, but we have been and assume that we dedicate balance sheet to our markets business. As we think about that, we're not focused on maximizing net interest income. We're focused on maximizing returns, how much money we make overall.

We will try and do as good a job as we can going forward, giving some more clarity on how we intend to use that balance sheet, how it can affect the different pieces. That is a little bit of what we saw during this past quarter, and it is the way we are thinking about the rest of the year. That is really helpful. Thank you. The next question will come from Scott Siefers of Piper Sandler. Your line is open. Morning, guys. Thanks for taking the question. I was hoping, Mike, maybe we could approach the NII question maybe, I guess, a little differently. I guess what are if loan growth in the second half will only be kind of modest, what are the other factors that will allow NII to grow?

Because I think you'll still need to average a few percent higher in the second half than you just did in the second quarter. Just trying to understand what the major puts and takes are within there. Yeah, Scott, it's a little bit of a lot of things, right, that will sort of add up to some growth each quarter. We do expect deposit costs to continue to come down. We do expect to see some loan growth come through. We do expect, which will be a driver, we do expect to see further repricing of the securities portfolio. It really is a little bit of a lot of things, plus some deposit growth as we go into the end of the year. I think all of that sort of adds up to seeing it grow sequentially each quarter. Okay. Perfect. Thank you for that.

Charlie, maybe just sort of a top-level thing. With the asset cap now off, I guess one of the questions that I get pretty frequently is sort of when or how might be the right time to revisit medium-term return targets. Do you have any broad sense for sort of where you are in thinking about that kind of dynamic? Sure. I guess a couple of things on that. I think you did not directly ask the question, but let me just maybe talk for a second about capital levels because capital levels obviously dictate returns to a certain extent. With what has happened, we have certainly seen a lot of change over the past quarter or so. Obviously, we have got the ability to rethink how we use balance sheet with the asset cap.

I do just want to remind people that I have said very consistently over and over and over again, when the asset cap is lifted, it's not like this light switch is going to go off and all of a sudden things are going to dramatically change. We didn't know exactly when the cap was going to be lifted. We didn't want to get ahead of ourselves. We are very carefully thinking through how we use the additional capacity to help grow the company. We expect that to happen over time. We never wanted to lead people to believe that there would be any major change in the next week, the next month, or the next quarter, but it certainly does open options for us to grow and increase returns beyond what we've seen in the past.

Now that it's off, we're going to be thoughtful about it. As we go through our planning for next year, this is the perfect time. We will do our best to talk more about it and provide more clarity broadly to everyone so we can create a level of understanding there. We have the lower SCB, which is a huge decrease after a significant increase from the year before, which we commented in the year before we didn't understand why we saw the increase. As we think about how that impacts where we should be running our capital levels, we want to take a little bit of time to let the Fed go through its process, both on CCAR and on the work they're doing on capital requirements. We can try and get an understanding of what the right long-term level of capital is.

They've said that they're going to provide more transparency on CCAR, whether it's the underlying assumptions, the models, things like that. That'll be extremely helpful for us so that we're not constantly readjusting capital targets on a yearly basis in any material way when, in our view, we haven't materially changed the risk of the company. That'll be forthcoming, hopefully over the next couple of months as the work they're doing on capital. That'll allow us to come back with a more definitive point of view on where we should be running capital. Certainly, all of these things are lower levels from where we had been running it because of the increases that we saw. That allows us to deploy excess capital either organically or through buybacks. We do expect to get there.

Then just more specifically to your question, we've also said very clearly, 15% is not the it's an interim target. It's not the final target. Once we get there, it's a good time to revisit where we go. Both through hopefully some increased returns that we're seeing in terms of how we run the business, running at some point with lower capital returns, we believe we'll be consistently at that 15%. Then we'll provide more information on where we go from there, which will obviously be a higher number, not a lower number. All right. That's perfect. Thank you both very much. All righty. The next question comes from Kim Huston of Autonomous Research. Your line is open. Hi. Thanks. Good morning, guys. Just one more question on capital.

Given what all you just said, Charlie, and that we still have now a really big amount of capital, the buyback in the second quarter was a little smaller than the first. Loan growth, as you said, looks like it's getting better, but not that quickly. Can we expect that you might do more in terms of the buyback in advance of kind of getting that final zone of where you want to live, given that it seems like you have enough capacity to do kind of all things you would want to do in terms of growing the balance sheet and also returning more? Yeah. Listen, I don't think we want to give a specific forecast on how much we intend to do. To your point, we have more capacity, not less capacity. The price of the stock does matter.

We will be thinking about that. I think we will go from there. I guess I would say, on the one hand, we do not feel like we need to deploy all of this capital immediately because we do want to have the opportunity to use the balance sheet to grow and do interesting things. I have also said that we do not intend to do anything dramatic. That does create more opportunity to buy stock back. Again, the way we are thinking about it is we want to first use the capital that we have to grow the company organically. That is what allows us to produce the right kind of returns. It allows us to create the ability to increase the dividend. Buying stock back is kind of what we are left with.

What we hope the answer is, and what certainly seems like, is we'll have the ability to do all of those things to a greater extent than we've been able to do in the past. We'll just hopefully be very thoughtful about the timing. Got it. One of, you've laid out all the organic potentials in the past, but the one I wanted to ask you specifically about is on retail deposits. Where there's obviously a strong competitive landscape and a lot of banks still building branches in other territories, you've talked about how that consent order coming off last year has helped you kind of just go to market in a broader sense. How will that manifest itself in terms of just retail deposit growth?

Can you see you expect an acceleration there in either net new checking or just overall deposit growth taking on the retail side? Thank you. Sure. Yeah. I mean, I think the answer is, as I said, I think it was just a little bit of you go back for a second is when we had the sales practices consent order, it was specifically driven by some of the things that happened in those businesses. And so we had to be very, very careful about what we did. We scaled back an awful lot of stuff, which stood in the way of our ability to grow.

Even as that order came off, recognizing we had a deposit cap—well, I'm sorry, an asset cap, which effectively can be a deposit cap—even though we were adding back some of the things that would actually help us grow quicker, we were very careful about not doing too much too quickly because when you have a constraint, you just do not want to bump up against that constraint. The activities that we have kind of reinstated inside the consumer business have to do with reporting. They have to do with the way we manage the business. They have to do with the way we pay people. You are starting to see increased net checking account growth. We are focused on primary checking account growth. That should, and we believe, will lead to higher deposits. What you will see is you are going to see more marketing.

You're going to see more aggressive marketing. You're going to see more merchandising in our branches. You're going to see more local advertising as well as national advertising, as well as just expansion of footprint in areas where we think we have room to grow. Those are all things that we have been very, very cautious about doing up till now. With the value proposition that we have for our customers and the strength of the brand and the great quality of the people here, we think we'll be able to compete very effectively. I remind people, we're not competing with a small number of banks. We're competing with a lot of banks out there that we believe we have a better value proposition for. Got it. Great. Thank you, Charlie. The next question will come from Ibrahim Punawalla of Bank of America.

Your line is open. Hey, good morning. I just wanted to follow up, Charlie, on what you said in terms of in one of your responses around nothing's going to change dramatically. 15% ROTCE, like step number one, which you were at 2Q again, just one quarter. Appreciate that. I think the glass half-full way to look at this, you mentioned the word grow aggressively many, many times on the call. I think the concern from an investor standpoint is a lot of this growth may come at the cost of ROTCE. I don't think that's what you're saying. Just give us a sense of the lens with which you're looking at these growths, be it on consumer deposits, commercial deposits. Could it be that we could see a near-term hit in terms of profitability before things pick up and you gain more wallet share?

Just how should we think about the impact on the next 6, 12, 18 months of returns? Are there offsetting factors on the expense side or productivity side that could mitigate things that you do to pursue growth? Thanks. Yeah. No, thank you for the question. I mean, we do not mean to imply at all that we will sacrifice returns for growth. As we do all of our planning and we think about the opportunities, we think the things that we are going to do to grow the company will actually be very focused on continuing to increase the returns that we have. Please do not take anything that we have said as anything other than we continue to be very focused on those two things. You do raise the question about expenses.

We do point out in the remarks that we made that we've continued to be very, very focused on using the expense resource that we have as wisely as we can. That means that we are still focused on continuing to drive efficiencies in the company. As we've done up till now, hope to be able to use this material part of the efficiencies that we continue to drive in the company as a way to pay for a lot of the investments that we intend to make. That is very consistent with what we've done. Even as we've increased marketing spend, we've increased the number of hires that we have in the corporate investment bank. We've increased the hires in the commercial bank. We've increased the number of bankers that we've had in the consumer business.

We've increased the number of financial advisors that we have. We haven't stood up and said that those things are dilutive to returns. It's just the opposite. We've been able to do those things because we're driving efficiency elsewhere in the company. Those things will drive increased revenue over a period of time and ultimately higher returns. We are continuing to think about those things the exact same way we've been thinking about them. I would just say that we, as I've said every quarter, including I think we said it on the last quarter, continue to feel like there are significant opportunities to drive efficiencies in the company, both traditionally and through technology, including AI.

The only thing I'll just make sure we're clear on is, yes, we had 15% ROTCE in the quarter, but we also recognize that we had the gain in our merchant services business. We do not really think about that as ongoing. We would say it is still a little bit lower, even though we were running capital levels before the SEB adjustment was put in place. Got it. Thanks for walking through that. Maybe a separate question, Mike, for you in terms of NII, the market's view on what the Fed might do keeps changing. I appreciate that. Remind us in terms of asset sensitivity as we put into context the sequential growth in NII in the back half and maybe into next year.

How should we think about what three or four rate cuts would do to the balance sheet and the ability to maybe offset that given the growth outlook that you assume? Thanks. Yeah. Look, I mean, we look at the implied forwards and what the market's pricing in on cuts, obviously. That is all sort of embedded in the view of where NII is trending as we look into the latter part of the year. Obviously, even with that, you're still going to see pricing come down on the positive side in the commercial businesses. You're going to see continued repricing on the fixed asset components of the balance sheet. Then you're going to hopefully start to see some more growth come out of it that will also help from an NII perspective.

All those things should be constructive as you look forward despite what could be rates coming down a little. All right. Thank you. The next question will come from Matt O'Connor of Deutsche Bank. Your line is open. Good morning. I was hoping you could just provide some clarity on the NII ex markets this quarter. I was having a hard time finding that. And then maybe just give the guidance or comments on kind of the full-year guide on NII ex markets just to clarify. Yeah. We do not break out the components in total across markets versus non-markets. That is not something we have historically done. I think when you look under what is happening in the NII ex markets, there are lots of puts and takes across the balance sheet.

I think if you look at the kind of rates in general are sort of about kind of what we expected, plus or minus a little bit. The change in rates that we've seen throughout the year is not impacting our guide really in any significant way. You've seen slightly higher payment rates in places like credit cards. That's probably muting balances there just a little bit, as well as some other factors there. Loan growth, depending on the outside of card, has been a little bit slower. Deposits are mostly behaving the way we thought. We're not seeing any significant, or we're seeing really the trends of any cash rebalancing into higher yields has been stable now for a bit, for a number of quarters. We're not seeing that change in any significant way.

I'd say overall, the trends are X markets are pretty stable to what we've seen over the last couple of quarters and largely consistent with what we've expected to see with a few puts and takes across the different portfolios. Okay. That's helpful. I'm sure you guys have heard it before, but just as you're growing the trading business, I think the clarity on the trading that I over time would be helpful. Then just separately, I want to ask about the lower tax rate this quarter and somewhat related just the impact of the new legislation reducing clean energy tax credits. I think there's some kind of puts and takes there as we think about some stuff going away and some stuff that you might be able to do that you're not doing now. Just the broader tax this quarter and going forward. Thanks.

Yeah. On the last piece on the tax credits, that'll be a few years out before you see anything, any real impact on that in terms of new projects that will come on. It'll be a little bit of a while, it'll be a while before you start to see that matter much. The broader bill doesn't have a lot of direct impacts relative to the taxes other than the tax credit piece. A few small things. I think just more broadly on the tax line, there's always puts and takes on the tax line given how big we are.

There's a few things in the quarter that probably brought the tax line a little bit, the tax rate down a little bit lower than what you see over a longer time period, including a California tax change that sort of changed the way they do revenue attribution and a few other sort of wonky items that sort of change it. Our view on the tax rate over a longer period of time is still kind of high teens. Tax rate is sort of probably the right place given what we see over a longer period of time. There always seems to be stuff in each quarter that sort of changes that a little bit. Okay. Thank you very much. The next question will come from Erika Najarian of UBS. Your line is open. Hi. Good morning. I wanted to ask another question about capital, Charlie.

Everyone appreciates that the regulatory reform is in flux. You mentioned earlier an 8.6% minimum on CET1. And your current CET1 level implies 140 basis point minimum to that 9.7. I'm just wondering, as we think about where you should operate going forward, are you saying that you want to take the time to make sure that that 8.5% is something that is a little bit sustainable if we get GSIB reform, if we get more comprehensive stress test reform? And if that's the case, is 140 basis points still an appropriate buffer, which would imply that your sort of minimum with buffer would be about 10%? So listen, I think I tried to answer this before.

I think the way we're in a period, so we're in a period of time where we have seen over a 13-month period, we've seen our capital requirement go up like 100 and how much did it go up? It went up 90 basis points. 190 basis. 90 basis. 190 basis. 90. 90 basis points. And then we saw it come down 120 basis points. The Fed has said that we're going to give you more information, which would be super helpful to us so that we can understand what the future volatility looks like. One would presume that with this administration and the types of things that they're saying, that the lower level is probably more indicative of what the future would look like rather than the higher level.

We just do not think it makes a whole lot of sense to come and say, "Well, here is how we are going to, here is a number that we are going to run with capital until we avail ourselves of the information that they tell us they are going to give us." Trying to directionally lower is the direction we are going, but we do not want it to be a moving target every quarter where we tell you something different. We do not think that is the right way to provide the kind of information that we should be providing. We just want to take that time to understand what the right level is. We will also be thinking about, with other changes that they are making and any other changes to these moving pieces, what the right buffer will be. Directionally, lower is certainly where things are going.

We do not know enough to actually tell you what that number should be yet. The good news is, right, we have a ton of excess capital. We have more flexibility to deploy it to help support clients and the broader economy here, right? That should give us more opportunity to use it. We will bring it down. I think we have shown over the last five years that we are not shy about returning capital back to shareholders through buybacks when we feel that is appropriate. Hopefully, we can see that come through over the quarters. We live in a really, I mean, for us, this is an incredibly interesting and fun time.

I mean, we're sitting here where even with the constraints that we've had, I think we've started to show that the things that we're doing have the ability to drive higher revenues across the company regardless of what's happened in the NII cycle. We spent a lot of time talking about the things that we've been doing to focus on growing non-interest revenues, which we've been doing because they're strategic opportunities, not just because of the balance sheet. Those strategic opportunities haven't changed. Those will continue to be there for us. We're still incredibly focused on increasing the non-interest revenues of the company as we've seen we've been able to do. We're starting to see some loan growth. Yes, the loan growth hasn't turned out this year to be as much as we otherwise would have hoped when we first set our targets, our guidance.

Overall, where we sit today and the types of things that we're seeing is certainly marginally better than what we had seen in terms of what we're seeing. We're starting to see deposit flows as we've talked about. We've got new account growth. We've got expenses in check. Credit is performing well. We've got more capital than we had the last time we had the conversation. We have less constraints. For us, as we sit here, even though there's a lot of work for us to do and we've got a lot to prove, we understand that. Those things all line up to be pretty exciting for the management team here. Agree with that. Thanks so much. Okay. The next question will come from Betsy Graseck of Morgan Stanley. Your line is open. Hi. Good morning. Hey, Betsy.

Charlie, I had a question about just how you're thinking about the arc of expenses over the next period of time, call it a year or two. With the asset cap removal, underlying question is, are there efficiencies that can be generated from investments you had to make that were unique to the asset cap period? If so, with those efficiencies, is there reinvesting in everything you just mentioned on headcount to drive revenues, or is there a technology angle to some of this reinvestment that we should be expecting? How are you positioned for generating efficiencies from AI? Thanks. Sure. Let me start, Mike, and then you pick up because I've been getting all the questions here.

First of all, on the question of expenses related directly to the asset cap, it's important to point out that the consent order that had the asset cap is still in place. Just as a reminder for those that haven't followed as closely as we do, the asset cap gets lifted when we adopt and implement a series of things. Then the full order gets lifted when the regulators view it as effective and sustainable. We obviously feel really good about the progress that we're making. We feel very comfortable that we're getting there. Until that order is lifted, we've got to be very, very careful about just changing anything because of the plans that we put in place and the way we and the regulators go about validation.

We're not assuming that anything materially changes up to this point until that happens. Even then, we'll be very, very careful. As we think about the opportunities to drive efficiency, when we talk about the fact that there are still substantial opportunities away from our ability to just do things more efficiently from a risk and control perspective, we're continuing to focus on driving those things across the company. What you've seen kind of quarter on quarter on quarter is our headcount has come down, using attrition as much as we can as our friend to create those efficiencies. Yes, technology will be able to help that trajectory continue even more.

We want to be careful about giving any long-term guidance beyond this year on expenses, which is why we've stopped because, as we've said very consistently, we really like the idea of going through the planning cycle, being able to take a look at what we want to invest in, what we think we can drive in terms of efficiencies, and then give a number. I would say the same thing that we said is similar to the question that Ibrahim was asking before. We're very, very conscious of the fact that expenses are an important lever for us, for us to be able to increase the returns for the company.

Hopefully, we'll be able to create the right kind of balance by increasing the level of investments while we're keeping expenses in check and focus on not just driving more growth, but driving higher returns in the shorter and medium term as we've tried to do up until now. Betsy, I would just say from an AI perspective, it's very early to see any impact of any significance from AI. We've got capabilities and pilots in our branch system, in our ops system, in our call centers, really across anywhere where you've got anything manual and a lot of people. Those things are starting to mature a little bit, very early. You're starting to see some of the benefit you thought you'd see in terms of efficiency start to come through in some of the early use cases. It's super, super early.

I think the impact will build over time there. Okay. Thanks. I know you said that you would address the ROTCE target when you hit the 15%, which you did this quarter. Can you give us a sense of the timing when we should expect that you would be revisiting that target? Just as a reminder, the 15% that we reported this quarter did include the merchant services gain. Again, we try and be as transparent as we can and look through that and some stuff you saw in taxes. We are not declaring victory on getting to the 15% yet.

Then maybe as we get towards the end of the year and we talk about next year, we'll talk a little bit more about the timing on those things and recognize that people want to understand a little bit more about how we're thinking about the future. Super. Thank you. Maybe the January call post the strategy deck? You just won't stop. We'll see. We'll see. Okay. No, thanks. We hear you, though. Thanks. Yep. Thank you. Okay. The next question will come from John Pancari of Evercore ISI. Your line is open. Good morning. Just want to see if you can give us a little bit more color on the loan yields this quarter. It looks like they were relatively flat. I guess overall, would have expected an increase given some of the frontbook-backbook dynamics.

Can you maybe talk us through some of the puts and takes and your expectation as you look out, given the rate environment and the curve outlook as well? Yeah. I mean, when you look at spreads, particularly on the commercial side, John, it is still very competitive. There have been a couple of spots where you see a little bit of widening of spreads, but not a lot. In most cases, what is holding spreads to be as tight as they are is really the competition we are seeing across the space, particularly in the middle market, commercial banking side of things. That is what is driving it when you look at that side of the house. Did that competition intensify to a greater degree than you may have thought? It seems like a higher loan yield expectation would have been fair to assume.

No, it's been pretty consistent now for a number of quarters, right? It ebbs and flows a little bit depending on which part of the country or which segment you may be talking about. The competition has been pretty intense there for a while. You are just not seeing sort of the widening that you might in sort of a slowing economic environment. That is just not materializing that way. Okay. My follow-up would be related to that too. Where are you seeing that competitive pressure come from? Is it private credit? Is it other types of non-banks? We have heard some citing insurance players stepping up again in certain parts of real estate. Are there areas that you would flag? Has that impacted anything around loan growth expectations? Thanks. Yeah.

I'd say still the primary competitor, particularly when you're talking about the middle market, commercial bank, or other banks. You certainly see other non-bank players at times in certain pieces of it. The primary competitor still is other banks. They vary depending on what part of the country you're in, obviously. I think that's what's driving it mostly. Okay. Thank you. The next question will come from Gerard Cassidy of RBC Capital Markets. Please go ahead. Hi, Mike. Hi, Charlie. Mike, you talked about the growth in the commercial and industrial loans in the quarter. It was predominantly in the corporate and investment bank. Can you give us a little more color and insights into where you saw that in that segment of the commercial and industrial loan portfolio growth? Yeah, sure. It's across the board in a bunch of sectors, Gerard.

I'd say we're seeing growth in places like fund finance, which are capital call facilities with big private equity firms. We saw a little bit of growth in probably three or four sectors across the large corporate space, including TMT and industrials, healthcare. A little bit across the board. You're also seeing some more asset-backed loan growth coming out of our markets business across whether it's mortgages or other types of collateral. A tiny bit of growth in prime brokerage. It really is sort of across the board in terms of a number of different areas within the corporate investment bank. Very good. You guys have talked a lot about improving efficiencies and improving profitability with the asset cap being lifted. Kind of a pivoting question. You talked about exiting the rail equipment leasing business, and you've exited other businesses over the years.

Are there any other businesses left that are not meeting your internal profitability targets possibly that could enhance the longer-term profitability of the company? Or is this essentially it for divesting of different segments? Yeah. The rail portfolio is really the last thing of any size. I mean, we looked at the businesses a few years ago now and sort of have methodically sort of worked our way through each of them. Really, the rail portfolio is sort of the last of those. Very good. Thank you. The last question for today will come from Chris McGrady of KBW. Your line is open. Oh, great. Thanks for squeezing me in. Just on operating leverage a little bit more broadly, the markets feel better today, more optimism in markets. Certainly, we know that's fluid.

I know you touched briefly on it, but just maybe unpacking the degree of confidence in the operating leverage over the medium term and then, I guess, both sides of it, the revenue and the expenses. Thanks. Yeah. Chris, I mean, look, I just come back to what we talked about a little bit earlier in the call. I think on the expense side, we feel as confident as we can be that there's a lot more to do on the efficiency side of it. And over the last four or five years, we've taken out $12 billion already. You've seen headcount come down by 20 consecutive quarters in a row. We're going to continue to focus on that. It's how we start all of our conversations with the business leaders and our budgeting each quarter. We go through it.

I think there is more to do there really across almost every part of the company. I think we will continue to drive that the same way we have done that the last number of years. I think on the revenue side, I just come back to the broader opportunity that we have to grow across each of the businesses. How that manifests itself in any given quarter is a little out of your control to some degree, given how markets can be. I do think across every single one of our businesses, there is a tremendous amount of opportunity to grow. I think those two things together should provide growth and profitability and returns over the long run. Great. Thank you. We have no more questions at this time. Great. We appreciate the time and look forward to talking next quarter. Thank you.

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