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spk09: Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo first quarter 2021 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, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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, starting as they begin the conference.
spk02: Thank you, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santamassimo, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first 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 materials available on our website. I will now turn the call over to Charlie. Thanks, John, and good morning, everyone.
spk06: I'll make some brief comments about our first quarter results, the operating environment, and update you on a few important topics. I'll then turn the call over to Mike to review the first quarter results in more detail. We are in $4.7 billion, or $1.5 per common share in the first quarter. As you can see, these results included a $1.6 billion decrease in the allowance for credit losses. Higher net interest income more than offset a decline in net interest income. And expenses are just beginning to reflect progress on our efficiency work. The impact of this work should increase in the latter half of the year. Credit quality continued to outperform our expectations with charge-offs at historical lows. But low interest rates and tepid loan demand remained headwinds for us during the quarter. And we continue to manage within the constraints of our asset cap, which require us to anticipate the inflows from government stimulus, effects of QE, and additional fiscal actions which could impact our balance sheet. Overall economic trends improved during the quarter. And while there are risks, the likelihood of improvement continues to increase. And you certainly see this in the markets. Equity markets are rising, spreads have tightened, and liquidity is strong. Additional fiscal stimulus, continued monetary support, and the acceleration of vaccine availability provide a path to a more complete reopening and further economic expansion. U.S. GDP growth is on track to surpass its pre-pandemic peak by the end of the summer and is expected to increase in 2021 by more than any year since 1984. Overall, the consumer is strong, though there are inconsistencies, which I will address later. Consumer net worth was up 10% in 2020, hitting a new all-time high of $130 trillion. Personal savings is approximately $1.3 trillion greater today than it was a year ago. It's expected that more than $1 trillion will be spent over the next five months. And this does not include the impact of President Biden's proposed initiatives. Wells Fargo customers, excuse me, specifically, as of last week, over $46 billion has flowed into our customers' deposit accounts related to round two and round three of federal stimulus payments, and we estimate that half has been spent and half remains in their accounts. For our customers who received federal stimulus payments, their median deposit balance was up 80% from a year ago, and for all of our customers, including customers who did not receive stimulus payments, Median balances were up 62% from a year ago. Weekly debit card spend was up every week compared to a year ago during the first quarter. The year-over-year increase accelerated in March, in mid-March, due to the impact of last year's COVID-related restrictions and the impact of stimulus payments and was up approximately 70% during this week last year of the quarter compared to a year ago, but was up 35% compared to the same week in 2019. We are seeing increased consumer spending activity in both travel and restaurants, two categories that have been particularly suppressed since the onset of COVID-19. Specifically for travel, for the week ended April 2nd, debit card spend was up 422% compared to 2020, but was still down 4% compared to 2019. Consumer credit card weekly spend continues to strengthen over the course of the first quarter as well, and ended up and ended the quarter up approximately 70% during the last week of the quarter compared to a year ago, but importantly, up 8% compared to the same week in 2019. Businesses remain strong as well. Most clients still have strong cash positions, and line utilization remain low. Demand for consumer products is high, and dealer inventory levels are meaningfully lower versus historical levels. After declining during the second half of the year, commercial loan balances seem to have stabilized, and if the economy continues to pick up, we would expect to see increased loan demand from our commercial customers in the second half of the year. With vaccine distribution accelerating, I'm hopeful that we will be shifting to a more normal way of life soon, but there's still many that will continue to need help, as not all have benefited equally during the recovery. Throughout the pandemic, our focus has been providing support for our customers and the communities we serve, and we continued those efforts during the first quarter. Since the pandemic began, we've helped 3.7 million consumer and small business customers by deferring payments and waiving fees. In addition to our $10.5 billion of PPP funding in 2020, In the first quarter, we funded approximately 70,000 loans, totaling $2.8 billion under the latest round of the Paycheck Protection Program. This year, we focused even more on small and diverse businesses, and our average loan size was $40,000, down from $54,000 last year. We had the lowest average loan size amongst our large bank peers. 96% have been for businesses with fewer than 20 employees. 43% have gone to businesses in either low to moderate income areas or majority minority census tracts totaling more than $6 billion between this year and last year. We committed last year to donate approximately 420 million of our fees from the PPP program and established our open for business fund. We're in the process of distributing these funds to a combination of CDFIs and not-for-profits that serve diverse small businesses. To date, we have distributed over $125 million and are working to accelerate distribution of the remaining funds. We estimate that these actions have protected more than 66,000 jobs and hope to make an even more substantial impact with the funds remaining. As we announced yesterday, we have invested in 11 black minority-owned deposit institutions as part of our $50 million commitment to support MDIs. We expect to compete We expect to complete our investments in another two by the end of the second quarter. And as I mentioned before, we processed over $46 billion of customer deposits related to the federal stimulus payments through last week and have cashed stimulus payments for non-customers without charging fees. While we're proud of these actions, we know there is still more to do. Lower-income families and individuals, as well as minority-owned small businesses, will continue to need support, and we will continue to look for ways to help. Climate change is one of the most urgent environmental and social issues of our time, and last month, Wells Fargo announced a major step in our efforts to support the transition to a low-carbon economy by setting a goal of net zero greenhouse gas emissions, including financed emissions, by 2050. We committed to publish data on our financed emissions and set interim goals as we work closely with our clients in this transition. We also released our first Task Force for Climate-Related Disclosure, I'm sorry, Task Force on Climate-Related Financial Disclosures report in the first quarter, which provides an update on our progress managing climate-related risks and opportunities. Let me turn and make some comments about our strategic priorities. Last quarter in my shareholder letter, I discussed the, and in the shareholder letter, I discussed the actions we're taking to improve our performance and we're making good progress. We continue to prioritize the work necessary to build the appropriate risk and control infrastructure, and it remains our top priority. As a reminder, this is a multi-year journey. Progress may not be a straight line, and while we still have significant work to do, we are diligently doing what's necessary, issue by issue. It's hard to share specifics given the nature of the work, but I believe we're making progress and we're confident in our ability to complete the work. In terms of business exits, I highlighted on the call last quarter that we were focusing our efforts on our core scaled businesses, and after rigorous reviews, we were in the process of exploring options for businesses that were not consistent with our strategic priorities. Mike will cover the financial details, but in the first quarter, we announced agreements to sell Wells Fargo Asset Management and the Corporate Trust Services businesses, and both are expected to close in the second half of this year. In addition, we completed a portion of the sale of the student loan portfolio and we completed the sale of the majority of the remaining portfolio recently. We are pleased that we have found buyers who we believe have a similar approach to service and are focused on providing clients with innovative products and solutions. These announcements are an important step to simplifying our business and allowing us to focus on our core strategic priorities. Our work to simplify how we operate and create a more efficient organization continues. We've made progress on our brand staffing and network optimization plans as we calibrate for changing customer behaviors and more traffic migrates to digital channels. We continue to execute on our commercial banking transformation as we optimize our coverage and operations model, consolidate lending platforms, and automate and standardize many manual processes such as onboarding a customer pain point, which has been key for us. And across the entire enterprise, we continue our ongoing efforts to reduce management layers, to speed decision-making, and reduce unnecessary bureaucracy. We are also focused on moving our businesses forward. A few examples. On the consumer banking side, we're accelerating our investments in digital with a particular focus on delivering a simple, easy-to-use, best-in-class customer experience for the most used mobile app features. We're also simplifying enhancing our product line, including launching clear access banking, our low cost, no overdraft product, and we've opened over 500,000 new accounts since the launch last fall. And this summer, we will be improving the benefits of our portfolio by Wells Fargo checking customers. As I've spoken about before, we're under-penetrated in credit card given our customer footprint, and we're working on developing a significantly improved value proposition that we can introduce to the market. And on the commercial side, we're going after the middle market investment banking opportunity in a different way than we have previously. This includes joint accountability, investments in talent, name-by-name client prioritization, and joint account planning. Mike will discuss capital more in his remarks, but our position remains extremely strong. We repurchased almost $600 million of common stock in a quarter and And based on the restrictions still in place for the second quarter, we have the capacity to return approximately $1.8 billion to shareholders. As a reminder, our asset cap limits our ability to deploy excess capital to our customers. Returning capital to shareholders remains a priority, and we look forward to resuming capital returns under the stress capital buffer methodology starting in the third quarter. Last quarter, I discussed constraints to achieving return on tangible common equity greater than 10% and then around 15%. I should note that those returns did not include credit loss reserve releases. The asset cap and capital return restrictions continue, but the progress on vaccination distribution, ongoing monetary policy, additional fiscal stimulus, and higher interest rates are helpful. We're in the midst of a multi-year transformation, and I'm confident that our operational and financial performance will continue to benefit from the progress we're making. I'd like to end by acknowledging that we've asked so much of our entire Wells Fargo team, and I'm proud of all the work they've done to support our customers and the communities we serve. We will continue to do all we can to support an equitable recovery and help those most in need of our support. I will now turn the call over to Mike.
spk13: Thanks, Charlie, and good morning, everyone. Charlie highlighted many of the ways we're actively helping our customers and communities, which we highlighted on slide two, so I'm going to start with our first quarter financial results on slide three. Net income for the quarter was $4.7 billion, or $1.05 per common share. Revenue grew from both a year ago and the fourth quarter as the decline in net interest income was more than offset by higher non-interest income. Our first quarter results included a $1.6 billion decrease in the allowance for credit losses. And as a reminder, in the first half of last year, we built reserves by a total of $11.5 billion, and we had $18 billion of allowance for credit losses at the end of the first quarter. We completed the sale of approximately half of our student loan portfolio in the first quarter, which resulted in a $208 million gain and a $104 million goodwill write-down and we closed the majority of the remaining portfolio just this past weekend. Our effective income tax rate in the first quarter was 6.4%, which included net discrete income tax benefits related to closing out prior year's tax matters. Our capital and liquidity remained strong. Our CET1 ratio increased to 11.8% under the standardized approach and 12.6% under the advanced approach. We repurchased 17.2 million shares of common stock for a total of $596 million, and we had $33 billion of excess capital over our CET1 regulatory minimum at quarter end. Our liquidity coverage ratio was 127%. Turning to slide five, which summarizes the financial impact of the business sales Charlie highlighted, we have included the 2020 revenue and expense associated with the businesses in the slide. While they represented a little over 3% of 2020 revenue, the pre-tax earnings is much smaller. Note that the table does not include the credit costs associated with the student loan portfolio, which can have a meaningful impact on the business's P&L and the expected expense reductions related to this business are incorporated into our $53 billion outlook for the year. Also, the expenses we've included related to the corporate trust and asset management businesses are the total expenses for those businesses. Some of those expenses may continue after we close the deals as we have transition service agreements and roughly 10 to 20% of those expenses are items such as corporate overhead that will take time to manage out of the expense run rate. In terms of segment reporting, the asset management business is now reported in corporate. Given that we announced the sale of the corporate trust business late in the quarter, that business is still included in commercial banking and will move to the corporate sector in the second quarter. Turning to credit quality on slide six, our net charge-off ratio in the first quarter declined to 24 basis points, the lowest it's been in a number of years and down 14 basis points from a year ago. Our losses have trended significantly better than our expectations due to the impact of forbearance programs and the unprecedented amounts of government stimulus. While there's still a lot of uncertainty, there are encouraging and improving trends related to commercial credit quality. Commercial net loan charge-offs declined $159 million from the fourth quarter to 13 basis points, the lowest loss rate since the third quarter of 2019. The improvement was broad-based with declines in all asset types, including $116 million of lower commercial real estate losses. As we have done since the start of the pandemic, we continue to closely monitor our exposure to retail, hotel, and office property types. The reopening of the economy has had a positive impact on retail and hotel as cash flow levels have begun to improve. That said, stress remains, and retail in particular was the driver of charge-offs in the first quarter. Though clearly there are negative demand trends in many office markets, the office portfolio continued to perform well, and we're not seeing any widespread stress in the portfolio as of now. Consumer net charge-offs declined $221 million from a year ago, with improvements across all asset types, but increased $88 million from the fourth quarter with higher losses in other consumer loans and credit card, but still continue to be low. Non-performing assets declined $692 million, or 8% from the fourth quarter, driven by lower commercial non-accruals, primarily due to declines in energy and commercial real estate non-accruals. $10.7 billion of our consumer loan portfolio, excluding government-insured loans, remained in COVID-related payment deferrals at the end of the first quarter. We stopped offering non-real estate related COVID deferrals in the fourth quarter and 98% of the balances that were still in deferral at quarter end were real estate related. Loans that have already exited COVID deferrals have continued to perform better than we anticipated with over 95% of the balances current as of the end of the first quarter. Though we're still not all the way back to pre-pandemic levels, we've continued to adjust our credit policies to reflect better economic conditions. Due to the reserve release in the first quarter, our allowance coverage ratio declined from the fourth quarter, but was up 90 basis points from a year ago. Similar to the fourth quarter, while observed performance has been strong, there was still a significant amount of uncertainty reflected in our allowance level at the end of the first quarter, and we'll continue to assess the level of our allowance. If the economic trends continue, we would expect to have additional reserve releases. On slide eight, we highlight loans and deposits. Our average loans declined for the third consecutive quarter and were down 9% from a year ago. The decline from the fourth quarter was driven by lower residential real estate loans due to continued high prepayments and re-securitization of loans we purchased out of mortgage-backed securities last year. Real estate loan balances have been impacted by actions we took early last year to discontinue correspondent non-conforming originations and home equity lending. We have started to originate correspondent non-conforming loans again and should start to see more volume from this channel over time. Commercial loans were relatively stable from the fourth quarter but were down 8% from a year ago when there was a strong borrow or draw activity during the early stages of the pandemic. Average deposits grew $55.5 billion, or 4% from a year ago and 1% from the fourth quarter, with growth in our consumer businesses and commercial banking, partially offset by declines in the corporate investment and banking business, corporate treasury, reflecting targeted actions to manage under the asset cap. With continued deposit growth, we have been actively managing down our long-term debt outstanding. We tendered for $6.8 billion of senior and subordinated debt in the first quarter, and along with maturities, total long-term debt declined $29.6 billion, or 14% from the fourth quarter, and was down 23% from a year ago. Turning to net interest income on slide nine, net interest income declined 5% from the fourth quarter, driven by two fewer days, unfavorable hedge ineffectiveness accounting results, continued repricing of the balance sheet, and lower loan balances. These impacts were partially offset by the benefit of lower long-term debt. On the call last quarter, we provided our 2021 net interest income outlook. We still expect net interest income to be flat to down 4% from the annualized fourth quarter level of $36.8 billion as the benefit of a steeper yield curve has been largely offset by softer than anticipated loan demand and low utilization rates on commercial loans, and faster than expected prepayments on residential mortgages. That said, it's important to recognize we are still early in the year, and our ultimate results for the year will remain dependent on how rate and lending environments evolve. If rates follow the current forward curve and commercial loans grow as the economic recovery gains momentum, which is expected by the industry, we would expect NII to land near the high end of the range. However, if loan demand proves softer than expectations, our total loan balance and our total loan balance remains flat compared with where we ended the first quarter, we would expect to finish closer to the middle of the range. We continue to closely monitor the evolving trends across each of the major drivers and will provide updates to our outlook as the year progresses. Turning to expenses on slide 10. Non-interest expense increased 7% from a year ago, driven by increased personnel expense. Deferred comp expense reduced personnel expenses in the first quarter of last year by $598 million. As a reminder, late in the second quarter of last year, we changed how we hedged deferred compensation, which reduced the volatility in our reporting for this item starting in the third quarter of last year. Personnel expense also increased from a year ago from higher incentive and revenue-related compensation, including the impact of higher market valuations on stock-based compensation, which was partially offset by lower salaries. All other expense was down 4% from a year ago, driven by lower professional services expense due to efficiency initiatives. Our expenses declined 5% from the fourth quarter, as seasonally higher personal expense was more than offset by lower restructuring charges and operating losses. Our 2021 expense outlook is unchanged at approximately $53 billion, with lower annualized expenses toward the end of the year. As we said on our last earnings call, our outlook excludes restructuring charges and the costs of business exits, such as the $104 million goodwill write-down related to the sale of student loans. We assumed $1 billion of operating losses in the outlook. The first quarter included $213 million of operating losses, but as you know, these expenses can be lumpy, especially as we continue to resolve legacy issues. We also assumed approximately $500 million of incremental revenue-related expenses, as these have been higher than expected so far this year due to strong equity markets, which is a good thing, as revenue more than offsets any increase. If the current market level holds, we would expect incremental revenue-related compensations this year to be approximately $800 million, but we are still early in the year and will update you as the year progresses. We are continuing to execute on efficiency initiatives, and additional initiatives continue to be identified and vetted. Turning to our business segments, starting with consumer banking and lending on slide 11. Net income increased from a year ago, driven by revenue growth in home lending and lower provision for credit losses. Consumer and small business banking revenue declined 6% from a year ago, primarily due to the impact of lower interest rates and lower deposit-related fees. The decline in deposit-related fees was driven by higher average checking account balances and higher COVID-related fee waivers. We expect a high level of Paycheck Protection Program loan forgiveness in the second quarter, which would result in higher net interest income, but as a reminder, the fees on those loans originated last year are being donated, so you will see a corresponding increase in donation expense, so it won't impact the bottom line. Home lending revenue increased 19% from a year ago on higher retail originations and gain on sale margins. The 12% increase from the fourth quarter was primarily due to higher mortgage banking income related to the re-securitization of loans we purchased from mortgage-backed securities last year, and an increase in retail originations. Credit card revenue declined 2% from both the fourth quarter and a year ago due to lower loan balances reflecting elevated payment rates. We continue to make progress in executing our efficiency initiatives in our branches. Transaction volume continues to shift away from our branches with 82% of consumer and small business deposits in the first quarter done digitally, up from 76% a year ago. We have closed 395 branches since the first quarter of 2020, including 90 branches in the first quarter of 2021. We are on track to complete the remainder of the 250 branches we expect to consolidate this year. We've also continued to adjust staffing levels, including the reductions related to branch closures. Importantly, to date, we've been able to make these adjustments while reducing customer attrition and improving client satisfaction. Turning to some key business drivers in slide 12. Our first quarter retail mortgage origination volume was the highest since 2016. Total mortgage originations increased 8% from a year ago as a $6.7 billion decline in correspondent originations was more than offset by a $10.5 billion of higher retail originations. Total mortgage originations declined 4% from the fourth quarter due to the seasonal slowdown in the purchase market and as growth in retail originations was more than offset by decline in correspondent originations. While the mortgage origination market is expected to decline in the second quarter as the anticipated increase in the seasonal purchase market is expected to be more than offset by decline in refinancings, we currently expect our origination volume to be robust as we have strong demand in the retail channel and we continue to build up volume in the correspondent non-conforming market. Auto originations increased 32% from the fourth quarter and 8% from a year ago in a strong market with supply shortages for both new and used cars. With the improving economic forecast, we are gradually returning to pre-pandemic underwriting policies. Turning to debit card, purchase volume increased 3% from seasonally strong fourth quarter levels. Debit card volume increased 20% from a year ago, reflecting higher consumer spending due to stimulus payments and improving economic conditions. And credit card purchase volume declined from seasonally high fourth quarter levels. Purchase volume was up 6% from a year ago, as lower year-over-year volume early in the quarter due to continued reductions in travel and entertainment spend was more than offset by growth in March. Commercial banking net income was up from both the fourth quarter and a year ago due to a decline in the provision for credit losses. Middle market banking revenue declined 20% from a year ago, driven by the impact of lower interest rates as well as lower loan balances from reduced client demand and line utilization. Asset-based lending and leasing revenue grew 7% from a year ago, driven by higher net gains and equity securities in our strategic capital business, as first quarter 2020 included impairments due to a decline in market valuations. This was partially offset by lower net interest income in first quarter 2021 from lower loan balances. Non-interest expense increased 4% from a year ago, primarily driven by higher technology spend, partially offset by lower headcount and consulting expense related to efficiency initiatives. Average loans declined for the third consecutive quarter and went down 19% from a year ago as COVID-related draws were repaid and loan demand and credit line utilization remained weak. Average deposits were up 8% from a year ago as stimulus programs have injected significant liquidity into the market. Turning to the corporate investment banking business on slide 14. In banking, revenue declined 6% from a year ago driven by the impact of lower interest rates and lower deposit balances and grew 7% from the fourth quarter. The linked quarter growth was driven by a 20% increase in investment banking revenue with strong debt and equity originations, partially offset by decline in advisory fees from strong fourth quarter levels. Commercial real estate revenue grew 5% from a year ago, primarily due to improved CMBS gain on sale margins driven by spread tightening, as well as an increase in low-income housing tax credit income. Market revenue increased 19% from a year ago and strong client demand for asset-backed finance products, other credit products, and municipal bonds, which was partially offset by lower demand for rates products and lower equities and commodities revenue. Average deposits declined 27% and average trading-related assets were down 14% from a year ago, primarily driven by continued actions we've taken to manage under the asset cap. As I mentioned earlier, wealth and investment management results exclude Wells Fargo asset management, which is now reported in corporate, and prior periods have been revised. Net income declined 18% in the business from the fourth quarter. Revenue grew, reflecting higher asset-based fees and higher retail brokerage transactional activity. Expenses were up due to seasonally higher personnel expense. Net income declined 8% from a year ago, reflecting the impact of low interest rates on net interest income, partially offset by the higher asset-based fees. We ended the first quarter with record client assets of $2 trillion, up 28% from a year ago, reflecting strong market performance. Net flows into advisory accounts improved in the first quarter from a year ago in the fourth quarter. Average deposits were up 19% from a year ago, and average loans increased 4% from a year ago, largely due to customer demand for securities-based lending offerings. Slide 16 highlights our corporate results, which included $1.2 billion of lower net interest income from a year ago, primarily due to the impact of lower interest rates, offset by a $1.4 billion increase in non-interest income. First quarter 2020 included equity impairments in our affiliated venture capital and private equity partnerships, and results in the first quarter of 2021 included a $208 million gain on the sale of the student loans portfolio. Non-interest expense declined from the fourth quarter on lower restructuring charges, and we'll now take your questions.
spk09: At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Our first question comes from the line of Scott Seifers with Piper Sandler.
spk05: Good morning, guys. Thanks for taking the question. I guess the first one I wanted to ask about is on NII guidance. So specifically in terms of premium amortization, there's about a $250 million delta between today's level of premium AM and where it was a year ago. Does that last year's level of about $360 million or so, does that represent in your mind a pretty typical level? And then kind of how quickly does it move back down to there?
spk13: Hey, Scott, it's Mike. You know, I think you really got to remember what happened last year that would have impacted premium AMOR, right? It was a bit of an abnormal quarter as you sort of got to the end of the quarter. You know, I think from here, I think, you know, based on what we're seeing here, You know, premium AMR probably has peaked in the first quarter and starts to trend down from here. How long it takes to sort of get to a kind of normalized view, I think we'll see over the next – we'll have a better clarity on that, I think, over the next couple quarters. But we would expect it to start trending down from here.
spk05: Okay, perfect. Thank you. And then just a separate question. So the lending recovery is kind of a big question for you guys and others. I guess just regardless of what happens with industry trends today, Maybe if you could speak to where you feel you guys are getting your fair share of loan growth and where you think you might still need to do better. I know you had mentioned, for example, credit card as being very under-penetrated, but just curious to hear broader thoughts there as well.
spk13: Yeah, look, as what you'll probably hear from a lot of folks, you know, the demand across really most commercial client segments has been pretty weak now. And and probably has stabilized or seems to have stabilized over the last couple of months. But I think we'll sort of see how that progresses into later this quarter. I think as we sort of look at where the opportunity is as the economy and the momentum in the economy really starts to take off more, it's really across the board in our core client segments, in our middle market, our commercial banking more broadly, I think there'll be opportunity in kind of the core, you know, large corporate segment, maybe to a lesser degree. But we do really expect to see that commercial banking demand, you know, start to pick up as the economy picks up. And so I would sort of highlight that. You know, I think Charlie has talked a lot about, you know, the credit card space. I think there'll be growth there. But given sort of the relative size of our portfolio to the balance sheet, I think that the impact there will be modest. to the overall size of sort of our loan portfolio.
spk05: All right. That's perfect. Thank you very much for taking the questions.
spk09: Your next question comes from the line of Ken Houston with Jefferies.
spk04: Thanks. Good morning, guys. Just wondering, Mike, if you can kind of just recodify that expense commentary for the year. You said the $53 billion number, and then you also talked about the revenue-related lift of about $800. So is that just the reset to $53.8 all things equal? I just want to make sure we know what that includes and doesn't include and how you expect it to traject from here. Thanks.
spk13: Yeah, sure, Ken. Thanks for the question. So, you know, if you recall how we sort of set the $53 billion target, I'll just give you a little bit of the background there. So we covered last quarter. So embedded in that $53 billion target was an increase of about a half a billion dollars of revenue-related expenses and about a billion dollars of operating losses sort of embedded in there. And what we excluded from there is the cost to exit the businesses, which you saw a little bit this quarter, the $100 million or so this quarter for the student loans business, and any restructuring charges that come throughout the year. So as you sort of think about the go-forward piece of it, the $53 billion we still feel really good about. I think that what's putting a little bit of pressure on that is the incremental $300 million of revenue-related expense. So I don't think it's a foregone conclusion that we're going to be $300 million higher, but I do think that's putting pressure on the $53 billion. So it's possible we're a little over that if the revenue-related expenses hold, which, by the way, should be a good thing, right? Because that means there's plenty of revenue on the other side of that to offset it.
spk04: And that was going to be my follow-up, Mike, which is, was the revenue uplift what you had already seen in the first quarter? Or is it things that you feel better about going forward that we haven't necessarily seen yet, but you're now anticipating a better revenue environment?
spk13: Yeah, we did see a little bit of it in the first quarter as equity markets outperformed, I think, everyone's expectations. So if those market levels hold throughout the rest of the year, that's when you'll see the rest of that revenue-related comp come in, and so you'll see the revenue associated with it throughout the rest of the year.
spk04: Okay. And then, I'm sorry, just last one on it. Are you still expecting the end of year on expenses to be lower than the beginning, as you had said, also in the fourth quarter, that trajectory still holds directionally? Yes.
spk13: Yeah, directionally, that's right. We'll get more benefit from the efficiency initiatives that we're executing later in the year, so that will sort of impact the run rate. And I would just point out and remind people that we do have a lot of seasonal expenses that hit the first quarter, and so you sort of need to normalize for those as you go out for the rest of the year as well.
spk04: Great. Okay, thanks, Mike.
spk09: Your next question comes from the line of Erica Najarian with Bank of America.
spk08: Hi, good morning. My first question is a clarification question for Mike. Clearly, the market responded to this comment. I think you noted that if, you know, loan growth was going to be continually tough this year, that you would be, NII would be down 2% from annualized fourth quarter, which I think the market is taking that you're bringing in your NII guide for the year, and I just wanted to make sure we interpreted that correctly, that it seems like a more realistic outlook for NII now with the curve steepening and perhaps green shoots on loan growth is flat to down 2%.
spk13: Yeah, no, thanks, Erica, for the question. You know, our guidance still holds that, you know, down, you know, somewhere between flat to the fourth quarter run rate to down 4%, and consistent to what we said, you know, in the first quarter is to get to the top of the range, we need to see some loan growth. That's still the case, although rates have offset some weakness that we've seen so far. And I think to get to kind of the middle of the range, we really need rates to kind of hold where they are. And we won't need a lot of loan growth from here to hit that. But I think there's plenty of scenarios that you can sort of think through that you know, put you somewhere else in the range. But, you know, what we tried to give you were a couple kind of realistic data points relative to where we think what's possible in terms of where we're laying within the range.
spk08: Got it. Very helpful. And my second question is for Charlie. You know, Charlie, clearly the market is reacting to what seems to be a brighter revenue picture for wells and continued progress in your transition and turnarounds. And it feels like it's shrugging off, you know, typically your stock wouldn't be up 3%, you know, after saying that expenses could flip higher and clearly the market doesn't care given the revenue outlook. I guess I'm wondering as we look forward to 2021, you know, and hearing you loud and clear in some of the investments that you've already, you know, planning to make in the consumer side, you know, what are the puts and takes in terms of, you know, a greater bottom line or benefit from the second half of that $8 billion cost savings that you've identified, you know, versus, you know, an economic picture that is clearly brightened even over the past three months. You know, in other words, should we think of your expenses, you know, having a higher floor, let's say $50 to $51 billion as we look out to 2022, And obviously that would come with greater efficiencies as revenue continues to improve.
spk06: Thanks, Eric. Listen, I don't think there's anything more that we're going to say in terms of what we would expect expenses to be going forward beyond what Mike covered in his remarks and what we said on last quarter. When we look at the opportunities to continue to drive efficiency in the company, which is really all about just running a better company, those continue to be extremely significant. We laid out just on a gross basis what we thought those opportunities were and our degree of confidence in being able to achieve that given the level of specificity that we had in line of sight. And I think that still holds true and over time we would expect to continue to find more kind of peeling the onion back. And at the same time we are investing in the business. And it's on the consumer side. It's on data. It's across the home lending platform, the card platform, our products in the consumer bank, what we're doing in our middle market business with technology, account, and I can go on and on of all the things that we're doing. And so I think that's all embedded in our statement that, you know, we would expect the fourth quarter in order to get to $53 billion just would clearly be a lower run rate than the $53 billion itself. And that as we look forward, we hope to see net expense reductions as we continue to drive efficiency while continuing to add investments into the business. So hopefully that's responsive to what you're asking.
spk08: Thank you, Charlie. Strong message this quarter.
spk09: Appreciate it. Your next question comes from the line of Betsy Gracek with Morgan Stanley. Hi, good morning.
spk11: I had a question around how you're thinking about the dividend and the buybacks. We know that post CCAR stress test, assuming you pass that, that there's a little bit more room for you to do both of those things. So maybe you could give us a sense as to how you would approach the buyback and the dividend decision, post-stress test, and in particular, what kind of time frame are you thinking about that you would need to optimize the capital structure down to your management targets? Because you're sitting with a lot of excess capital today, as you know.
spk06: Sure. Mike, what am I starting? And you can pick up. I guess we'd start with the dividend. It's not lost on us that our dividend is quite low, certainly relative to where we're earning today and as we look forward. And we all know that's a consequence of two things. It's a consequence of the restrictions that were put in place by the Fed in terms of what those limitations were. But it was also a point of view that we had, which was we didn't want to have to, if the environment even would get worse from that point in time, be in a position to have to reduce the dividend again. So we would like to increase the dividend to a more reasonable level. We think about it as targeting a payout ratio, excluding reserve releases and things like that. And then beyond that, it is, you know, investment in the business. It's deploying our capital for our clients and, you know, then the difference, you know, being buybacks ultimately just given the amount of excess capital that we have today. And, like, you can talk a little bit about the timing.
spk13: Yeah, and as you sort of think about, you know, timing, obviously, you know, we've got a lot of, you know, components to sort of think about there. But, you know, you sort of think about it over the next year or so, you know, or year. I think that sort of gets you probably a reasonable timeframe to sort of work our way down. you know, assuming, you know, as we've been told that the restrictions come off and we're back to sort of a more normal stress capital buffer regime. And so I would sort of think about it over that time frame, Betsy, in terms of, you know, what the timing looks like. And obviously some of that depended upon CCAR and the results and how that all plays out.
spk11: Got it. And on the payout ratios, I mean, the dividend had been on the higher end of the peer group, but your peer group's running somewhere between, you know, 30 and 40 percent, and that's, you know, I would think what you mean by reasonable. I'm not asking you to tell me what ratio, but I guess I'm asking you, is that the right peer group, or would you say, you know, you should widen your aperture a little bit and go more like 25 to 40, bring in some of the, you know, G-SIBs in there?
spk13: Yeah, no, look, I think, you know, as you sort of think about the payout ratio over time, you know, I think, you know, we'll sort of come up and, you know, obviously it's going to be a board decision, Betsy, in terms of, you know, what the dividend trajectory sort of looks like. But it's not lost on us that we need to sort of be in a reasonable sort of payout range over time. And obviously that's going to be dependent upon what we think the earnings capacity is going to look like. And so I think you'll see that sort of come through over time as we sort of, you know, have more ability to distribute capital.
spk06: Yeah, and I guess what I'll just add, Betsy, just real quick is I think the way you – I mean, I think the numbers and whatnot, the way you talked about it is generally the right way to think about it in terms of how – I mean, number one, we were clearly high relative to, you know, what others were and in terms of what we – you know, probably makes sense for us. You know, that's not the way we're thinking about it. you know, more long-term range in terms, I think, of what you talked about is right. And, you know, we would like to, you know, do something sooner rather than later. And that might not get us to where we ultimately want to be, but it would be, I think, an important step. That's the direction that we're going.
spk11: Got it. Okay. Thanks so much for the call, Charlie. I appreciate it.
spk06: Sure.
spk09: Your next question comes from the line of John Pencary with Evercore ISI.
spk06: Good morning. Just on the margin front, I just wanted to see if you could quantify the impact of the hedging effectiveness on the net interest margin this quarter. And then separately, could you just talk about margin expectations from here, just given the rate backdrop? We're looking at the bottom here, and we can see some upside as we move through the rest of the year. Thanks.
spk13: Yeah, sure, John. It's Mike. The hedging effectiveness had about a three-basis point impact on net interest margin, and And as you probably know, we'll get that back, a negative three basis point impact, and we'll get that back over time. Hedge ineffectiveness is sort of a temporary difference that comes back. As you sort of think about the outlook from here, if the case that we sort of laid out that gets us to the top of our NII range plays out in the way that underpins that, then we should see some growth in both NII and NIM from here. And so this hopefully will be either bottom or pretty close to the bottom as you sort of look forward if that case plays out. Now, as you know, NIM can move around a little bit quarter to quarter, so you might have that bounce around, but the general trajectory should be positive.
spk06: Okay. Got it, Mike. Thanks. And then last, uh, separately on the cost save side, I know you expect about the one and a half billion to fall to the bottom line of the 3.7 billion this year. Can you maybe, um, help us think about the magnitude that could fall to the bottom line of the remaining savings of the remaining 4.3 billion as they received any, any additional color you can provide this quarter now that you're beginning to peel the onion as you noted earlier. Thanks.
spk13: Yeah, John, I would just go back to what we just talked about a few minutes ago. As you sort of think about the trajectory of the expenses, we'll get more of that impact as we go throughout the year. And as Charlie just mentioned, the run rate as we go into the fourth quarter will be at a lower rate. And as we sort of think about the investments we need to make and also the additional efficiency initiatives that we vet and sort of are working on top of what we talked about last quarter play out, you know, we'll provide more guidance on that, you know, as we think about 2022 when we get later in the year.
spk06: And this is Charlie. I just want to add a couple of things if I can. You know, first of all, I just remind everyone that, you know, we have a tremendous amount of work to do on our control environment. And when you look at the consent orders and all those things, and so no one has asked about that. And again, there's really very little that we can say. As I said in my prepared remarks, But we have a lot of work to do. We're committed to spend whatever is necessary. And it is a significant amount of money. And as we get into next year, we're not going to lock ourselves into a certain number because we have to spend what's appropriate. So as we get closer, we'll be in a better position to give you more color. But given it's three quarters away, it just doesn't make any sense. And I also just want to just remark, we are very focused on improving efficiency of the company. but the world is moving really quickly. We have a lot of work to do in terms of building the businesses and putting ourselves in a position so that we do create the kind of revenue growth that we would expect to be able to get out of this franchise. And so that's just a reminder of part of the reason why we're not being too specific about what we expect beyond this year because as we continue to do our work and plan for the future, we need to have the ability to do what's necessary to build the company for the long term. While we've still said we still would expect expenses to be down on a net basis as we look into the out years. But more to come as time goes on. Got it. All right. Thanks, Charlie.
spk09: Your next question comes from the line of David Long with Raymond James.
spk06: Good morning, everyone. You know, Charlie, we've talked a lot about the businesses and becoming more efficient, if you will, and focusing on those that impact your strategic priorities. Are there any businesses that you would like to increase your critical mass in or new businesses to get into that you think would be helpful to your strategic priorities? You know, I think, so on the first point, I think, you know, when we look at these, you know, our four businesses that we report publicly, we generally believe that there are material growth prospects in all of them, all for very, very different reasons. And so, you know, it's hard to sit here today and say whether, you know, one should be a little bit higher than the others, but I think we feel great about the positions we have. We feel great about the opportunities in each. And so I think that should be an honest assessment of the way we view our businesses. What was the second part of the question again? I'm sorry. Are there any holes or any opportunities that you see to increase critical mass in any specifics in any of those business lines? Just thinking about any areas where if you had some excess capital, could you invest it there to gain some? some market share or enhance your goal to improve your strategic priority outlook? I think all the things that we have to do at this point are continuing to build out the products and services that we have at the core of the franchise. We are spending a significant amount of money and think we've got a significant opportunity. given the size of our consumer footprint and in terms of what we should be doing from a digital perspective. The way we kind of look at it internally is we're in the game, but we're not at all a market leader in terms of what our digital capabilities are. We have a very, very clear roadmap about what we intend to build out, and we would start to be bringing those things to market this year. But as I said, when we talk about what we're spending, this year in that $53 billion. That is included in there. And we've got opportunities like that across all the businesses. So I think we're not in a position to buy anything at this point. Our focus is on spending our money to strengthen what we have, but still believe that there are material opportunities to do that, some shorter term and some longer term. Got it. Thank you, Charlie. Appreciate the call.
spk09: Your next question comes from the line of Matt O'Connor with Deutsche Bank.
spk10: Good morning. Just a long-term strategic question, trying to look past the asset cap and everything. As we think about the investment bank, what is the vision for that longer term? You've got a competitive advantage in the SLR, which is becoming more and more evident. with the Fed exemption going away? I think you're about 100, 150 basis points above peers. Is there a way to better leverage that? And then maybe you could just also comment on the equity trading. And it's not huge numbers, but, you know, was that impacted by a hedge fund out there?
spk06: So let me start. You know, I think our aspirations, you know, for a corporate investment bank is, It's actually interesting because I actually, other than the fact that we're not afraid to talk about it, I actually don't think about it being really all that different from what we've been doing over the past bunch of years. When you look at our results, the corporate investment bank is an extremely important part of the company. That's not because I declared anything differently. All we did is we broke out the results so you actually saw the importance of it. A significant part of it is the corporate bank, but the investment bank is a meaningful portion of it as well. And so as we think about what it should look like going forward, we want to continue to build out the corporate investment bank as we've been doing in a very linear way, not in an exponential way, not moving beyond our risk appetite that kind of defines what Wells Fargo is, but just by serving the existing customers that we have in most parts of the company in a much more holistic way, And ultimately over a period of time that does allow you to expand your reach in terms of what your client base is. And so we're focused on the products and services that are predominantly US customers want from us. We've talked about the opportunities to penetrate the corporate investment banking products into the middle market. But it's true of there's significant opportunities in the large corporate market in the US where we've got significant treasury management relationships material lending relationships and were completely under-penetrated in terms of what fees are for those customers relative to at other institutions. So that's the way we're thinking about it. And again, I would just stress it's a continuation of building it out in a methodical way, not focusing on using risk in order to grow share. but focusing on our customer relationships that we have because we have a shot. And just to be clear on the equity piece that you're talking about, just remember we do have an equity platform which you can see in our results. I would just describe in terms of our prime brokerage business because I'm sure we'll get a question on it, so just answer it now. Our exposure in total and our individual exposures, I would describe as just very consistent with the size of our platform. You know, we manage it the way we, in terms of risk, the way we manage all the risks in the corporate investment bank. And I think you've seen, you know, the results over a period of time there in terms of what that means, because it's not just what you do, it's how you do it. And so we did have a relationship with Archegos. We said publicly that we were always well collateralized. We exited it. We exited it with all of our exposure with no loss. And I'll just add that we had substantial excess collateral after liquidation. So it just says, again, in terms of the way we think about how we want to manage businesses that have risk in it, not that we'll be perfect all the time. And as is the case in all events, there are lessons to be learned, both in terms of what we've done and what others have done. And we'll factor that into how we manage the businesses as we always would.
spk13: And I would just add just one thing as you sort of think about our growth from here. We are a bit constrained in growing our investment bank with the asset cap restrictions that we have in place, given the significant growth that we've seen in consumer deposits in particular. So So as you sort of think about that timeline and that approach, Charlie said, that'll take some time to sort of play out.
spk06: Yeah, just to reiterate, you know, that, you know, as we look at the actions that we've had to take to accommodate all the liquidity that we've seen, the corporate investment bank has bared the biggest brunt in terms of where we've actually gone to create a bunch of that capacity. So as we think about the future, you know, the first step is actually just getting back to where we were. So...
spk10: And then just to clarify, the decline in equity trading year over year, is that just, if it wasn't from Archegos, is that distortion from the retirement? There's some noise, I think, related to that in the year ago comp. Was that what's driving that?
spk13: Yeah, it's just activity levels in our business. And, you know, our business is a little bit different than others, a little bit smaller cash business that sort of, I think, drove a lot of activity this quarter. So, So I think there's a number of factors sort of driving it. No individual sort of item that's significant. Okay. Thank you.
spk09: Your next question comes from the line of Steven Schubach with Wolf Research.
spk14: Hi. Good morning. So I wanted to start off with a question for Mike just on the fee income outlook. You know, lots of moving pieces in the quarter, but how should we be thinking about the appropriate jumping off point for core fee income? As we think about the completion of the business sales and maybe some normalization in IB and mortgage activity, I know that there's more explicit guidance that's been given on the NII side. I was hoping you could maybe unpack how we should be thinking about that core fee income run rate from here pro forma the completion of those sales.
spk13: Yeah, so obviously we've given you a lot of detail on those sales, so you can model in the impact that that's going to have on fee income pretty easily. As you sort of think about some of the other big line items underneath that, we had about $2.8 billion in the quarter for advisory and other asset-based fees, primarily in our wealth business. And as you sort of think about the key driver there, it's going to be equity market levels. And so you can model what you think is going to happen there, plus flows that may come in. As you said, another billion three in the mortgage business, that is a bit cyclical, as you sort of pointed out. But given what we see at this point for the second quarter, we expect to have robust origination volumes in our business. And so that should be a good a good quarter at least. And as rates continue to rise, you'll see some impact there in terms of volume impact there. As you look at some of the other pieces, you've got deposit and lending fees just under a couple billion dollars there too. I think those are pressured in the short run, but should see some normalization and growth over time. You've got card fees, which should grow with economic activity. And then you've got another couple billion that's kind of, you know, I'd kind of characterize as more transactional in nature, whether it's commissions or investment banking fees. And so I think if you sort of think about it that way, you can probably, you know, come up with a few drivers that sort of help you model that in a way that gives you a view on where it's headed.
spk14: Thanks for that, Culler. And just for my follow-up on NII, maybe focusing on liquidity deployment. You guys are in a very strong excess liquidity position. I know that a couple of quarters ago, and I think, Mike, it was actually your predecessor who alluded to the fact that your appetite was tepid to redeploy some of that excess into securities, just given at that point in time, the curve was flat as a pancake. Now that we've seen some incremental steepening, which told me you could speak to what's contemplated in the NII guidance in terms of excess liquidity deployment. and your appetite to actually grow the securities book from here, just giving your liquidity capacity to do so?
spk13: Yeah, no, as you point out, we've got plenty of capacity. And I think, you know, as you look at what happened in the quarter, you know, kind of in a marginal way, you know, a little under $10 billion, we've increased the portfolio. So we've started to redeploy a bit of it. But as you sort of point out, although the curve has steepened, you know, rates are still relatively low. And so we're working to balance sort of the short-term carry we're going to get, you know, by redeploying faster with, you know, OCI impacts over time and how to do this in the most effective way. And when we get good entry points, we're taking advantage of it. So I would think that we're going to continue to redeploy at a prudent pace as we see opportunities that sort of make sense from a not just the short-term carry view, but also all the other items that we sort of need to take into account as we sort of look forward.
spk14: That's great. Thanks so much for taking my questions.
spk09: Your next question comes from the line of Saul Martinez with DBS. Saul, you may be on mute.
spk07: Sorry about that. I was on mute. Mike, I believe you mentioned that the expenses or some of the expenses associated with the asset management business and the corporate trust business will be sticky and will remain for a bit. And we're talking about about, you know, annual 2020 about $1.7 billion in aggregate. What's still a little bit unclear to me is in the $53 billion expense number, what proportion of that $53 billion or $1.7 billion is embedded in the $53 billion guide? And I guess as an adjunct to that, I guess can you just talk about how sticky those expenses, what proportion of those expenses will stick around? How do they roll off over what time period? Because I guess what I'm a little bit sensitive to is with the sale of the three businesses, you're creating about a $2.3 billion revenue hole. And just want to make sure that we understand that there's no notable impact on the expense base. So if you can just help us unpack some of this stuff, it would be helpful.
spk13: Yeah, no, it's a good question. So as you sort of think about corporate trust and asset management, we assume that those expenses would be here for the full year and the $53 billion. So there's no savings assumed relative to the outlook we gave you. So that's sort of, I guess, point number one. On the other parts of the question, what we were trying to point out is with both of these businesses, probably certainly for the corporate trust business to maybe a greater degree, we'll have some transition services agreements as they take on and migrate these businesses. So some of the expenses stay. Some of that will get offset in and other items, but some of the expenses will stay as part of those agreements. So not everything transitions sort of day one. That's sort of point number one. Point number two on it is that, as you would expect, there's a portion of these expenses that are more shared across the organization. I use sort of corporate overhead just as an example. So it'll take us a little longer to work the majority of that out. And so I characterize that as somewhere between 10% and 20% of it will take a little bit longer. And then I guess lastly, as we sort of get to closing on these deals, we'll be transparent and provide an update to our guidance on how these will impact it.
spk07: Got it. But if we're thinking about 2022 in relation to the sort of the ongoing expense run rate, which was reflected in the $53 billion, really the $1.7 billion, I'm just looking at asset management and corporate trust, that the bulk of that should by that point, assuming the deal's closed, should, you know, call it, I don't know, 80, 90% of that, should be out of the run rate by next year.
spk13: Yeah, subject to any impact from transition services agreements. Got it. Right.
spk06: As we get closer, we'll give you more.
spk13: Which we will get paid for in revenue. Yep. Yeah, as Charlie said, in most cases for these transition service agreements, we'll have some expense still there, but we'll get reimbursed and the way the accounting works on that is just geography. We'll get some revenue and offset by these expenses.
spk07: Is there a reason why these are not placed in discontinued operations until the deal closes?
spk13: Well, I think we moved asset management to corporate and so we moved it out of the segment that it's in and as I noted on the call, we'll move corporate trust out of the commercial banking segment in the second quarter. So you'll be able to clearly see sort of the impact of it in the operating segments.
spk07: Got it. All right. Thank you very much.
spk09: Your next question comes from the line of John McDonald with Autonomous Research.
spk12: Hey, Mike, two quick cleanup items. Just on the tax rate, can you remind us what's making the tax rate low this year and whether the reserve releases put some upward pressure on that and then More importantly, is it sustainably low as you look out into further years because of tax advantage investments, or is part of it profitability related? Just give us the factors there.
spk13: Yeah, the biggest impact, John, on the tax rate relative to kind of the marginal rate that we've got is the impact we get from the tax credits we get on our low-income housing and renewable energy investments. And as you can see from the K disclosures, those have been growing year after year, and we expect them to grow in 2021 as well. And those are what they are, right? Those are pretty easy for us to identify and forecast, and that's the biggest piece of what's bringing down the effective tax rate. And those credits will continue. Obviously, the more pre-tax income that we have, you know, above and beyond what we expect, we'll sort of be at the marginal tax rate. And so, you know, presumably if we, you know, obviously theoretically if we earn more money, then you'll see that effective tax rate sort of inch up over time.
spk12: Okay. And then just on the mortgage outlook you mentioned.
spk06: Hey, John, this is Charlie. The only one I want to add on that is just, and Mike, you can correct me, the – The reserve releases affect the rate, but the size of our total tax number, not that big. Again, the substantial impact on the lower rate is the dollar benefit that we get from these tax-advantaged investments that we have. And as Mike said, just on income going forward, think about it in terms of the marginal rate.
spk12: Got it. So you're still expecting a single-digit tax rate this year, Mike? correct?
spk13: Yeah. Yeah. No, at this point, that's the case.
spk12: Okay. And then just to clarify on the mortgage outlook, Mike, I think you said like the industry, you know, might be down in volume, but you guys expect to buck that a little bit because of some of the retail strength you have, or were you kind of just saying that you'll be down a little bit, but still robust? If you could just clarify your outlook on mortgage, that'd be great.
spk13: Yeah, look, the industry data, typically their forecasts lag a little bit relative to what the industry is actually seeing. And so I think the industry is projecting that second quarter is going to be down a little bit, but we'll see how that sort of plays out over the coming weeks in terms of what their forecasts are. But I think based on what we're seeing in our pipeline, we feel like it'll be a pretty robust quarter on the origination side. you're likely to see that gain on sale margins come down, but we're likely to see an increase in volume as well. Okay, thank you.
spk09: Your next question comes from the line of Vivek Juneja with JP Morgan.
spk01: Hi, Charlie, Mike. Thanks for taking my questions. Just a couple of cleanup ones, just a little bit further on mortgage banking. Mike, since you just answered that partly, the question I have is G&M buyouts. You talked about that boosting your mortgage banking gains. How much was that? Because then that could give us a sense of what did your gain on sale margin do in Q1 versus Q4? And how much are you expecting that gain on sale margin – I'm sorry, the G&M buyouts to continue in the next couple of quarters? How much more to do?
spk13: Yeah, I think, you know, Vivek, I don't have the number in front of me on the impact from the buyouts, but I would also sort of point out, so we can follow up with you after, but I would also point out that, you know, the early buyouts as we re-securitize them, that impacts sort of our balance as well, sort of our loan balance in home lending as And so I think that's another big driver. And we give you some data in the queues in terms of what those balances look like quarter to quarter. So we would expect that, you know, over the coming quarters that we're going to continue to re-securitize more of those loans.
spk01: Okay. And then the second one for both of you. I saw the numbers on the expected gain on sale on the businesses. well, the asset management and corporate trust. Is that net of goodwill or is that, would we need to adjust a goodwill right down on that? And that'll obviously play into your share buybacks. And Charlie, given that we're all anticipating the asset cap to be lifted at some point, how are you thinking about the pace of share buybacks since you know, that'll give you an opportunity to put, you know, some of that capital to work in terms of growing the balance sheet too. Don't worry, I'm not trying to pin you down on that timing of asset cap getting lifted.
spk13: Yeah, so Vivek, I'll start there. So, you know, I don't want to get wonky on accounting, but, you know, the way we accounted for the student loan business was a sale of the portfolio. And so there was a goodwill write down that showed discreetly in the P&L and how that flows through. as you sort of look at the corporate trust business sale and the asset management sale, you won't have a corresponding write-down of the goodwill, the gains net of everything that goes into exiting there. So you don't need to adjust for that. I think as it comes to sort of the asset cap question, we'll go back to our you know, stock answer around, you know, not, you know, sort of not commenting on that at all, other than the fact that, you know, as Charlie has said a couple of times on the call that, you know, we're, it's our top priority and we're continuing to do whatever we need to do to sort of work our way through that. And we continue to believe we're making good progress there. And as you sort of look at, you know, our capital and liquidity levels, you know, we've got, you know, a significant, continue to have a significant amount of excess capital. Yeah. All right. Thanks.
spk09: Our final question will come from the line of Charles Peabody with Portalis.
spk03: Yeah. I have two questions, one on cards and one on NII. On the card front, you mentioned that you are punching below your weight. And I was curious, you're hearing from a lot of the card companies and JP Morgan this morning that they're going to really accelerate their marketing spend on cards in the second half of the year. So how are you expecting to gain market share? Is it pricing, awards? How are you going to improve your relative position in that business?
spk06: Sure. This is Charlie. Thanks for the question. First of all, I would say, again, kind of like my comments on the Corporate Investment Bank, when we think about the opportunity, we're not talking about doing anything new. that is materially different from a risk perspective for the company. The way we look at it is we have a business today which has $35-ish billion of receivables. When you look at the size of the consumer base that we touch across the franchise, it's hugely substantial, and we're hugely underpenetrated, even though we do have a reasonable-sized business to start out with. Ultimately, when you look at what we do as a card company, the fact is our card propositions are not competitive, what is available today in the marketplace or where people are going. When we look at our things that we do on fraud, when we look at our customer service, every step of the way, we think we have opportunities to make material improvements in what our offerings look like, which will make our products far more attractive for those that currently have the products so that it becomes their primary product, but also more attractive for the customers that we currently touch. And so, you know, it's a very, very, you know, we're very, very clear about what we think we've got to do to increase that penetration. In a lot of ways, it's very, very basic because we're building on something which is particularly uncompetitive, which I just look at like it creates great opportunity for us.
spk03: As a follow-up question on NII, I believe you guys have modeled scenarios for negative rates at the short end. Can you share some of your findings on that?
spk13: Yeah, negative rates on the short end won't have a significant impact on us at all. I think we have the outlet at the Fed at 10 basis points, and so I don't see that being an impact for us.
spk03: Thank you.
spk09: I'll now turn the conference back over to management for any concluding remarks.
spk06: This is Charlie again. I just want to thank everyone for the time, and we look forward to talking to you during the quarter and then on the call next quarter. Take care.
spk09: Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.
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