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spk02: Welcome and thank you for joining the Wells Fargo first quarter 2022 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 1. If you would like to withdraw your question, press star 2. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.
spk05: Thanks, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santamasimo, 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 file 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 SSE filings in the earnings materials available on our website.
spk11: I will now turn the call over to Charlie. Thanks, John, and good morning, everyone. I'll make some brief comments about our first quarter results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review the first quarter results in more detail before we take your questions. Let me start off with some first quarter highlights. We earned $3.7 billion, or 88 cents per common share, in the first quarter. Our results included 21 cents per share impact from a decrease in the allowance for credit losses. We had broad-based loan growth with both our consumer and commercial portfolios growing from the fourth quarter. While net interest income was down modestly from the fourth quarter, driven by fewer days in the quarter, it grew 5% from a year ago. Higher interest rates, along with our expectations for continued loan growth, should drive higher net interest income growth than we anticipated at the beginning of the year. Mike will provide more details regarding our current view later on in the call. However, the increase in rates negatively impacted our mortgage banking business. The mortgage origination market experienced one of its largest quarterly declines that I can remember. and it will take time for the industry to reduce excess capacity. Credit performance remained incredibly strong, and our net charge-off ratio declined to 14 basis points. While we have minimal direct exposure to Russia or Ukraine, we're monitoring certain industries that have the potential to be impacted by the conflict and economic sanctions, but thus far don't have concerns. In addition, we returned a significant amount of capital to our shareholders in the first quarter, including repurchasing $6 billion of common stock and increasing our common stock dividend to 25 cents per share. The significant changes we've made across the company have put us in a position to increase the dividend, and our work continues. The health of our consumer and businesses so far has remained strong, though we're entering a period of uncertainty. March was the eighth straight month in which inflation outpaced income, with lower-income consumers being most impacted by rising energy and food prices. That said, higher deposit balances and rising wages have thus far allowed consumers to weather these headwinds. We continued to see median deposit balances above pre-pandemic levels, up approximately 25% compared to 2020, but down from the highs observed in 2021. Consumer credit card spend remained strong, up 33% from a year ago, All spending categories were up with the highest growth in travel, entertainment, fuel, and dining. After strong growth in the first quarter of 2021 driven by stimulus payments, debit card spending increased 6% in the first quarter of 2022. Discretionary spending remained strong with entertainment up 39% and travel up 29% from a year ago. The increase in energy prices was reflected in a 27% increase in fuel spending. Loan demand from our commercial customers increased with growth in both commitments and loans outstanding as customers' borrowing needs are increasing to fund working capital expansion. Credit quality remains strong with net recoveries in our commercial portfolio. Now let me update you on progress we've made on our strategic priorities. Building an appropriate risk and control infrastructure remains our top priority, and I continue to believe that we're making significant progress. Early in the first quarter, we named Derek Flowers, our new chief risk officer, following Mandy Norton's retirement announcement. Derek has extensive experience managing risk, including the work he's done over the last several years of managing the build-out of Wells Fargo's risk and control framework. Derek has been with Wells Fargo for over 20 years, and his familiarity with the company and his risk background make him the ideal candidate to succeed Mandy who I'd like to thank for the tremendous progress she made in transforming the risk organization. We also continued to make progress in resolving legacy regulatory issues, with news in January that the OCC had terminated a consent order regarding add-on products that the company sold to retail banking customers before 2015. We have much more work to do to satisfy our regulatory requirements, and we will likely have setbacks. but I'm confident in our ability to continue to close the remaining gaps over the next several years. We remain focused on improving our financial performance while investing to drive growth across our businesses. Providing our customers with simple, easy-to-use and fast digital experiences is one of our most important strategic priorities. In the first quarter, we began rolling out our new mobile banking experience for our customers in our consumer businesses, and feedback has been very positive. Digital adoption, which is critical to both delivering seamless digital experiences that our customers expect and reducing the cost to serve, has continued to increase with mobile active customers up 4% from a year ago. We added approximately 500,000 new mobile active customers in the first quarter alone. We continue to invest to improve our digital capabilities with additional enhancements planned for this year. We're also focused on reducing friction and moving money. We've continued to invest in Zelle and made changes to expand customer usage, including increasing sending limits. These changes have helped to drive 21% growth in active SEND customers and a 33% increase in SEND volume from a year ago. We continued to enhance our credit card offerings with our partnership with Built Rewards and MasterCard. This first of its kind co-brand card allows members to pay rent and earn points with no transaction fees on rent payments at any apartment in the U.S. In the first quarter, we selected Encino to streamline our origination, underwriting, and portfolio management for our small business customers. This collaboration is expected to provide our customers with a more streamlined lending experience and builds on our existing relationship that we announced last year to accelerate our digital transformation within our commercial banking and corporate investment banking businesses. Let me just make some summary comments before I turn it over to Mike. As we sit here today, our internal indicators continue to point towards the strength of our customers' financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation, and this will certainly reduce economic growth. In addition, the war in Ukraine adds additional risks to the downside. Wells Fargo is positioned well to provide support for our clients in a slowing economy. While we will likely see an increase in credit losses from historical lows, we should be a net beneficiary as we will also benefit from rising rates, we have a strong capital position, and our lower expense base creates greater margins from which to invest. We remain diligent in extending credit and are focusing on managing the other risk types within the company as well. We remain on target to achieve a sustainable 10% ROTCE subject to the same assumptions we've discussed in the past on a run rate basis at some point this year. We continue to focus on a broad set of stakeholders in our decisions and actions. As we have all seen, the reports and images coming out of Ukraine are deeply concerning. In order to support those most impacted, we announced a million dollars in donations across three nonprofits in support of humanitarian aid for Ukraine and Ukrainian refugees, as well as services that support the U.S. military. Earlier this week, we also announced plans to introduce Hope Inside centers in select branches to increase access to financial education and guidance. Working with Operation Hope is one important way that we can remove barriers to financial inclusion as part of our Banking Inclusion Initiative, which is focused on helping more people who are unbanked gain access to affordable mainstream banking products. Since the pandemic began, close to 100,000 of our employees never left the workplace. And last month, we started to welcome the rest back to the office. It's been great to be back together again, and I want to thank all of our employees as they work together to better serve our customers, our communities, and each other. I will now turn the call over to Mike.
spk12: Thank you, Charlie, and good morning, everyone. Net income for the quarter was 3.7 billion, or 88 cents per common share, and our results included a 1.1 billion decrease in the allowance for credit losses, predominantly due to reduced uncertainty around the economic impact of COVID on our loan portfolios. Our effective income tax rate in the first quarter was approximately 16%, which included net discrete income tax benefits due to stock-based compensation. We expect our effective income tax rate for the full year to be approximately 18%, excluding any additional discrete items. Our CET1 ratio declined to 10.5%, still well above our regulatory minimum of 9.1%. We highlight capital on slide three. The decrease in our CET1 ratio from the fourth quarter reflected a $5.1 billion reduction in cumulative other comprehensive income driven by higher interest rates and wider agency MBS spreads, which reduced the ratio by approximately 40 basis points. Higher risk-weighted assets driven by growth in loan balances and commitments. We adopted the standardized approach for counterparty credit risk, which had a minimal impact on total risk-weighted assets, and we continued with our strong capital returns. We repurchased $6 billion of common stock in the first quarter, bringing our total repurchases since the third quarter of 2021 to $18.3 billion, which is in line with our 2021 capital plan. While we have flexibility under the stressed capital buffer framework to exceed the share repurchases contemplated in our capital plan, we will be disciplined in our approach given the current rate volatility and currently expect to have significantly lower levels of share buybacks in the second quarter. Finally, we've submitted our 2022 capital plan, and as I've called out before, it's possible that our stress capital buffer could increase when the Federal Reserve publishes our official stress capital buffer in the third quarter, while our GSIB surcharge of 1.5% will remain the same for 2023. Turning to credit quality on slide five, our net loan charge-off ratio declined to 14 basis points in the first quarter. Commercial credit performance was strong again, with 29 million of net recoveries in the first quarter driven by recoveries in energy, asset-based lending, and middle market. Consumer credit performance was also strong. Credit losses were down 59 million from the fourth quarter, which included 152 million of net charge-offs related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans. The first quarter included higher auto losses and seasonally higher credit card losses. Non-performing assets decreased 323 million, or 4%, from the fourth quarter. Commercial non-accruals were down 423 million, declining again this quarter, and are now below pre-pandemic levels. Consumer non-accruals increased 82 million, driven by an increase in residential mortgage non-accruals, primarily resulting from certain customers exiting COVID-related accommodation programs. Overall, early performance of loans that have exited forbearance have exceeded our expectations. Our allowance for credit losses at the end of the first quarter reflected continued strong credit performance, less uncertainty around the economic impact of COVID, the economic recovery thus far, and an outlook that reflects the increasing risks from high inflation and the Russian-Ukraine conflict. On slide six, we highlight loans and deposits. Average loans grew 3% from a year ago in the fourth quarter. Period end loans grew for the third consecutive quarter and were up 6% from a year ago with growth in both our commercial and consumer portfolios. I'll highlight the specific growth drivers when discussing business segment results. Average deposits increased 70.6 billion or 5% from a year ago with growth in our consumer businesses and commercial banking. partially offset by continued declines in corporate investment banking and corporate treasury reflecting targeted actions to manage under the asset cap. Turning to net interest income on slide seven. First quarter net interest income increased 413 million or 5% from a year ago and declined 41 million from the fourth quarter. The decline from fourth quarter was driven by 178 million of lower income from EPBO and Paycheck Protection Program loans. as well as two fewer days in the quarter, which offset the impact of higher earning asset yields and higher securities and loan balances. Last quarter, we highlighted that net interest income for full year 2022 could potentially increase by approximately 8%, driven by loan growth and other balance sheet mix changes, as well as the benefit from rising rates, which was based on the forward curve at that time. Obviously, a lot has changed over the past three months. Loan growth has been solid and average loan balances were up 3% versus the fourth quarter and 2% at period end. If we continue to see increased demand, it's possible that average loan balances will be up in the mid single digits from the fourth quarter 2021 to fourth quarter 2022, up from our prior outlook earlier this year of low to mid single digits. The rate increases currently included in the forward rate curve would also drive stronger net interest income growth than we anticipated earlier in the year. However, it's important to note that the benefit from rising rates is not linear, and we would expect deposit betas to accelerate after the initial rate hikes, and customer migration from lower yielding to higher yielding deposit products would also likely increase. Higher rates will also have a negative impact on mortgage volumes and potentially on market-related fees in corporate and investment banking, private equity, and venture capital businesses, and in wealth management. Given our current expectations for higher loan growth and recent forward rate curves, net interest income for full year 2022 could be up mid-teens on a percentage basis from 2021. That said, net interest income growth will ultimately be driven by a variety of factors, including the magnitude and timing of Fed rate increases, deposit betas, and loan growth. Now turning to expenses on slide 8. Non-interest expense declined 1% from a year ago. We continue to make progress on our efficiency initiatives and expenses also declined due to divestitures last year. The first quarter included approximately $600 million of seasonally higher personnel expenses, including payroll taxes, restricted stock expense for retirement-eligible employees, and 401 matching contributions. We also had $673 million of operating losses, which were primarily driven by higher customer remediation expenses. predominantly for a variety of historical matters. Our full year 2022 expenses are still expected to be approximately $51.5 billion. However, as we experience this quarter, operating losses can be episodic and hard to predict, and we will continue to update you on our expense expectations throughout the year. Turning to our operating segments, starting with consumer banking and lending on slide 9. Consumer and small business banking revenue increased 11% from a year ago, primarily due to higher deposit balances, higher deposit-related fees, primarily reflecting lower fee waivers and an increase in debit card transactions. We continue to reduce the underlying costs to run the business and serve customers. Customers have continued to migrate to digital channels, and correspondingly, teller transactions are down 45% from pre-pandemic levels. Over the same period, we've decreased our number of branches by 12% and branch staffing by approximately 30%, and we have more opportunities to improve our efficiency while we continue to make enhancements to better serve customers. Earlier this year, we announced changes we are making to help our customers avoid overdraft fees. We began to implement some of these new policies and will be rolling out the rest of the changes this year. We eliminated fees for non-sufficient funds and overdraft protection transactions in early March. So these changes didn't have a meaningful impact on the first quarter results. We still expect the annual decline in these fees to be approximately 700 million. However, as we highlighted last quarter, this is an annualized estimate and the reduction may be partially offset by higher levels of activity and we will observe how customers respond to the new features that will be introduced in the latter part of the year. Home lending revenue declined 33% from a year ago and 19% from the fourth quarter driven by lower mortgage originations and press margins given the higher rate environment and competitive pricing in response to excess capacity in the industry. Mortgage rates increased 156 basis points in the first quarter and are above rate levels observed for most of the last decade. Reflecting this environment, we expect second quarter originations and margins to remain under pressure and mortgage banking revenue to continue to decline. We've started to reduce expenses in response to the decline in volume and expect expenses will continue to decline throughout the year as excess capacity is removed and aligned to lower business activity. Credit card revenue was up 6% from a year ago, driven by higher loan balances and point of sale volumes. Auto revenue increased 10% and personal lending was up 2% from a year ago, primarily due to higher loan balances. Turning to some key business drivers on slide 10. Our mortgage originations declined 21% from the fourth quarter. We believe the mortgage market experiences the largest quarterly decline since 2003, primarily due to lower refinance activity in response to higher mortgage rates. Home lending loan balances grew modestly from the fourth quarter driven by the third consecutive quarter of growth in our non-conforming portfolio, which more than offset declines in loans purchased from securitization pools or EPBOs. Turning to auto, origination volume increased 4% from a year ago but was down 22% from fourth quarter due to credit tightening and higher risk segments and increased price competition as interest rates rose and we targeted solid returns for new originations. Turning to debit card, transactions declined 7% from the fourth quarter due to seasonality and were up 3% from a year ago with double digit growth in travel and entertainment. Credit card point of sale purchase volume continued to be strong, was up 33% from a year ago, but down 5% from the fourth quarter due to seasonality. While payment rates remain elevated, balances grew 14% from a year ago due to strong purchase volume and the launch of new products. New credit card accounts increased over 80% from a year ago, and we continue to be pleased by the quality of the accounts we're attracting. Turning to commercial banking results in slide 11. Middle market banking revenue increased 8% from a year ago, driven by higher deposit and loan balances, as well as the impact of higher interest rates. Asset-based lending and leasing revenue increased 17% from a year ago, driven by higher loan balances, stronger net gains from equity securities, and higher revenue from renewable energy investments. Non-interest expense declined 6% from a year ago, primarily driven by lower personnel and occupancy expense due to deficiency initiatives and lower lease expense. After declining during the first half of last year, average loan balances have grown for three consecutive quarters and were up 6% from a year ago. Revolver utilization rates have increased but are still well below historical levels. Loan demand has been driven by larger clients who are increasing borrowing due to the impact of inflation on material and transportation costs, as well as to support inventory growth. We're also seeing new demand from some clients who are catching up from underinvestment in projects and capital expenditures over the past couple of years. Turning to corporate investment banking on slide 12. Banking revenue increased 4% from a year ago, primarily driven by higher loan balances and improved treasury management results. Average loan balances were up 18% from a year ago with increased demand across most industries, driven primarily by capital expenditures and growing working capital needs. Commercial real estate revenue grew 9% from a year ago, driven by the higher loan balances and higher revenue in our low-income housing business. Average loan balances were up 17% from a year ago, and originations in the first quarter outpaced volumes from a year ago, and loan pipelines continued to be strong. Markets revenue was down 18% from a year ago, primarily due to lower trading activity in residential mortgage-backed securities and high-yield products. Average deposits in corporate investment banking were down 25.3 billion, or 13% from a year ago, driven by continued actions to manage the asset cap. On slide 13, wealth and investment management revenue grew 6% from a year ago, driven by higher asset-based fees and higher market valuations, and higher net interest income from the impact of higher interest rates, as well as higher deposit and loan balances. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first quarter results reflected market valuations as of Jan 1st, and second quarter results will reflect the lower market valuations as of April 1st. The 5% increase in expenses from a year ago was primarily driven by higher revenue-related compensation, which was more than offset by higher revenue. Average deposits were up 7% from a year ago, and average loans increased 5% from a year ago, driven by continued momentum in securities-based lending. Slide 14 highlights our corporate results. Both revenue and expenses declined from a year ago, driven by the sale of our student loan portfolio and divestitures of our corporate trust services business and Wells Fargo Asset Management. These businesses contributed $791 million of revenue in the first quarter of 2021, including the gain on sale of our student loan portfolio, and they accounted for approximately $400 million of the decline in expenses compared with a year ago, including the goodwill write-down of our student loan portfolio. We will now take your questions.
spk02: 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 1st question comes from Scott Seifers of Piper Sandler. You may go ahead.
spk03: Yes, thank you for taking the question. Um, Mike, we appreciated the commentary on reiterating the expense guidance for the full year. was just hoping, given sort of the lumpiness between the seasonality and the comp expenses and then some of the operating losses, if you could maybe give a little bit more of a fine point on the trajectory. In other words, how much could we or should we expect things to come down in the second quarter? And then is it going to be just a progressive decline through the end of the year? Or how will things ebb and flow in your mind?
spk12: Yeah, great. Thanks, Scott. You know, as I said in the remarks, we had about $600 million of seasonal expenses in there, you know, related to, you know, 401K and stock comp and all the associated stuff in the first quarter. So that, you know, that starts to fall away. And then obviously the other piece in there that I mentioned was operating losses. And that can be a little lumpy as you go throughout the year. But when you sort of, you know, take a step back, as you saw last year as well, as we execute our efficiency initiatives, You generally don't get all those benefits starting day 1 and so you'll continue to get more and more impact throughout the year. So you should expect the expense trajectory to be down as we go throughout the year. Now, every quarter may not be down in a linear way, but nonetheless, you'll see a trend downward. And just to reinforce what we said in the remarks, we did We still believe that $51.5 billion for the full year is achievable, despite the fact that we had the higher operating losses in the quarter. And then I'll just reiterate the other piece of guidance we gave on NAI. We do think, as we said in January, we thought NAI would be up about 8%. So we're almost doubling that to kind of the mid-teens as we look throughout the year, both given, you know, due to the loan growth we've seen and as well as the substantial move in rates.
spk03: Perfect. Thank you. And then just maybe to follow up, I think you guys talked in the past about an expectation for expenses to decline next year as well. You know, just given how lasting some of these inflationary pressures seem to be, do you see any risk to that outlook of another down year in costs next year?
spk11: Hey, it's Charlie. You know, I would say a couple of things. I think it's still the way we think about the way we want to plan for the year for sure, as we sit here today. You know, on inflationary pressures, I would say, and it's still early and still think, you know, things will still continue to evolve. But our own experience here is that the wage pressures that we've seen today are not as great as they were in the fourth quarter of last year. So they still exist, but they do seem to be slowing. And obviously, the Fed is going to, as I said, going to do everything they can to bring that down. And so as we sit here today, by the time we get to next year, I think we'll be in a very, very different position relative to where inflation is. And so we're still very focused on you know, use the word efficiency, but we're really focused on running the place better. And that's what these expense reductions actually result in.
spk02: Perfect.
spk11: All right.
spk02: Thank you guys very much. The next question comes from Steven Chubek of Wolf Research. Your line is open, sir.
spk07: Hi. Good morning. So I wanted to just start off with a question on NII and excess liquidity deployment. Specifically, I was hoping you could just speak to your appetite to deploy some of the excess liquidity that you guys still retain and where reinvestment yields are currently, just given spread widening and MBS in particular, and what securities you might look to purchase, given some of the sensitivities on the duration side.
spk12: Yeah, thanks, Steve. It's Mike. You know, look, the first, you know, when it comes to deploying liquidity, it's going to be, you know, loans first, right? So if you think about the waterfall. And so as we see, you know, more loan growth, that's where it's going to go, you know, first. And obviously, you know, that's the preferred path anyway. And then based on what we see there, you know, we will, you know, decide, you know, if we're going to grow the securities portfolio throughout the year. You know, I would say our, you know, the guidance we gave, you know, for NII does not assume that we grow the portfolio in any substantial way. And so that'll, you know, we'll have to see how that goes, you know, based on, you know, what we see from a loan growth perspective. And then you can see where yields are, you know, across both treasuries and MBS, which are the, you know, two primary sectors. asset classes we have in the portfolio. And, you know, I think obviously we're now investing at higher rates than we've seen certainly in a while, and that's additive as we go forward.
spk07: And just one follow-up relating to deposit beta specifically. Certainly a big area of focus given the more aggressive PACEFED tightening as well as QT. And I was hoping you could just speak to your relative stickiness of your deposit base versus last cycle, given the liability optimization you guys have been executing under the asset cap for a number of years now. And is there a credible case in your view that deposit betas could, in fact, be lower this cycle, just given some of that favorable deposit remixing?
spk12: Yeah, I know. I think you highlighted the right points. You know, as you look at what we've had to do over the last couple of years to manage on the asset cap, you know, we've really pushed away some of our most interest rate sensitive deposits during that time. And so we've seen the least rate sensitive deposits on the retail side and consumer side, you know, grow as a percentage of the overall deposit base. And so that's definitely going to help, you know, lower the average betas that we'll see relative to what we saw in the last cycle. You know, I think our expectations as you sort of think about the different, you know, slices of the deposit base, you know, haven't really changed much, you know, over the last couple months. You know, I think as we look at the first 100 basis points, we don't think, you know, deposit rates are going to move that much, which is pretty similar to what we saw. last go around. And then I think on the consumer side, you know, you'll have, you know, slower betas and you'll have higher betas on the wholesale side. But, you know, likely given our position, you know, we'll, you know, we'll lag a little bit on pricing given the asset cap and what we've got to do to continue to manage that.
spk11: And this is, and the only thing I would add is that I think, you know, a lot of, you know, also has to, it also depends on, you know, what the other alternatives are. for folks are out there, certainly on the consumer side. And when you look at the environment that we're heading into and the volatility that we'll see, I think that's a very different kind of environment than if you're in a very stable market and rates are just moving up relatively slowly. It is different in that respect as well.
spk07: That's great. If I could just squeeze in one more quick one, would just be remiss if I didn't ask about, given some of the fee income commentary that you guys had highlighted, particularly some of the headwinds on both mortgage as well as wealth management, how we should be thinking about the right jumping off point for 2Q fee income, just given a lot of volatility in a few of those line items in the quarter?
spk12: Yeah, I'll give you a couple points there. So if you think about the advisory assets, you know, if you look at what's happened in both the fixed income and equity markets in terms of the valuation at the 331, you know, being down, you know, I think roughly 5 or 6% is probably not a bad place to start the modeling on advisory assets, you know, given the fact that, you know, a large chunk of them are billed in advance based on that value. On the mortgage business, we will see a step down given the pretty abrupt slowdown in the refinance market in particular. We still expect to have decent volumes in the purchase market, but spreads will definitely or gain on sale margins will definitely be impacted given there's still a lot of excess capacity in the system. Now, I would just, you know, keep that in context of the backdrop that, you know, we laid out in terms of the growth in NII as you look through the rest of the year. So, even if you start to see a little bit of pressure on those line items, you know, the growth in NII, you know, will position us pretty well throughout the rest of the year.
spk11: Yeah, and this is Charlie, and the only thing I would just add to that, I think when you think about, you know, how we are, and I, you know, kind of said this in the quote and in my remarks, You know, the way we're positioned going into an environment like this is we feel, you know, very positive about, you know, where we stand. You know, and, you know, mortgage banking income is going to decline because rates are going up, and we're going to make, you know, much more on the increase in rates than we will on the, you know, decline in mortgage banking income. You know, we're continuing to focus on reducing expenses. Credit is still exceptionally good. Um, and, you know, certainly will be into the next quarter based on everything that we see and, you know, possibly beyond, even though at 1 point, they will go up. Um, and so, you know, while. You know, we're not sure what the overall economic environment will look like. Um, that doesn't change our point of view on the fact that we're well positioned for it.
spk12: Just a reminder, I said in my script, Steve, too, on the impact of the reduction in non-sufficient fund balance fees and some of the overdraft changes we made. You'll start to see the impact in the second quarter as well.
spk07: Got it.
spk02: Thanks so much for taking my questions. The next question comes from John Pencary of Evercore ISI. Your line is open.
spk10: Good morning. On the expense side, I appreciate you helping us out with the $51.5 billion in terms of the reiteration of the guide. On the operating loss side, how do you feel about that $1.3 billion expectation given the pressure on the number in the quarter? And then separately, I guess also on the cost savings, I want to see how you're feeling about the $3.3 billion in gross saves and $1.6 billion net. Any changes to that expectation? Thanks.
spk11: So, I'll just, I'll take the first part, Mike, and maybe you take the second. On the first one, you know, the things that we saw in the first quarter are very specific to remediations. And so, you know, what we saw in the first quarter really has nothing to do with, you know, what we'll see in the next series of quarters. And so, those kind of stand on their own and it's not something that, you know, gets built on from there.
spk12: Yeah, and as you look at the efficiency, and I think hopefully this was implied in the guidance we gave, but we're executing well on the efficiency program that we've got. And as I've said a number of times over the last couple quarters, it's not a static program. This is something that we're embedding in the DNA of how we run the place, and it continues to evolve, and we feel good about executing on that.
spk10: Okay. And then on the capital side, I know the CET1 declined of 90 basis points this quarter. You also mentioned the SCB surcharge could increase. You did flag the lower levels of buyback expected for the second quarter. Maybe can you talk about your thoughts on capital return beyond the second quarter, just given how things are shaping up and your earnings outlook? I just wanted to see if we can get updated thoughts there. Thanks.
spk11: Yeah, I mean, I'll start Mike and then you can chime in. I think I think what we're just trying to do is just, you know, it's we do have the reality of, you know, the impact on during the quarter. And so you see where CET1 is. You know, our quarter is, you know, our dividend is about, you know, a billion dollars a quarter or so. So we do have, you know, plenty of room inside there for, you know, any other further changes to OCI or the ability for us to grow RWA, which we want to do as loan growth continues to show the demand that we're seeing. And so I think just where we are specifically in the second quarter will depend on where rates come out. And then beyond that, we'll still, obviously, we're going through CCAR, but we still should have capacity. to figure out what we want to do with the excess capital that the company generates.
spk12: Yeah, and as earnings capacity grows, as NII grows, and we go through the year and we execute on our efficiency program, you know, there's – and we're still operating under the asset cap, you know, there's – you know, I think you'll see us be prudent, but we've got plenty of flexibility as we look through the rest of the year.
spk10: Okay, great.
spk02: Thanks for taking my question. The next question comes from Ken Usden of Jefferies. Your line is open, sir.
spk04: Great. Thanks.
spk02: Good morning.
spk04: Hey, just a couple follow-ups on the cost side. So, Mike, the business sales from last year and, you know, kind of the stranded costs and the transition agreements, Can you walk us through again how much of that, you know, was in the first quarter? And then how, you know, how does that kind of decline? And is that also, you know, built into your full year expectation for the cost numbers?
spk12: Yeah, so what we said, you know, Ken, as you look at the first quarter, is about $400 million of expenses fell away in the quarter as the executive business exited. Um, and the remainder, and so about 300Million of that was from the ongoing run rate of the businesses, but 100Million was a, uh, you know, a charge we took last year for the student loan business. But, uh, and the remainder, you know, falls either under the, which are in place today and likely run most of the year, if not into early next year. But remember, there's revenue on the other side of that. And then you have the stranded costs. So, you know, the numbers we laid out the end of the fourth quarter last year are haven't changed. And, you know, as the TSA, as the TSAs roll off, you know, we'll do our best to, you know, highlight that, you know, if it's meaningful. And then we're going to continue to work on the stranded costs and get them out. But that'll take a little bit of time, as we said last quarter.
spk04: Right. Okay. And then just two little things on managers' income. You did mention that you had the EPBO program. sales this quarter, and I think related lower net interest income, plus you did show the decline in premium M. I'm wondering if you can just help us understand how much the EPBO sales took out of NII, and are you still expecting those to go out through the year? And then how do you expect premium M to trend from here? Thanks, Mike.
spk12: Yeah, and the combo of PPP, you know, PPP loans and EPBOs, you know, came down, you know, sequentially or link quarter about 178 million. And that was the impact on revenue there and AI. And so, you know, we'll reiterate that in the, you know, in the queue when it comes out. You know, as you look at premium AMOR for mortgage-back, you know, you can look at the slide for reference when you have time. I know it's a busy day today, but it came down, you know, roughly a little over $100 million, you know, $110 million, $15 million decline in the quarter. And that will continue to decline as prepays slow, you know, throughout the year. So it's come down quite a bit since where we were last year.
spk04: Okay.
spk02: Thanks, Mike. Thank you. The next question comes from John McDonald of Autonomous Research. Your line is open.
spk13: Hi, Mike. Just on the fee and confront, you made a couple comments already about the core fee lines. What about some of the more volatile lines on the capital market side? I think the venture capital came in a little bit better than expected in a tough market this quarter. What should we be thinking about in terms of investment banking, trading, and maybe the Northwest Venture line?
spk12: Yeah, as you know, predicting investment banking fees and market fees is fraught with lots of issues. But I think it's clear that on the investment banking side, some of the capital markets, particularly on the equity side, have slowed quite a bit this year, given some of the volatility we've seen. Our pipeline really hasn't change much, it's still pretty strong, you know, for where we stand coming into the quarter. And so some of that, you know, realization of that pipeline is just, you know, somewhat market dependent and, you know, and dependent on when some deals, timing of, you know, some of the deals closing. So we'll see. You know, the market, you know, market revenue, markets revenue is somewhat dependent on the volatility that we see and the demand we see. And so I think as others have gone through this, we'll you know, we will benefit from some of that as we go through it, but it's hard to predict exactly where we'll end up. And then on Norwest Venture, you know, like if you go back a number of years and you look at, you know, there's some number, you know, there's some like stability to that line, you know, when you look at over the last three or four years. I think when you look at some of what happened this quarter, we did have a bunch of realized you know, like business being sold or, you know, going public or in one or two cases of some of the investments. And so that was really good to see that that's still continuing despite some of the market volatility. And I think, you know, we'll see how it goes. I think, you know, we won't, it's hard to imagine we'll see some of the peaks that we saw last year in that revenue line item. But I do expect we'll continue to see some good performance across those businesses.
spk13: Okay, thanks. And also, on the NII, any comments you could make about your expectations for the cadence of the NII improvement throughout the year and maybe a little bit of what you're baking in on premium M and maybe how much benefit you get from on a spot basis like a hike of 25 or 50 peps, just any framework there. Thanks.
spk12: Yeah, no, so so, you know, a lot of it's going to be dependent on how fast the Fed moves. And as you know, is when the Fed moves, the impact of that is immediate. You start realizing that, you know, the day after. And so, you know, obviously, the expectations there have changed quite a bit. So that'll be that'll be the case. I think, you know, in the queue. we give you the, you know, the shock, you know, the numbers on 100 basis point moves. And those are pretty close to what you should expect for the first, you know, few rate rises in terms of the impact. And, again, it's pretty immediate for most of us.
spk13: And the premium, Mike, do you assume that that comes down throughout the year?
spk12: Yeah, it has to. Yeah, I mean, absolutely. It'll continue to come down as we see rates go up and prepay slow. Sorry about that. But yeah, I think you'll start to see that come down. You know, I think it'll be, it's a little bit dependent upon, again, you know, how things progress, but it's not unreasonable to think as we look at the next quarter that it's, you know, somewhere in the ballpark of what we saw from on a link quarter basis this quarter.
spk13: Got it. I guess I was wondering, did you improve the assumptions for that? Is that part of the NII upgrade, or is that more just rates? Okay.
spk12: Yeah, that's baked into the increase in NII that we gave John.
spk13: Okay. Thank you.
spk02: The next question comes from Ibrahim Poonawalla of Bank of America. Your line is open.
spk00: Good morning. I guess first question, Charlie, you've in the past talked about the 15% ROTC as needing the asset cap to lift and some level of higher rates. We're getting a lot more in terms of higher rates than we expected six months ago. Just doing rough math in terms of how we've talked about expense outlook, mid-teens and high growth, do you think it's conceivable that we hit 15% ROTC at some point Over the next 4 to 6 quarters, even without the asset cap being lifted.
spk11: You know, I don't want to talk about a timeframe yet, because I think what we've consistently said and we'll stick to that is we'll get to 10% and then we'll talk a little bit more about the 15% and try and hone a little bit more on timing. But I do think it is fair to assume that the rate rises that we're seeing are are more than we would have thought was necessary to get to 15%. But, you know, so I think, you know, the question of, you know, the asset cap not, you know, still being with us, I think that's just, you know, that is the reality. And so it's quite possible that the rate rises will be more of a benefit than we would have hoped in terms of offsetting that. But I just think we should just wait until we get to 10%. But certainly, these rate rises that we're seeing in the asset sensitivity that we have are certainly a meaningful positive for us and more than we would have expected.
spk00: Appreciate that response. And just one quick question on credit, Mike. When we think about another quarter of sizable reserve We've seen one of your peers yesterday build reserves, talking about just putting a higher weight on a stress case scenario. Give us a sense in terms of your outlook for the economy and how that leads to loan loss reserves where they are today versus, I think, a day one CC was about 95 basis points. Just any thought process around how you're thinking through that would be helpful.
spk11: Yeah, this is Charles. I'll take a stab at it first. You know, I think it's... You know, I think understanding what's in our CISO assumptions is something which is important as hard as it is to predict. It does give you a sense for how we're thinking about things and how our loan book and other items play out in that reserve and calculation. But it is very hard to compare across companies because we have different scenarios. We put different probabilities on different things. And the way, you know, the conservatism in models is different across companies. I think what we've seen consistently in our reserving levels is we've been on the more conservative side relative to others. That might just be, you know, a view of a more conservative set of assumptions or something which is embedded in our models or the way we think about just the potential impacts of COVID and now the potential impacts of a slowing economy. So, I would say overall, sitting here today, if you were to look at the way we look at the assumptions that go into it, I think we were already assuming a reasonable percentage of probability on the downsides. And so that hasn't changed. But we feel better about some of the assumptions we made relative to COVID. And we've added some assumptions relative to inflation. So I think, you know, net, net, net, that's what drives the reduction in terms of where we are. And I still think where we feel very comfortable and hopefully are, you know, at the more conservative end of, you know, what can come out of a CECL calculation.
spk00: That's helpful. And should we then still assume that the reserves probably track lower over the next few quarters at least, absent a big change in the macro?
spk11: Yeah, I think it's, you know, it's all dependent on the macro at this point. Sure. You know, CECL requires you to, you know, take a look at, you know, based upon what the, you know, we're, you know, the full amount of the losses embedded in the portfolio relative to what you see is, you know, the macroeconomic outlook and the specific performance. So, you know, if our outlook gets, you know, gets better, reserves will come down. If it gets worse, they'll go up. And if it stays the same, it'll be along there.
spk00: Thank you for taking my questions.
spk02: Thank you. The next question comes from Betsy Gracek of Morgan Stanley. Your line is open.
spk01: Hi, good morning. I had another semi-technical question here, but on the and I outlook, I get your point that you should see improvement pretty near term from the rate environment. I'm just thinking about what you put in your release for the yields on loans where at least this quarter, loan yields came down a bit. Now, I know part of that's probably day count, but we saw some declines in resi mortgage on first and second lien and also on the auto side. And I just wanted to get a sense, and also in CNI, right? So I just wanted to get a sense what was playing into that queue on queue, and then how quickly that could revert, you know, as we go through this year.
spk12: Yeah. Hey, Betsy, it's Mike. I'll try to take a shot at that. I think on the resi mortgage side, what you're seeing is the impact of the EPBO loans. And so the impact of those coming down, so that creates a little bit of noise, I think, there relative to the yield there. As you look at the rest of the C&I book, I'm going to get the directionally the percentage, but it's, you know, call it, you know, two-thirds of the CNI book in that neighborhood is floating rate, you know, maybe plus or minus a little bit there. But, you know, and so that starts to react pretty, you know, obviously direct pretty quickly to rates moving. And, you know, in any given, you know, quarter, you see a little bit of noise on that yield, but you'll start to see that react as rates go up.
spk01: Okay, it's not like it's hedged out and that's why we saw what we saw at QQ? No. Okay. And then the other message I'm getting from you this morning is that this rate improvement you're expecting to drop to the bottom line, is that fair?
spk12: Well, I think we reiterated our expense guidance for the year, and NII is going to be a lot better. Betsy, what's in your question?
spk11: I'm not sure I understand.
spk01: Well, you're getting an uptick in rates, and given the fact that your guidance on expenses is holding steady, it seems like you're going to drop all that rate hike to the bottom line.
spk11: Well, I mean, yes, we're going to make more money on NII. We went through the specifics on how non-interest income will likely come down, but obviously not nearly as much as the benefit that we'll get as you look out over NII. You know, charge-offs still will remain at low levels for the foreseeable future, even though those will go up at some point. And yes, expenses will continue to come down for us to meet that 51.5 number, so.
spk01: Yeah, I mean, it feels like it's, you know, at least a mid-singles uptick on consensus EPS. That's what it feels like to me, at least. But, I mean, I know if I drop all the NIAID at the bottom line, I get something closer to a,
spk11: high singles uptick on consensus EPS, but... Again, just make sure you look at, you know, we might try to lay out a little bit of what's going to happen on non-interest income. And again, charge offshore at all-time lows. You see the delinquency numbers, so unless there's, you know, something on the commercial side or the wholesale side that we're not aware of, it's, you know, we feel, it's one of, you know, when we talk about how we feel, I think it's, you know, the economy is the economy. We are positioned... you know, well for this kind of environment. But we also think people should just make sure that they're conscious of, you know, the movement in all the line items.
spk01: And then on the customer remediation charge that you took this quarter, I guess that's the other, you know, kind of question that I've been getting is it's one-timey, but it feels like it's happened a lot. So, you know, how much more is left?
spk11: You know, it's really hard to answer and I understand the frustration and, you know, I would say every quarter we go through this, we say we want to make sure that we've got everything. But, you know, we are, you know, we have to make sure that when we look at these remediations, they're aligned with what makes sense for the customer and that we've captured all the portfolios. You know, some of these remediations require us to go back and recreate a scenario from, you know, 10, 15 years ago. And so that's part of the complication that we see. And so we're not going to say that there's no more, but they're very case specific. And at some point, you know, they will be behind us, but we have to do what we have to do. you know, at least in the big scheme of things relative to, you know, the benefits that we'll see from things like NII, you know, these aren't overwhelming. And, you know, we understand, you know, how this fits into the guidance that we've given on full-year expenses.
spk01: Yep. Okay. Thank you.
spk02: The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.
spk06: hi i guess just following up on the regulatory line of questions and you know as usual i gotta ask some questions that are tough to answer but um what you've acknowledged you're making significant progress the regulators have acknowledged you're making significant progress the fundamentals are clearly moving in the right direction in a meaningful way um but you know in the prepared remarks you you still say um need to continue to close these gaps over the next several years And I guess the question is, like, is this just cautionary language, or are there still things that you are implementing on kind of a daily and ongoing basis to address some of the legacy issues? I guess I thought you had implemented kind of the fixes, and it's kind of the oversight and execution situation. But maybe you could just talk to that.
spk11: Yeah, I don't recall saying anything. The words that that you just use, I think we have been trying to be very clear that we have a lot of ongoing work to do. Um, that, uh, we feel very good about the frameworks that we have in place. Uh, but we are, you know, as you, uh, you know, once you develop the framework, the implementation of the frameworks. That takes a significant amount of time. Um, we continue to do that and as we. Develop stronger controls inside the company. We will potentially find things that then have to get fixed and remediated because this is, you know, many years of of. Of of work that we're doing at this point. And as the regulators look at the amount of time that it takes to do it at the things that we find as we put these controls in place. and just some of these legacy things that, you know, continue to remain out there. I just think it's prudent that, you know, we expect to have things. You know, I think we say, you know, it's possible or likely, but, you know, if there was something specific, we would say it. But I think it is, that's just, that's the reality of the situation that we're on. And so it is, you know, where we find ourselves is, you know, and I'll speak for ourselves, not the regulators, WE ARE, HAVE MADE SIGNIFICANT PROGRESS FROM WHERE WE WERE WHEN WE GOT HERE, BUT THERE IS STILL A SIGNIFICANT AMOUNT MORE WORK TO DO.
spk06: OKAY. AND THEN JUST A FOLLOW-UP ON A DIFFERENT TOPIC. I APOLOGIZE IF I MISSED IT, BUT YOU DID TALK ABOUT SLOWING BUYBACKS IN THE SECOND QUARTER, PARTLY RAISED, PARTLY LOANS, AND OBVIOUSLY YOU'VE BOUGHT BACK A LOT THIS QUARTER. Did you give the magnitude that you expect to buy back or remind us your targeted capital at least until the next fee card comes out? Thank you.
spk12: Yeah, Matt, I'll take that. As we've said a few times in the past, we plan to run the CET1 ratio at somewhere between 100 and 150 basis points over our reg minimum, which right now is 9.1%. And I think as we look forward, you know, given the way the framework works is we'll have plenty of flexibility to do what we think is prudent on buybacks as we go throughout the rest of the year.
spk06: Okay, thank you.
spk02: Thank you. The next question comes from Erica Najarian of UBS. Your line is open.
spk00: Hi, good morning. My questions have been asked and answered. Thank you.
spk02: Thank you. Thanks, Erica. Thank you. The next question will come from Charles Peabody of Portales Partners. Your line is open.
spk09: Yeah, most of my questions have been asked. But let me ask one question about how you manage your mortgage banking operation, because you're one of the few large banks that still has a relatively balanced origination and servicing sides. And historically, servicing was kind of viewed as a balance to origination. When originations didn't do well, servicing would do well. But that hasn't been the case recently in your recent history. And so can you talk about how you're managing it and why there isn't a balance to those two pieces?
spk11: Yeah, I'll start. This is Charlie, Mike, and then you can pipe in. I think, you know, we think about our mortgage business in the context of the whole company, not as a separate independent entity that has to stand by itself. And so, when we think about the interest rate risk position of the entire company, that's where we think about what potentially happens on the production side versus what happens in the MSR. You know, the management of the MSR is, you know, is difficult. It's got some very different types of risks embedded in it. And, you know, if all you did was look at those two offsets, you could be kidding yourselves. as to what the value of the servicing is. And so, as I said, net, net, net, when we look at the position of the company, I would look at the reduction of mortgage banking income not being offset by the MSR, but being offset by the rest of the benefit that we'll get as a company at NII.
spk09: And just as a follow-up, when you gave guidance about a material step down in mortgage banking in the second quarter, were you talking strictly on the origination side or as a whole entity?
spk12: As a whole. Think of the mortgage banking income line as what we were referring to.
spk11: And remember, included in there is the fact that the MSR is fairly well hedged. So it's basically, it's the whole, but it's also what's really driving it is origination.
spk02: Thank you. Our final question for today will come from Gerard Cassidy of RBC Capital Markets. You may go ahead.
spk08: Thank you. Good morning. Charlie, you both referenced in your comments about the excess capacity in mortgage banking. And you're anticipating or waiting for some of that excess capacity to come out as originations, of course, for the industry have come down to higher rates. What are some of the metrics you guys are monitoring and keeping an eye on to show you that that capacity is coming out of the system?
spk12: Well, you know, I think as you start thinking about the industry as a whole, it's hard, Gerard, to look at any specific metrics per se. But I think where you're going to see that first is likely gain on sale margins as people, you know, start to normalize as, you know, excess capacity comes out, right?
spk11: So I think that's probably one of the areas I would look at. Yeah, and listen, I mean, people just – listen, everyone in the industry looks around at, you know, the amount of, you know, volume being down substantially. They look at the amount of expense that they have. You know, people then rationalize the expense that they have, and that naturally, you know, changes the competitive dynamics about where people are pricing. So, you know, we're focused on making sure that we've got the right level of expense relative to the revenue and volume that we're seeing, and that's exactly what everyone else does.
spk08: Very good. And, Mike, just following up on your gain on sale and margin, gain on sale margins, What would you consider normal and where are they for you guys today?
spk12: Well, I don't, we don't disclose the, um, the margin itself, uh, as you sort of look forward, but, uh, you know, normal normal varies right as you sort of look through the cycle in the mortgage business. And so, you know, I think we're certainly. If you start thinking about, you know, primary, secondary spreads, you know, that's one indicator of sort of where gain on sale margins will go, I think. And we're now back to, you know, what is likely more historical levels, right, around 100 basis points or so when you look at that. And that's, you know, so I think you're kind of back to, you know, a more normal level there. And then I think as excess capacity goes out, like, you'll start to see the gain on sale come back up, so. I think it's hard to, it's hard to say exactly what normal will look like there as we go through this cycle.
spk08: Okay, and then just as the follow up question, Mike, you alluded to the possibility that the stress capital buffer following this year's CCAR could be a little higher for you folks. Is there, can you give us some color what is making you think that way?
spk12: It's just the severity of the, you know, of the, you know, variables that went into it, Gerard. And, you know, obviously it's a bit of a black box in terms of what exactly what the answer is. And so, you know, we're, you know, we do our best to try to look at, like, how that might impact us and how the Fed might look at it. But it's really based on the severity of the scenario that played through.
spk08: Great. I always appreciate the color. Thank you.
spk12: I appreciate it. And I think that's the last question. So we know it's a really busy day for everyone. So we thank you for spending the time and we'll talk soon.
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