Wells Fargo & Company

Good morning. Thank you for joining our call today where our CEO, Charlie Sharp, 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. I'll make some brief comments about our first quarter results and update you on our priorities. I'll then turn the call over to Mike to review first quarter results in more detail before we take your questions. Let me start with some first quarter highlights. Our results in the quarter were strong and reflected the continued progress we're making to improve returns. We grew revenue from both the fourth quarter and a year ago. We continue to make progress on our efficiency initiatives, and expenses declined from both the fourth quarter and a year ago, driven by lower operating losses. But we continue to be focused on controlling other expenses as well. The consumer and majority of our businesses remain strong. Delinquencies and net charge-offs have continued to slowly increase as expected. We're looking for signs of accelerated deterioration in asset classes or segments of our customers. And broadly speaking, we saw little change in the trends from the prior quarter. However, weakness continues to develop in commercial real estate office. And Mike will discuss this in more detail. Given what we're seeing, we're taking incremental actions to tighten credit on higher risk segments, but continue to lend broadly. We increased our allowance for credit losses for the fourth consecutive quarter. Our economic expectations used to support the allowance have not changed meaningfully, but we do continue to look at specific asset classes, such as commercial real estate, to appropriately assess the adequacy of the allowance. We will continue to monitor the trends in each of our loan portfolios to determine if future action is warranted. Both commercial and consumer average loans were up from a year ago, but were relatively stable from the fourth quarter. Consumer spending remained strong with growth in both debit and credit card spend, but spending began to soften late in the quarter. The decline in average deposits that started a year ago continued in the first quarter, primarily driven by customers seeking higher yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press, but those inflows have abated. Our CET1 ratio, which was already strong, increased to 10.8% even as we resumed common stock repurchases in the first quarter, buying back $4 billion in common stock. Let me share some thoughts on the recent market events impacting the banking industry. We're glad that the work we have completed over the last several years has put us in a position to help support the U.S. financial system. Along with 10 other large banks, we utilized our strength and liquidity and we made a $5 billion uninsured deposit into First Republic Bank, reflecting our confidence in the country's banking system and to help provide First Republic with liquidity to continue serving its customers. I'm proud of everything our employees have done during this historic period to be there for our customers. We believe banks of all sizes are an important part of our financial system as each is uniquely positioned to serve their customers and communities. It's important to recognize that banks have different operating models and that the banks that failed in the first quarter were quite different from what people think of when they think about the typical regional bank. These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with a broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear. Our diversified business model provides opportunities to serve our customers broadly, which reduces concentration risk across the different elements of risk. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies. We also have strong capital and liquidity positions, which include a mix of deposits and access to multiple funding sources. And our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles. Now, let me update you on the progress we've made on our strategic priorities our top priority remains building out our risk and control framework appropriate for our company. I spend time in my recent annual letter highlighting why you remain confident in our ability to complete this work. Including having much more effective reporting and processes in place to provide appropriate oversight. adding close to 10,000 people across numerous risk and control related groups as part of our commitment to make the investments needed to complete the work, and building the management disciplines and culture to govern and execute the work, which includes the operating committee reviewing risk and regulatory progress and escalations on a weekly basis. I also summarized the actions we've taken to simplify the way we operate. This work continued in the first quarter as we largely completed the exit of the correspondent home lending business as part of our plans to simplify that business. We're also narrowing our retail mortgage business to focus on predominantly bank customers and underserved communities. Our strategy includes broadening our existing investment from the Special Purpose Credit Program to include purchase loans, investing an additional $100 million to advance racial equity in home ownership, and deploying additional home mortgage consultants in local minority communities. We continue to transform the way we serve our customers by offering innovative products and solutions. We announced a multi-year agreement with Choice Hotels to launch the new co-branded credit card this month, creating a best-in-class credit card program designed to enhance our customers' experience and bring them more value. We rolled out early payday late last year, which makes eligible direct deposits available up to two days early. In the first quarter, this enhancement provided customers early access to over $200 billion in direct deposits. We launched FlexLoan in the fourth quarter, a digital-only small-dollar loan that provides eligible customers convenient and affordable access to phones. Customer response continues to exceed our expectations, and we've originated over 100,000 loans since November. Digital adoption and usage among our consumer customers continued to increase. We added over 500,000 mobile active customers in the first quarter, and digital logins increased 6% from a year ago. Since rolling out Vantage, our new enhanced digital experience for our commercial and corporate clients late last year, we've received overwhelmingly positive feedback on the new user experience. Vantage uses AI and machine learning to provide a tailored and intuitive platform based on our clients' specific needs. We also continue to make progress on our environmental, social, and governance work. We announced a $50 million grant to the NAACP to support efforts to advance racial equity in America. This is the single largest donation the NAACP has ever received from a corporation and builds on our longstanding relationship with the NAACP that spans more than 20 years. The Wells Fargo Foundation expanded its commitment to housing affordability through another $20 million housing affordability breakthrough challenge to advance ideas to help meet the need for more affordable homes across the country. We also announced a $20 million commitment to advance economic opportunities in Native American communities, including addressing housing, small business, financial health, and sustainability. Before concluding, I wanted to highlight the management changes we announced yesterday. Mary Mack, the CEO of Consumer and Small Business Banking, is retiring this summer She spent her entire career at Wells Fargo and has led consumer and small business banking for the past seven years through a significant amount of change, including defining a new path forward in the business. I can think of few Wells Fargo colleagues who have done as much for our company and have been as visible in the communities that we serve over such a long period of time. We also announced that Sol Van Verden, head of technology at Wells Fargo, will succeed Mary. Saul is a strong leader, a technologist, and he knows how to run a business. This makes him the ideal person to lead consumer and small business banking into the future. Our branch network will continue to be the key to the business, but our customers expect us to provide them with increasingly digitized and seamless banking experiences across all channels. Saul understands this deeply and has consistently proven his ability services across Wells Fargo. Finally, Tracy Cairns, currently head of consumer technology, will become head of technology for the company, reporting to me. Tracy has worked in the technology and finance industry for more than 20 years and has led a series of business critical initiatives to modernize our technology platforms across our consumer businesses. She's a strong results driven leader. It's always great when we can tap our own leaders for roles within the company, and I want to thank Mary for everything she's done during her tenure at Wells Fargo. It's truly been a pleasure working with her. As we look forward, we're carefully watching customer behavior for clues on how the economic environment is changing. Customer activity is still relatively strong and delinquencies remain low, though they are increasing. There are pockets of risk, such as commercial office real estate, which will likely impact institutions differently, and we're proactively managing our own exposures. We continue to expect economic growth to slow, and we are prepared for a range of scenarios. We will continue to monitor both the markets and our customers and will react accordingly. Our diversified business model should enable us to support our customers throughout economic cycles.

I will now turn the call over to Mike. Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $5 billion, or $1.23, for diluted common share. While there was a lot going on in the banking industry around us, we continued to focus on our priorities, and our results reflected the progress we were making, which I'll highlight throughout the call. Starting with capital and liquidity on slide three, Our CET-1 ratio is 10.8%, up approximately 20 basis points from the fourth quarter, reflecting our earnings in the quarter and lower risk-weighted assets. After pausing share repurchases for the prior three quarters, we repurchased $4 billion of common stock in the first quarter. Our CET-1 ratio remained well above our required regulatory minimum plus buffers, and we expect to continue to prudently return excess capital shareholders in the coming quarters. In the first quarter, our liquidity coverage ratio is approximately 22 percentage points above the regulatory minimum. We continue to benefit from a diversified deposit base with over 60% of our deposits in our consumer banking and lending segment as of the first quarter, which is a higher percentage than before the pandemic. Turning to credit quality on slide five, net loan charge-offs continue to slow Commercial net loan charge-offs decreased $16 million from the fourth quarter to five basis points. However, while loss has improved, we continue to see some gradual weakening in underlying credit performance, including higher non-performing assets. We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase. Total consumer net loan charge-offs increased 60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago, and we've continued to take credit tightening actions to position the portfolio for a slowing economy. Non-performing assets increased 7% from the fourth quarter, driven by higher commercial real estate non-cruel loans, but were down 12% from a year ago due to lower residential mortgage non-cruel loans. Of note, 87% of the non-cruel loans in our commercial real estate portfolio were current on interest, and 75% were current on both principal and interest as of the end of the first quarter. Our allowance for credit losses increased $643 million in the first quarter, reflecting an increase for commercial real estate loans, primarily office loans, as well as an increase for credit card and auto loans. Given the increased focus on commercial real estate loans, especially office, we provided more detail than our portfolio on slide six. We had 154.7 billion of commercial real estate loans outstanding at the end of the first quarter, with 35.7 of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs, and challenging capital market conditions. While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been de-risking the office portfolio, which resulted in commitments declining 5% from a year ago, and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted. As you can see in the slide, we've provided some additional data on the office portfolio, Approximately 12% is owner-occupied. Therefore, the loan performance is mostly tied to the cash flow of the owner's operating business rather than rents paid by tenants. Nearly one-third had recourse to a guarantor, typically through a repayment guarantee. The portfolio is geographically diverse, and as you'd expect, the largest concentrations are in California and New York. Over two-thirds of our office loans are in the corporate investment banking business, and the vast majority of this portfolio is institutional quality real estate with high-caliber sponsors. While approximately 80% of it is Class A, keep in mind that this is a single measure that is hard to evaluate in isolation. For example, newer or refurbished properties may perform better regardless of whether they are Class A or B. We are providing this data to give you more insight into the portfolio, but as is usually the case in commercial real estate, each property situation is different and a myriad of other variables such as leasing rates, loan-to-value, and debt yields can determine performance. which is why we regularly review the portfolio on a loan-by-loan basis. As a result of market conditions and recent increases in credit side assets and non-accrual loans, we've increased our allowance for credit losses for office loans for the past four quarters. The allowance for credit losses coverage ratio at the end of the first quarter for the office portfolio in the corporate investment bank was 5.7%. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period of time as we actively work with borrowers to help resolve issues they may be facing. On slide seven, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the fourth quarter, while period end loans declined 1% from the fourth quarter, with lower balances across our consumer and commercial portfolios. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 244 basis points from a year ago and 56 basis points from the fourth quarter, reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% from the fourth quarter due to the consumer deposit outflows as customers continued to reallocate cash into higher yielding alternatives and continued spending. During the market stress last month, we experienced a brief increase in deposit inflows that has since abated, and while our period end deposit balances were slightly higher than we expected at the beginning of the quarter, they're still down 2% from the fourth quarter. As expected, our average deposit cost increased 37 basis points from the fourth quarter to 83 basis points, with higher deposit costs across all operating segments in response to rising interest rates. Our mix of non-interest-bearing deposits declined from 35% in the fourth quarter to 32% in the first quarter, but remained above pre-pandemic levels. Turning to net interest income on slide 8. First quarter net interest income was $13.3 billion, which was 45% higher than a year ago, as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days. Our full year net interest income guidance has not changed from last quarter, as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. Ultimately, the amount of net interest income we earn this year will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix and repricing, and loan demand. Turning to expenses on slide nine. Non-interest expense declined 1% from a year ago, driven by lower operating losses and the impact of efficiency initiatives. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement-eligible employees, and 401 matching contributions. Our full year 2023 non-interest expense, excluding operating losses, change from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses. Turning to our operating segments, starting with consumer banking and lending on slide 10. Consumer and small business banking revenue increased 28% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit related fees driven by the overdraft policy changes we rolled out last year. We are continuing to make investments in this business. We're beginning to increase marketing spend. We're accelerating the efforts to renovate and refurbish our branches. For our bankers, we're investing in new tools and capabilities to provide better and more personalized advice to customers. We're continuing to enhance our mobile app and mobile active users are up 4% year over year. And we're also seeing increased activity and positive initial indicators after our rollout of Wells Fargo Premier last year. It's early on for all of these initiatives, but we're starting to see some green shoots. At the same time, we continue to execute on our efficiency initiatives. Teller transactions continued to decline. We reduced headcount by 9%, and total branches were down 4% from a year ago. In home lending, mortgage rates remain elevated, and the mortgage market continued to decline. Our home lending revenue declined 42% from a year ago, Correspondent Channel and lower revenue from the re-securitization of loans purchased from securitization pools. We continue to reduce headcount in the first quarter, and we expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the Correspondent Channel as announced in January and began to reduce the complexity and the size of the servicing book. During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances driven by higher point of sale volume. Auto revenue declined 12% from a year ago due to my lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due to rising interest rates. Personal lending revenues up 9% from a year ago due to higher loan balances. Turning to some key business drivers in slide 11. Mortgage originations declined 83% from a year ago and 55% from the fourth quarter, with declines in both correspondent and retail originations. As I mentioned, we stopped accepting correspondent applications in January, so going forward, our originations will be focused on serving Wells Fargo customers and underserved communities. The size of our auto portfolio has declined for four consecutive quarters, and the balances were down 8% at the end of the first quarter. Origination volume declined 32% from a year ago, reflecting credit tightening actions and continued price competition. Debit card spending increased 2% in the first quarter compared to a year ago, an increase from the 1% year-over-year growth in the fourth quarter. Discretionary spending drove the growth, with non-discretionary spending stable from the fourth quarter levels. Credit card spending increased 16% from a year ago, in line with the year-over-year growth in the fourth quarter, with sustained growth in both discretionary and non-discretionary spending. Spending growth slowed throughout the quarter, but was still at double digit levels in March. We continue to see some slight moderation in payment rates in the first quarter, but they were still well above pre-pandemic levels. Turning to commercial banking results in slide 12. Middle market banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances, while deposit-related fees were lower, reflecting higher earnings credit rates on non-interest-bearing deposits. After base lending and leasing revenue increased 7% year-over-year driven by loan growth, which was partially offset by lower net gains from equity securities. Average loan balances were up 15% in the first quarter compared to a year ago, driven by new customer growth and higher line utilization. After being stable in the second half of last year, line utilization increased slightly in the first quarter. Average loan balances have grown for seven consecutive quarters, and we're up 2% from the fourth quarter with the growth in asset-based lending and leasing driven by continued growth in client inventory. Growth in middle market banking was once again driven by larger clients, including both new and existing relationships, which more than offset declines from our smaller clients. Turning to corporate investment banking on slide 13, banking revenue increased 37% from a year ago, driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment banking fees declined from a year ago, reflecting lower market activity with clients across all major products in nearly all industries. While commercial real estate market transactions are down across the industry, our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates and higher loan balances. Markets revenue increased 53% from a year ago, driven by higher trading results across all asset classes. Average loans grew 4% from a year ago, but were down from the fourth quarter. Lower balances in banking reflected a combination of slow demand, increased payoffs, and relatively stable line utilization. Declining commercial real estate balances were driven by the higher rate environment and lower commercial real estate sales lines. On slide 14, wealth and investment management revenue was down 2% compared to a year ago, driven by lower asset base fees due to lower market valuations. Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives. At the end of the first quarter, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Rich Kedzior, Expenses decrease 4% from your go to my lower revenue related compensation and the impact of efficiency initiatives. Rich Kedzior, Average loans were down 1% from a year ago, primarily due to a decline in securities based lending. Rich Kedzior, By 15 highlights our corporate results revenue decline 103 million or 83% from a year ago as higher than interest income was more than offset by lower results in our affiliated venture capital and private equity businesses. Results in the first quarter included 342 million of net losses on equity securities or 223 million pre-tax and net of non-controlling interests. In summary, our results in the first quarter reflected an improvement in our earnings capacity. We grew revenue and reduced expenses and had strong growth in pre-tax free provisioned profits. As expected, our net charge offs have continued to slowly increase from historical lows and we are closely Our capital levels grew even as we resume common stock repurchases and we expect repurchases to continue. And the guidance we provided last quarter for full year 2023 net interest income expenses excluding operating losses has not changed. We will now take your questions.

We will now begin the question and answer session. If you would like to ask a question, please first unmute your phone and press star 1. If at any time your question has been answered, you may remove your request by pressing star 2. Our first question for today will come from Scott Seifers of Piper-Standler. Your line is open.

Scott Seifers, Piper-Standler, Good morning, everybody. Thank you for taking the question. Mike was hoping to just start out on the deposit side. So when you talk about the influx of deposits from some of the you know, sort of special situations having abated. Did that money actually leave the bank or is it just sort of the inflows that have stopped?

Yeah. Hey, Scott, thanks for the question. Look, the inflows stopped, right? And, you know, they came in, you know, in a pretty short period of time and those inflows stopped. And I think what you're seeing, you know, since then is just normal, you know, spending in the consumer side and normal activity across the, you know, across the other businesses.

Okay, perfect. And then I guess maybe switch gears just a bit. I think in your prepared remarks, you'd discussed plans to sort of prudently return excess capital in coming quarters. You know, I was very glad to see the resumption in repurchase in the first quarter, but just given all the kind of cross currents that we've got, whether it's uncertainty on the regulatory environment or, you know, uncertainty on the economy, um, you know, kind of countered against your, your very strong capital levels. Just curious for maybe a little more color on how you would be thinking about share repurchase in the, through the remainder of the year.

Yeah, this is Charlie. Let me take a step. I would say, listen, I think the way we feel about it is, um, you know, our capital levels grew quarter over quarter. uh even after we purchased the four billion of stock so just you know shows our ability to uh to generate capital if necessary uh because of the environment or regulatory changes or things like that so um uh because of that we do feel like we have the ability to continue to return uh uh return capital to shareholders um while we still have plenty of flexibility to deal with anything which could come our way. And so, you know, our excess above the regulatory minimums plus buffers is extremely high beyond what we feel that it needs to be. So we think we can continue to address that and still be very prudent with how we manage capital. Wonderful. Okay.

I have a bunch more questions, but I have a feeling they'll be asked to go forward as well. So, Charlie and Mike, thank you guys very much. Really appreciate it.

The next question comes from Steven Schubeck of Wolf Research. Your line is open, sir.

Hey, good morning. So, I wanted to get a little bit more granular on some of the expense trends that we're seeing. You know, we've gone through the exercise of benchmarking your segment efficiency ratios versus peers. clearly have made significant strides improving profitability across virtually every segment, commercial, CIB, and wealth. The PPNR margins are running really in line with the peer group. It's still the consumer efficiency ratio in the mid-60s, which is running well above peers. And I was hoping you could just speak to the opportunity on the expense side within consumer. How much of a benefit should you see from the retrenchment in mortgage? And maybe what do you see as a normalized efficiency target for this segment just given your current mix of business?

Hey, Steve, it's Mike. I'll start, and Charlie can chime in if he wants. You know, I think when you think about consumer, you know, I think we still have a lot more work to do there. And, you know, it's both in the consumer lending space or the mortgage space as we simplify the servicing side of that business. And that just takes a little bit of time to work its way through, needs to be thoughtful, and in some cases requires a little bit of investment in technology and the like. And then, you know, on the consumer banking side, you know, we've continued to rationalize the branch footprint and branch setup. You know, we continue to see teller transactions and other things decline, and so I think you'll see us, you know, focus there. And hopefully what you've seen in that segment is a consistent quarter-on-quarter, you know, decline in headcount and other factors, and that will sort of, you know, continue to hopefully be the case. And then when you think about just where the end state is, you know, we shouldn't look any different than our peers, our best-in-class peers for each of our segments, including that one. So over a period of time, that's the goal.

And I would just add, you know, when you look at our, you know, that segment, we obviously, you know, mix versus other people is an issue. Our home lending business is today extremely inefficient. which is part of the reason why we made the decisions that we made. So we've got a lot of wood to chop there, which will play out over a period of time to make that business more efficient. And as we've talked about on the consumer banking side, We've done, I think, for many, many years after Mary got her job in the consumer banking operation, our focus was dealing with the cleanup, which they've done an exceptional job in the consumer and small business bank about, and then turned our attention to becoming more efficient, which she has worked really hard on. and that's a combination of looking at our branch footprint, staffing within the branches, migrating people to digital, and we're behind on that, but there's been a lot of progress made over the last year and a half to two years, and so there's still a tremendous amount of opportunity there, but it's in flight.

Really helpful, Culler. Just for my follow-up, I wanted to unpack some of the NII trends that we're seeing within the wealth side specifically. And there's a big focus right now on yield seeking behavior if the higher for longer rate environment persists. You and your peers have seen contraction in NII sequentially and continued deposit outflows. Was hoping you could speak to whether you're seeing any abatement in just the pace of cash sorting or yield seeking behavior as of yet, or if it's continued at a pretty healthy clip.

Yeah, I'll take that. And when you look at the sequential change in NAI, it's really the two fewer days in the quarter that drove it. Otherwise, it's pretty flat to the fourth quarter as we thought it would be when we talked in January. When you think about wealth, it's been pretty stable, the trend. It's not accelerating. It's not decelerating at any significant clip at this point. And what we see there is, you know, we're capturing that cash, you know, those cash alternatives that people are buying in the wealth business. And so I think that trend will continue for a while, and the good news is we're capturing that, you know, in other ways. But the trend has been pretty stable, and that's probably going to be the case for a little longer.

Helpful caller.

Thanks for taking my questions. The next question will come from John McDonald of Autonomous Research. Your line is open.

Hi, good morning. Mike, I was wondering what your outlook is for the second quarter, NII, and maybe if you could talk a little bit about the puts and takes to that and what you're thinking for second quarter. Thanks.

Yeah, John, you know, as you look at... As things are trending, you can see where deposits are on a period end and an average basis. That's probably input number one. Then you can see that deposit yields have increased. Those two things are going to be the biggest drivers. You should expect a little bit of a step down from Q1 into Q2. And we'll see exactly sort of what that looks like as we get a little bit, you know, into the quarter. But I think the variables are there to kind of come up with, you know, a range of outcomes.

Yeah. Okay. And the outlook for the full year obviously embeds a pretty big step down from the first quarter starting point. Can you give us any more color about the types of assumptions you have embedded into the full year outlook on deposit flows, mix shift, and reprice beta?

Yeah, sure. And, you know, as we've talked over the last few quarters, there's still a ton of uncertainty out there with regards to really all the inputs that go into that, right? And whether it's the mix of deposits, the absolute level, or where pricing will be. And so, you know, our guide assumes that it's still going to be a pretty competitive space for deposits on the pricing side, that we will still see some mix shift happening. And that will see some, you know, moderate declines as people continue to spend and the trends happen. So, you know, as we talked about even, you know, last quarter, I think, you know, we'll get as time goes by, we get more and more information. And so we're hopeful that there's, you know, upside, but we'll, you know, to the forecast, but we'll see that in the second half of the year. And it'll be a function of how all those factors play out. But, you know, we're hopeful that we'll see that and there'll be some upside there.

Okay, thanks. The next question comes from Ken Usden of Jefferies. Your line is open.

Hey, good morning. I just want to ask a follow-up on the cost side. So, I think, you know, we're all pretty clear on your, you know, view of continuing to hold the core flat from here. But I think an ongoing question is just, you know, as we look further out, and I know there's no crystal ball here, like what would you get the line of sight when that next wave of gross saves related to all the, you know, duplicative and extras build up in the infrastructure related to risk compliance, et cetera, you know, when you get the line of sight of when you can start to sunset that? Because I know you've talked about that as a big point of how you get the ROE, you know, up over the medium term.

Yeah, Ken, let me try to clarify a little bit of that. So, you know, I think when you look at, you know, what we talked about last quarter in terms of getting to a you know, 15% ROTCE, you know, in the medium term, that didn't assume that we would have to take out a significant amount of the cost related to the risk and regulatory, you know, build outs that we're doing. And that efficiency on those expenses will be out a little while. It could be years in terms of before we really get at some of that. But I think our focus is to get the return to a sustainable 15% in the medium term by not having to rely on that. It really goes back to what we talked about, really making sure capital gets optimized not just in terms of shareholder return, but also across the balance sheet, requires us to continue to execute on the efficiency initiatives outside of the risk and regulatory work. And then we'll start to get the benefit of some of the investments that we've been making now for the last couple of years.

And I'll just add to that, just to be clear, when we think about the opportunities to continue to drive efficiency in the company, we don't even think about... all the expenses related to the risk and regulatory framework work that we're doing. You know, that work is, you know, and those expenses are, you know, they're necessary and those are not an excuse for us not to be efficient in everything else that we do. And so, as we talked about in the consumer businesses a second ago, we look across all the things that we do and there's still significant opportunity to just become more efficient and either reduce the expense base or provide more capacity to invest going forward. And at some point, can we become more efficient in how we run the risk infrastructure of the company? Probably, but that's not on the radar screen and not necessary for us to achieve our efficiency goals. Yeah, and thanks for those clarifications.

One, just a question on the fee side. I know watching your trading results are a lot different than watching some of the bigger peers, but just looking at that billion three on the face of the income statement this quarter in the context of the environment, can you help us put that into context? Was that just an exceptional result this quarter? Did it have anything we should be mindful of as we think forward? And just, you know, your general outlook there. Thank you.

Yeah, sure. You know, we certainly benefited from, you know, the volatility that we saw, particularly in the rate market and some of the other asset classes in the quarter. And you can see that in the results. But, you know, when you look at some of the, you know, core platforms in FX and other areas, you know, we've been just consistently, you know, investing in some of those platforms. So hopefully over time you'll see, you know, good results there. But the quarter definitely was influenced by the volatility that we saw across the market.

Okay, thanks very much.

The next question will come from Ibrahim Poonawalla of Bank of America. Your line is open.

Hey, good morning. I just wanted to follow up on the capital comments. I guess, Charlie, you talked about this. Is it fair for us to assume clearly we have the SCB coming out of the stress test? That'll be one data point. And then the Basel reforms. Should we assume that the CET1 likely drifts higher, maybe 11%, maybe higher in the near term while you still buy back stock? Is that a right assumption? And secondly, I think, Mike, you mentioned about optimizing for capital in RWA. Maybe if you can call out a few things that you can do to optimize RWA relative to where the balance sheet is today.

Yeah, sure. Thanks. You know, I think that, you know, the simple answer to your first question is no, we don't expect that to continue to keep, you know, keep drifting up. You know, certainly we'll find out, you know, the results of CCAR with everybody else in June. And then we've got Valable 4, which is a little bit longer timeline than that. But we're 160 basis points above the regulatory minimum buffers. We've got plenty of capital to deal with whatever comes out of that. And as we said, over time, we'll get closer to 100 basis points or so above the 9.2%. And so I think there's you know, plenty of capacity to deal with whatever comes and continue to return money back to shareholders, as Charlie said.

And just while you think of the second part, and again, all I was trying to say is we have a lot of flexibility To deal with things that come our way. And so we're not anticipating, you know, significant additional capital needs. We're not anticipating that, you know, any, you know, potential downturn could create, you know, additional capital needs inside of the business. All we're saying is that if anything of those things were to happen. We have the flexibility to deal with that, both because of the amount of earnings that we have, as well as the existing excess capital that we have. So you'll add those, you take that and you say, we bought, you know, all those things happened while we bought $4 billion stock back this quarter. So we feel we'll be able to continue to return capital and still maintain a very conservative position.

Yeah, and then just to give you a couple examples to help illustrate the capital optimization, the mortgage business is one of them. If we want mortgage exposure, we can buy securities. You don't have to always hold the mortgage. If you're buying securities, you don't have to buy UMBS. You can buy Ginnies. And then you can look at each of the underlying portfolios and make sure we're getting the return from a relationship point of view that we think, whether that's in the commercial bank or the corporate investment bank. plenty of areas that we can either reallocate capital to clients that we think will get better returns for or optimize some of the underlying portfolios.

Got it. And just one separate question. You made tremendous progress, Charlie, since taking over on the compliance risk management front. There was a news article last night talking about some OCC MRAs. I don't expect you to comment on that, but just give us a sense from a shareholder perspective, your level of confidence around But the risk of another shoe dropping on a major setback to all the efforts and actions that you've taken to address the regulatory orders, to the extent you can, just to give comfort that the progress that we've made is getting us closer to the finish line as opposed to another big setback that could push us back again.

Yeah. Listen, I would refer you back to my shareholder letter. Where I wrote about it extensively. And, you know, I think is still continue to feel exactly the way we felt when we wrote that letter wasn't that long ago. Which is, you know, we have continued work to do feel very confident in our ability to get the work done and that we're making progress and so We live in an environment where things can come up. That's always the case, so we don't want to pretend like there are no risks of other things out there. But if there was anything specific, we would do our best to let you know. We feel good about the progress that we're making and are extremely focused on making sure that we've got all the attention decked against it. But we're confident that the things that we're doing will close the gaps that existed at the company when we got here.

No, sir. Thank you very much.

The next question comes from John Pancari of Evercore ISI. Your line is open.

Good morning. On the back to the NII drivers, can you maybe give us an updated expectation on how you're thinking about loan growth here as you look through 2023? I know you cited some of the pressures on the consumer side, but some of the favorable trends still on commercial and then separately on the deposit side. Do you have an updated expectation regarding your total deposit data as you see pricing, you know, pressure continue?

Yeah, thanks. So on the loan side, you know, I think we're definitely seeing pockets of growth in places like the commercial bank. And that's been pretty consistent now for, you know, a couple, a couple quarters, it's not, you know, but the overall growth rate across total loans has has moderated for the last, you know, three quarters, and which is exactly what we thought might happen, you know, when we were, you know, talking last, last summer. And so I think it'll still be pretty moderate. You know, I wouldn't expect huge growth in loans over the rest of the year. And embedded in our guidance is it's some, you know, low single-digit, you know, growth rate, you know, in terms of loans for the year. And so I think, you know, I think that's what we're assuming there. What was the second part again, John? Sorry. Yeah, it was around your updated deposit.

Sorry, deposit beta. Sorry.

Yeah, no, look, on the deposit side, you know, to date, you know, betas have played out almost exactly what we thought, how we thought they would. And, you know, I think from here, You know, the path of rates will matter. Competition will matter. And so, as I mentioned earlier in the call, we're still assuming it's going to be pretty competitive when we give you the guidance that we gave you. And I think we may find that hopefully that it gets, you know, that maybe we're being a little conservative there. But we do think at this point it will still be competitive. Right. And I think the betas will be pretty reasonable, though, on the consumer side when you look back after the rates rise, they stop.

Got it. Okay, thanks, Mike. And then separately on the commercial real estate front, maybe if you could just elaborate a little bit on the stress that you're seeing. I know you discussed office. Maybe can you talk about your LTVs in office, maybe on a on a refreshed basis if you happen to have that, and maybe in other portfolios as well, because clearly the change between origination LTVs versus where we're seeing refreshed levels come in are clearly what is motivating some of the impact around reserve behavior. So if you can give us a little color there, that'd be helpful.

Yeah, sure. In the office space right now, as many others have said too, this is going to play out over an extended period of time. We're not seeing a lot of near-term stress in terms of whether clients are current or seeing very big issues on a property by property basis at this point, but we do expect some of that to come. Um, and, uh, and I think it'll be for all of the reasons that, you know, everyone's reporting on. Right. And in particular, it'll be in cities that, you know, you see weakness in places like San Francisco and L. A, a little bit in Seattle. And so it's all the places where. Either lease rates are already lower than the national average or, you know, the secular changes around, you know, back to office are changing in a little bit more of a bigger way. And, you know, but it's going to take time. And we just haven't seen it translate into loss content yet. And we're going very granular, property by property. And so giving you LTV numbers from a portfolio at a portfolio basis really isn't that helpful at this point. Because it really is going to be a matter of what each of these underlying properties look like and what the issues are there. And we haven't seen a lot of trades happening either recently. And so that also will impact how you think about the valuations. And what we're doing is really just making sure we stress it in a whole bunch of different ways on a property level basis to make sure we understand where the potential issues might come from.

Okay, thank you. The next question comes from Betsy Gracek of Morgan Stanley. Your line is open.

Hi, good morning. Good morning. Hi. How are you doing? A couple questions, a little bit of follow-up, but one on the credit side. I wanted to just understand a little bit about the recoveries in commercial. I know in the deck you mentioned that commercial NCOs were down in part due to higher recoveries and just wanted to understand how long you see those recoveries persisting and, you know, is there any driver for them actually increasing from here? Thanks.

Yeah, there really isn't any story there, Betsy. You know, I mean, we get recoveries, you know, every quarter and there really isn't a significant, you know, trend, you know, change one way or the other. And again, it's going to come back down to individual underlying issues or situations that drive it quarter to quarter. But I wouldn't read too much into the trend.

Okay. And then separately on the wealth deposits, I know earlier in the call you addressed this, that you would expect to see the wealth outflows. continue at, you know, current pace or so for at least a little bit of time. I'm wondering, is there any anchor that you can give us with regard to wealth deposits as a percentage of client assets, you know, that existed pre-COVID that, you know, maybe we should anchor back on in modeling that line item?

Yeah, I mean, what we gave you in my commentary was just cash as a percentage of assets. And it's quite a bit higher than it was before, about 12% now versus 4%. And obviously, deposits is going to be a subcomponent of that. And there are other drivers of how much cash people are going to hold as a percentage of assets. And right now, you're seeing a lot of what is going into cash alts is coming out of other asset classes. So it's a little harder to give you a specific number of deposits as a percentage of assets because you're seeing people sell equities and other asset classes and drive up those cash balances.

Right. And cash for you, it's including things like MMF and treasury bills, things like that?

Absolutely, yeah. Right.

Yeah, okay.

And so I would just take the, you know, the current, you know, balance that you see in the wealth space and the deposit side and assume it, you know, continues to come down at a pretty, you know, at a stable pace for a little bit.

And I just, last question here on deposit betas. I know you indicated that they should be okay. I guess I'm wondering how you think about deposit betas this cycle versus last cycle, similar, higher, lower, any senses to versus prior cycle in magnitude would be great. Thanks.

Yeah, look, I mean, it'll be different, obviously, and part of what's going to drive that is how long rates stay higher. And I think that we'll, you know, that's, you know, we'll find that out over a period of time. But, you know, as you can tell, you know, where betas have performed so far, they've performed pretty well when you look at it relative to the last cycle, particularly given how far rates have moved up in excess of what happened last time. And so, you know, and they're behaving, you know, exactly as you might think, right? And if you go portfolio by portfolio, the betas are pretty high on the large corporate side. That's been the case now for a couple quarters. They're a little bit lower in the commercial bank, given the nature of that client base. And in the consumer side, you know, they're relatively low, given the amount of rate rises that we've seen so far. And so, you know, so I think on the large corporate side, you'll see those be pretty consistent from here. And the consumer side will be a function of all the things we talked about earlier. All right. Thanks so much.

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

Good morning. I was hoping you guys could elaborate on the slowing consumer spending towards the end of the month. Any more color there and any thoughts on what's driving that?

Yeah, it was pretty small, you know, when you look at, you know, that change. So I wouldn't read too much into it. You know, I think people are still – there's still a lot of activity out there, and consumers are still out spending both on the debit side and the credit side. So, you know, I wouldn't read into a couple weeks. Okay.

And then, separately, I know I always kind of harp on some of these reg issues. And I appreciate, you know, the New York Post article yesterday you can't comment specifically on. But, you know, it did allude to some concerns in your trading business. And obviously, you know, it performed extremely well. You've been growing it, although I don't think you're growing it, you know, super aggressively. But there's been some political comments, maybe it was six months ago or so, that, you know, you shouldn't be growing your capital markets business while you're investing in these other areas. So I guess maybe you could just address the trading businesses overall in terms of, you know, how you're growing them in a responsible way and how you're making sure that the oversight and risk management is fine. I mean, because, again, externally, it seems like everything is going really well, but, you know, there's, it's hard to tell. Thank you.

We have no concerns over what we're doing in the business. We're not increasing risk in any meaningful way. We've had strong oversight in that business and we think it continues. And, you know, we benefited from business activity, which is focused on customer flow. We have strong financial risk management in the company and have had that for a long period of time. We have strong risk management over our trading businesses and controls. And I would just be really careful to take, you know, the source that you're taking and using that to expand into anything beyond from whence it came. If it was anything meaningful to report, we'd report it. And as I said, we feel really good about the progress that we're making, and we feel good about the performance of the company. And I think it's that, you know, that stands on its own.

Okay, that's very clear and very helpful. Thank you.

The next question comes from Gerard Cassidy of RBC Capital Markets. Your line is open.

Gerard Cassidy Thank you. Hi, Mike. Mike, you talked about some of the reasons why your commercial loan growth was quite strong on a year-over-year basis. Can you share with us, are you guys seeing any re-intermediation where, you know, the DCM market was very weak in the quarter for the industry. It was weak last year. Are you guys seeing benefits from that where people are, you know, corporate and commercial customers are coming to you using your balance sheet more so than possibly a year and a half ago?

Not, not in any meaningful way. Um, there's always an anecdotal story I'm sure out there. Um, but I wouldn't say it's meaningful.

Very good. And then as a follow-up, I knew you gave us some details about the net interest income growth this year. There's still been... Yeah, annualize the first quarter results.

We lost you there for a second. Can you just repeat the whole second part?

Sure. You gave us some details on the outlook for net interest income growth, up 10%. If you annualize your first quarter number, of course, that would be greater than the 10% growth for the full year. And you gave us the reasons why there's a lot of uncertainty. The one specific question, though, is, as you're thinking on the yield curve and i know this is very hard uh nobody can predict it where it's going to be but have you are you thinking that the yield curve and maybe a rate cut could be coming sooner and the yield curve comes down when you look at your outlook or has your outlook for the interest rates changed i guess is the question well i think certainly the market expectations are uh implying that there'll be a uh a decrease in the late part of the year um you know and so i think

you know, that's certainly being priced in at the moment. You know, but I do think that you need to be prepared that that's not going to happen. And I think, you know, it's possible it doesn't. So I think as we get a little closer, we'll all know. And what we try to do in our guidance is use what the market's telling us, right? So if that doesn't happen, there's, you know,

and rates are higher than what the market's implying then there could be that there'll be a little upside there yeah and the only thing i have is listen you know in all of this you know you can you know there's a i tried to say this in our remarks which is you know we've we've said constantly we don't know what the future holds uh we see what the market is saying um who knows where the market is right or wrong you have uh you know the fed chair who's talking about expect rates higher for longer. And so we're prepared for a range of scenarios. When we think about giving guidance, we just try and choose a benchmark, which is the market, which is, you know, it's a scenario. and pick your own scenario based upon what you all think and you can make your own determination what it'll be but we're just trying to give you both like a benchmark and what supports that benchmark but also be clear that there are a range of alternatives out there which you know could you know could make the result differ just trying to be as transparent as we can no I appreciate the further insights that's very helpful thank you sure the next question comes from David Long of Raymond James your line is open

Good morning, everyone, I appreciate all the color on some of the deposit flows, but let me just ask it a little bit different way from a non interest bearing deposits figure the number of the percentage of his come down, how do you expect that concentration to change over the course of the next several quarters.

Well, I wouldn't try to predict it exactly over the next couple quarters, but I think if you look at the, you know, we're about 32% in the quarter, and if you go back a number of years pre-pandemic, that was in the mid-20s. And so we could, you know, and we've said this in other forums, you know, you could see it start to trend, you know, towards there. Will it get down there? Unknown, but I think you'll see it trend down a little bit more.

Sure. If you look back over the last 15 years since the great financial crisis, rates have been pretty close to zero outside of a brief period just before the pandemic. Do you see noninterest-bearing deposits going back to pre-great financial crisis levels for Wells Fargo or the industry where we had numbers there in the mid to high teens?

I think that's almost impossible to predict. Got it.

Okay.

Thank you.

Appreciate it. The last question for today will come from Chris Katowski of Oppenheimer. Your line is open.

Yeah, good morning and thanks for taking the question. I guess I wonder how do you anticipate managing the duration of your investment securities portfolio from here? I mean, obviously it must have extended out quite a bit last year. And, you know, we saw the mark to marks on it increase, you know, across the industry. But I noted kind of the HTM portfolio is down about 7% during the quarter. And I mean, do you anticipate running that down? And if so, how quickly does it run down if you do nothing?

Well, I think, you know, obviously that's going to be a little bit dependent on rates and where rates go, you know, given, you know, there's some mortgages and mortgage securities in the portfolio in terms of the burndown. And I think we're going to continue to be thoughtful, as we have in the past, around thinking about the size of the portfolio in total, including the AFS. And that's really a function of a bunch of things, including how much loan growth we expect to see over a period of time. And then we look at all of the other, you know, other constraints that we've got to, you know, worry about around liquidity and everything else. And, you know, we decide on how much goes into HTM and what the makeup of it is. But at this point, we feel, you know, comfortable with, you know, with the quantum and both in terms of the size of the portfolio and the duration of the portfolio.

Okay. So you anticipate keeping it roughly the size, all things being equal, or does it run down?

I think we'll make that decision over time. I don't anticipate the portfolio getting much bigger from here over the next few quarters, but I think we'll make that decision over time, and then the burndown will be what it is based on where rates and natural maturities of the portfolio go.

Okay. Thank you. That's it for me.

All righty, everyone. Thanks so much. Appreciate it, and we'll talk to you soon. Take care. Thank you all for your participation on today's conference call.

At this time all parties may disconnect.