Wells Fargo & Company

financial institutions, financial sponsors, healthcare, and technology, media, and telecom. We've also started to see the benefit of the targeted investments we're making in our trading capabilities, including adding talent and improved technology with a focus on supporting our core clients. Finally, we're launching a partnership with Centerbridge, which helps us provide our middle market clients with access to alternative sources of capital, another example of how we're providing solutions for our clients. Investing in our business and introducing new products and services remains a priority in 2024, and Mike will highlight some of the opportunities later on the call. In 2023, we also continue to take a closer look at the businesses that were not in sync with our strategic priorities. As I mentioned, we simplified the home lending business, which included exiting the correspondent business. We are reducing the size of our servicing portfolio, as well as optimizing our retail team to align with our narrower customer focus. In the third quarter, we sold private equity investments in certain Norwest Equity Partners and Norwest Mezzanine Partners funds. We also continue to invest in the communities we serve throughout the year, and you can see many examples at the beginning of our slide presentation. As we look forward, our business performance remains sensitive to interest rates and the health of the US economy, but we are confident that the actions we are taking will drive stronger results over the cycle. We are closely monitoring credit, and while we've seen modest deterioration, it remains consistent with our expectations. Our capital position remains strong, and returning excess capital to shareholders remains a priority. Mike will talk more about our expectations for 2024, but I'd like to make a couple of points. We have seen and have said that we expect net interest income to decline from the high levels we saw as rates were rising last year. And given that we remain modestly asset sensitive, the implied Fed rate path reflected in recent forward curves impacts our outlook for NII. Significant uncertainty exists regarding eventual timing and extent of Federal Reserve interest rate actions. Mike will give you our expectations for net interest income, but please recognize that it is based upon a series of market assumptions which may be right or may be wrong. We hope the overview of our assumptions is helpful. Second, we remain focused on tightly controlling our expenses, but there are several moving pieces which Mike will walk you through. We will continue to invest what's necessary for our risk and control work. We continue to realize expense efficiencies, And at this point, we are planning to increase our investment spending to create better growth and higher returns in future. Our expected efficiencies roughly offset our planned increase in additional spend at this point. Decisions on how much to invest are dynamic. We closely monitor the outcomes of our investments, and we will adjust our plans based on the success we see. We are focused on our shorter-term results, but remain committed to building a well-managed faster growing and higher return company over the medium and longer term. I have said and I remain excited about the opportunities to increase our share in returns across all of our businesses. We believe the actions we have taken and continue to take provide a path to 50% ROTCE. I want to conclude by thanking our employees for the dedication, talent and all they do to move our company forward. I'm excited about Wells Fargo's future and all that we will accomplish in the year ahead. Mike, over to you.

Thank you, Charlie, and good morning, everyone. The first couple slides summarize how we helped our customers and communities last year, some of which Charlie highlighted, so I'm going to start with our fourth quarter financial results on slide four. Net income for the fourth quarter was $3.4 billion, or $0.86 per diluted common share. Our fourth quarter results included 1.9 billion or 40 cents per share for the FDIC special assessment and 1.1 billion of severance expense, including 969 million or 20 cents per share for planned actions. These expenses were partially offset by 621 million or 17 cents per share of discrete tax benefits related to the resolution of prior period tax matters. Turning to capital liquidity on slide five. Our CET1 ratio increased to 11.4% in fourth quarter, 2.5 percentage points above our regulatory minimum plus buffers. This increase was driven by our earnings and an increase in accumulated other comprehensive income reflecting lower interest rates and tighter mortgage-backed security spreads. During the fourth quarter, we repurchased $2.4 billion in common stock, We repurchased a total of $12 billion in common stock in 2023, and we currently expect to be able to repurchase more than this amount in 2024. We will continue to consider current market conditions, including interest rate movements, risk-weighted asset levels, stress test results, as well as any potential economic uncertainty with respect to the amount and timing of share repurchases over the coming quarters. Turning to credit quality in slide seven, As expected, net loan charge-offs increased up 17 basis points from the third quarter to 53 basis points of average loans driven by commercial real estate office and credit card loans. The increase in commercial net loan charge-offs reflected the higher losses in commercial real estate office, while losses in the rest of our commercial portfolio were stable from the third quarter. As expected, losses started to materialize in our commercial real estate office portfolio as market fundamentals remain weak. The losses were across a number of loans spread across various markets and were driven by borrower performance, lower appraisals, or the result of properties or loans being sold at a loss. We substantially built reserves for this portfolio throughout 2023 as credit size and non-performing assets increased. And while we expect additional losses in the coming quarters, given market fundamentals, and capital markets and liquidity challenges in this sector, the amounts will likely be uneven and episodic. Our commercial real estate team has a rigorous monitoring process and continues to de-risk and reduce exposure, and we're using this information to evaluate our allowance, which I will discuss later. Consumer net loan charge-offs continue to increase, and we're up 118 million from the third quarter to 79 basis points of average loans. The increase was driven by the credit card portfolio, which performed as expected, with increased losses driven by recent vintages maturing. Non-performing assets increased 3% from the third quarter as growth in commercial non-accrual loans more than offset declines in consumer. The increase in commercial real estate non-accrual loans was driven by a $567 million increase in office non-accrual loans. Moving to slide eight, our allowance for credit losses increased slightly in the fourth quarter, driven by an increase for credit card and commercial real estate loans, partially offset by a lower allowance for auto loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. While the charge-offs we took in the fourth quarter were contemplated in our allowance, We are still early in the cycle, and after going through our quarterly review process, the coverage ratio in our CEIB commercial real estate office portfolio remained relatively stable at 11%. On slide nine, we highlight loans and deposits. Average loans were down from both the third quarter and a year ago. Credit card loans continued to grow, while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 122 basis points from a year ago and 12 basis points from the third quarter reflecting the higher interest rate environment. Average deposits declined 3% from a year ago as growth in corporate and investment banking was more than offset by declines in our other deposit gathering businesses. reflecting continued consumer spending and customers reallocating cash into higher-yielding alternatives. Period-end deposits included in the chart on the bottom of the page were up $4.2 billion from the third quarter as declines in consumer banking and lending were offset by slightly higher deposits in wealth and investment management for the first time in over a year, as well as higher commercial deposits, which included our efforts to attract clients' operational deposits. As expected, our average deposit costs continued to increase, up 22 basis points from the third quarter to 158 basis points, with higher deposit costs across all operating segments. The pace of the increase was similar to the third quarter. Our mix of deposits continued to shift, with our percentage of noninterest-bearing deposits declining to 27%. Turning to net interest income on slide 10. Fourth quarter net interest income declined 662 million or 5% from a year ago due to lower deposit and loan balances partially offset by the impact of higher interest rates. I'll provide details on our 2024 net interest income expectations later on the call. Turning to expenses on slide 11. While our fourth quarter non-interest expense included the FDIC special assessment and 1.1 billion of severance expense, including $969 million for planned actions, expenses declined from a year ago driven by lower operating losses. While most of the planned actions should result in lower headcount, some of the actions are related to our workforce location strategy, which should lower occupancy costs and provide other benefits but may not always reduce headcount. Total expenses increased from the third quarter driven by the FDIC special assessment and higher severance expense. Personnel expense increased $554 million from the third quarter, as higher severance expense was partially offset by lower benefits and incentive compensation expense, including certain year-end adjustments, as well as the impact of efficiency initiatives, including lower headcount. Turning to our operating segments, starting with consumer banking and lending on slide 12. Consumer small and business banking revenue increased 1% from a year ago, driven by higher net interest income reflecting higher interest rates, partially offset by lower deposit balances. We've been focusing on controlling expenses and lowering the cost to serve our customers, which includes driving digital adoption, simplifying our product portfolio, and using technology to automate our operating environment. As our customers continue to shift to lower cost channels, resulting in fewer teller transactions and handled call volumes, We've reduced our total number of branches by over 280, or 6%, from a year ago. At the same time, we have been refurbishing our branches as part of an accelerated multi-year effort to transform and refresh our whole branch network. I'll highlight other ways we are investing to improve the customer experience later on the call. Home lending revenue increased 7% from a year ago, lower gain on sale margins and originations, as well as lower loan balances, were more than offset by improved valuations on loans held for sale due to losses in the fourth quarter of 2022. We continued to reduce headcount home lending in the fourth quarter, down 36% from a year ago, reflecting market conditions as well as our new strategy. Credit card revenue declined 1% from a year ago driven by the impact of introductory promotional rates and higher rewards expense, partially offset by higher loan balances and interchange revenue. Payment rates have been relatively stable over the past year and remained above pre-pandemic levels. New account growth continues to be strong, up 17% from a year ago. Auto revenue declined 19% from a year ago driven by lower loan balances and continued loan spread compression. And personal lending revenue was up 13% from a year ago due to higher loan balances. Turning to some key business drivers in slide 13. Mortgage originations declined 69% from a year ago and 30% from the third quarter, reflecting the progress we made on our strategic objectives for this business, as well as the decline in the mortgage market. As we executed on our strategic objectives, we've also made significant progress on reducing the amount of third-party loans serviced, down 18% from a year ago. The size of our auto portfolio has declined for seven consecutive quarters and balances were down 11% at the end of the fourth quarter compared to a year ago. Origination volume declined 34% year-over-year, reflecting credit tightening actions. Debit card spending increased 2% from a year ago, with both discretionary and non-discretionary spend up 2%, with growth in most categories except for home improvement, fuel, and travel. Credit card spending continued to be strong, was up 15% from a year ago. All categories grew with double-digit growth rates in every category except fuel, home improvement, and apartment apparel. Turning to commercial banking results on slide 14. Middle market banking revenue increased 6% from a year ago, driven by the impact of higher interest rates and higher deposit-related fees, reflecting lower earnings credit rates. Asset-based lending and leasing revenue increased 9% year-over-year due to the impact of higher interest rates and improved results on equity investments. Average loan balances were up 2% from a year ago driven by growth in asset-based lending and leasing. Turning to corporate and investment banking on slide 15. Banking revenue increased 15% from a year ago driven by higher lending revenue higher investment banking revenue due to increased activity across all products, and stronger treasury management results. As Charlie highlighted, we've successfully hired experienced bankers, which is helping us deliver for our clients and positioning us well for when markets improve. Commercial real estate revenue grew 2% from a year ago, reflecting the impact of higher interest rates, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago, driven by higher revenue in structured products, equities, credit products, and commodities. Average loans were down 3% from a year ago, with growth in markets more than offset by declines in banking and commercial real estate. On slide 16, wealth and investment management revenue declined 1% compared to a year ago, reflecting lower net interest income driven by lower deposit balances as customers continued to reallocate cash into higher yielding alternatives. The decline in net interest income from a year ago was partially offset by higher asset-based fees due to increased market valuations. As a reminder, the majority of WIMP advisory assets are priced at the beginning of the quarter, so fourth quarter results reflected market valuations as of October 1st, which were higher from a year ago. Asset-based fees in the first quarter will reflect valuations as of January 1st, which were also higher from a year ago. Average loans were down 3% from a year ago, driven by decline in securities-based lending. Slide 17 highlights our corporate results. Revenue declined $345 million from a year ago, reflecting higher deposit crediting rates paid to the operating segments. This decline was partially offset by improved results in our affiliated venture capital business on lower impairments. Turning to our expectations for 2024, starting on slide 18. Let me start by highlighting our expectations for net interest income. As we look forward, there are a number of factors that could impact our results, including the ultimate path of rates, the shape of the yield curve, quantitative tightening and fiscal deficits, consumer behavior, and competitive behavior, to name just a few, all of which we have little to no control over. This makes it particularly difficult to estimate an interest income for 2024, There was more uncertainty than usual given the market's strong view of rate cut timing in the quantum. Looking at our results, while we had strong growth in full year net interest income in 2023 versus 2022, our net interest income came down modestly each quarter last year driven by the higher deposit pricing and mixed changes. You can see this impact when you analyze our fourth quarter net interest income, which was down approximately 3% from our full year 2023, net interest income of $52.4 billion. Our current expectation is that full year 2024 net interest income could potentially be approximately 7% to 9% lower than our full year 2023. This expectation is anchored on the forward rate curve and a series of business assumptions, including lower rates in the recent forward rate curve, which given our modestly asset-sensitive position would be a headwind to net interest income, a slight decline in average loans for the full year, which includes modest growth in commercial and credit card loans in the second half of the year after a slow start to the year. Reinvestment of lower yielding securities run off into higher yielding assets, which would also modestly extend the duration of the investment portfolio. Further attrition in consumer banking and lending deposits, as well as continued mix shift from lower yielding products to higher yielding. Deposits in our other deposit gathering businesses are expected to be relatively stable and market funding replaces the decline in consumer deposits as needed. We currently expect that net interest income will trough towards the end of this year. As we've done in prior years, we are also assuming the asset cap will remain in place throughout the year. Ultimately, the amount of net interest income we earn in 2024 will depend on a variety of factors, many of which are uncertain, including the absolute level rates, the shape of the yield curve, deposit balances, mix in pricing, and loan demand. Turning to our 2024 expense expectations on slide 19. We started our focus on efficiency initiative three years ago, and we successfully delivered on our commitment of approximately 10 billion in gross expense saves. Through our efficiency initiatives, we have reduced headcount every quarter since third quarter of 2020, and headcount is down 16% since the end of 2020. Looking at our expectations for this year and following the waterfall on the slide from left to right, We reported $55.6 billion of non-interest expense in 2023, which included the $1.9 billion FDIC special assessment. Excluding this item, expenses would have been $53.6 billion, which we believe is a good starting point for discussion of 2024 expenses. Looking at the next bar, we expect severance expense to be approximately $1.3 billion lower. driven by the $969 million expense we took in the fourth quarter for planned actions. We expect expenses to increase by at least $300 million due to higher revenue-related expense driven by wealth and investment management. Revenue-related expenses will ultimately be a function of activity and market levels and therefore could be higher or lower than this estimate. At this point, we expect all other expenses to be flat, though there are significant efficiencies and increased investments included in this expectation. We expect approximately 2.7 billion of gross expense reductions in 2024 due to the efficiency initiatives. We highlight in the slide some of the areas where we anticipate additional savings and continue to believe we have more opportunities beyond 2024. Similar to prior years, the resources needed to address our risk and control work are separate from our efficiency initiatives, and we will continue to make significant investments in our risk and control infrastructure. While we remain focused on executing on our efficiency initiatives, we're also continuing to invest, and we expect approximately $1.1 billion of incremental technology and equipment expense, reflecting higher costs related to the amortization of investment in prior years, as well as new investments planned for 2024. We also expect merit increases of approximately $700 million, which are primarily awarded to employees with lower salaries. We highlight some of the other areas where we plan to invest on the next slide, Our 2024 expense outlook includes ongoing business-related operating losses of approximately $1.3 billion, similar to the level we had in 2023. As previously disclosed, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses. So putting this all together, we expect 2024 non-interest expense to be approximately $52.6 billion. It's important to note that while we've made substantial progress executing on our efficiency initiatives, As Charlie highlighted, we still have a significant opportunity to get more efficient across the company. Given how critical it is to continue to invest in our business, on slide 20, we provide some examples of our areas of focus for 2024. Let me highlight a few. Building the right risk and control infrastructure remains our top priority, and we will continue to invest in this important work. Charlie discussed many of the technology investments we've already made to transform how we serve both our consumer and commercial customers, and we plan to continue investing in these areas this year throughout our businesses. We are planning to hire more bankers and advisors to grow our Wells Fargo Premier offering to our affluent clients. We plan to launch a new travel-oriented credit card as part of our autographed suite of products, as well as a new small business credit card this year. To better serve our commercial clients, we plan to continue to hire within investment banking and commercial banking to support priority sectors and products to help drive growth. Now, let me conclude with slide 21, where we will discuss return on tangible common equity. When we first discussed our path to improving returns on the fourth quarter 2020 earnings call, we had an 8% ROTCE. Since then, we have taken multiple actions to improve our returns, including executing on our efficiency initiatives, investing in our businesses to help drive growth, and returning excess capital to shareholders, including increasing our common stock dividend from 10 cents to 35 cents per share and repurchasing $32 billion of common stock. These actions help to improve our ROTCE. Our reported ROTCE in the fourth quarter was 9%, but as we highlight in the table, our ROTCE was impacted by a number of notable items. Our 2023 returns also reflected the benefit of rising rates, which helped to drive strong net interest income growth. And as I've already highlighted, we expect net interest income to decline this year. We still believe we have an achievable path to a sustainable 15% ROTCE over the medium term, as we continue to make progress on transforming the company. There are several key factors that support our belief Our ability to return excess capital, we currently have a significant amount of excess capital, 2.5 percentage points above our regulatory minimum buffers for CET1, and as I already highlighted, we expect to increase our share repurchases this year. I highlighted the progress we've already made to reposition our home lending business, including reducing the amount of third-party mortgage loan service by 18% from a year ago. As we continue to streamline this business, we expect the profitability to improve. We've grown our credit card business with balances up 40% since the end of 2021 and new accounts 25% higher than the fourth quarter of 2021. However, the current profitability of this business has been impacted by acquisition costs and allowance bills, and we expect profitability to improve as the portfolio matures. Finally, we've made significant investments the last few years across our franchise to better serve our customers and help drive growth. We expect the revenue growth that these investments should generate in businesses like corporate investment banking and wealth investment management will help fund additional investments. So we have many drivers to close the gap and improve returns. In summary, our results in 2023 demonstrated our commitment to improving our financial performance. We grew revenue, reduced expenses, increased capital returns to shareholders, and maintained our strong capital position. We will now take your questions.

At this time, we will now begin the question and answer session. If you would like to ask a question, please press star then one and record your name and institution at the prompt. If at any time your question has been answered, you can remove your request by pressing star two. Once again, that is star one for questions at this time. And our first question of the day will come from Steven Chubik of Wolf Research. Sir, your line is open.

Good morning. So, happy new year. Mike, I appreciate all the NII detail. Just given all the different puts and takes that you cited, I was hoping you could provide some context as to how you're thinking about the exit rate for NII in 24 per the guidance. Just given expectations per the street that NII should inflect positively in 25, just want to get a sense as to how you're thinking about where NII could potentially drop or stabilize based on the forward curve.

Yeah, no, I appreciate the appreciate the question. You know, when you, you know, based on what we gave you, Steve, I think, you know, we said in the on the page and in my remarks that that we do expect it to start to, you know, inflect and trough, you know, as we get towards the end of the year, exactly when that happens, you know, I think we'll we'll sort of see. We're not going to get too specific there, but we do expect that you would start to see a trough as we get to the end of the year and into 2025.

Very helpful. And then for my follow-up just on expenses, the core expense guidance shows another net reduction in 24. You noted that you're making investments, but those will be offset by efficiency savings. I just want to get a sense as to how long you can sustain that why this core expense trajectory continue to fund investments with future efficiencies?

Yeah, you know, I think when we think about, you know, the efficiency journey that we're on, you know, I think Charlie and I have been both pretty clear, you know, consistently now that, you know, there's more to do, you know, and 2024, you know, is just, you know, another year in the journey, right? And we've got more to do post that to continue to drive efficiency across the place. You know, where we're going to net out on a year-to-year basis in terms of the net spend, you know, I'm not going to try to predict. But as you look across, you know, the company, I think we're just continuing to methodically make progress to drive automation, efficiency, you know, reduce third-party spend, reduce our real estate footprint, you know, across all of the different, you know, dimensions. And I think we think we've got more to do, and that will continue into 2025 and beyond.

That's great. Thanks so much for taking my questions.

The next question will come from John McDonald of Autonomous Research. Your line is open, sir.

Hi, good morning. Mike, I wanted to ask about the fee income drivers for this year. Charlie mentioned, obviously, some examples of progress that you've gotten leverage on investments. And then obviously, you know, you've got cyclical headwinds and tailwinds. So maybe just could you walk through some of the bigger fee income drivers and give your sense of, you know, puts and takes and how you're feeling this year going into the fee revenue outlook?

Yeah, sure. Thanks, John. You know, when you look at the components there, I mean, the largest one, you know, is going to be our advisory fees in the wealth and investment management business. And, you know, market levels are higher than they were, you know, this time last year. And so if that holds or gets better as you know, many people predicting that should be, you know, constructive for that fee. You know, when you start looking at, you know, the other line items like trading, you know, the market's got to cooperate. We're happy with the progress we've been making across the different businesses there, but the market's going to have to cooperate as well for that to, you know, continue. You know, we had a number of impairments, you know, across our venture capital portfolio this year. You know, at some point that should start to peter out and we'll see that, you know, inflect. You know, and then the other fee lines should be pretty predictable for, you know, for the most part as you sort of look forward.

Okay, and just to follow up on the net interest income idea of bottoming towards the end of the year, you know, theoretically, what would be the drivers of that kind of bottoming? Do you have fixed asset reprice that helps, or is it kind of assumed a new asset generation? Maybe you could just wrap that into, you know, some thoughts about what would drive that inflection in the context of any update on rate sensitivity as well. Thanks.

Yeah, sure. Maybe I'll start with the latter part first. And as you can see in the data we gave in the presentation, we're anchoring it to what was in the forward curve as of day last week, which is not that dissimilar to what you have today. And I think when you look at sensitivity to that, our interest rate sensitivity disclosures in this case are a pretty good estimate for how to think about whether if rates are a little bit higher or a little bit lower than what's in that forward curve. And if you look at where we were at the end of the third quarter, we were still modestly asset sensitive. That'll still be the case at the end of the fourth quarter. It will come down a little bit from where it was, but it will still be asset sensitive. And if you look at the forward curve, I think on average, rates are coming down you know, something like 50 basis points. And so, you know, it is pretty linear math when you look at the sensitivities that we included in the queue. You know, when you look at, you know, the underlying assumptions as you go into the year, you know, we've got, you know, loan growth being pretty muted in the beginning part of the year. That'll start, you know, hopefully start to pick up as we get later in the year. So that will be, you know, a driver of it as you get towards the end of the year. You'll have some stabilization. We're expecting stabilization of pretty stable deposits across the commercial and the wealth management businesses. At some point, the consumer deposits will also stabilize and the mix will stabilize as well. You've got continued asset repricing that happens in there as well. So it's a little bit of all of it that brings you to... you know, the point at which it starts to trough and inflect, you know. But again, exactly when that's going to happen, we're going to, we'll sort of leave, we'll leave until later in the year, but we do expect that that'll happen as we get closer to the end of the year.

Understood. Thanks.

The next question will come from Ken Usden of Jefferies. Your line is open.

I'm sorry if I'm going to stay on theme, but just as you start to the beginning of the year and deposit price, you know, continues to flow through and the mix continues to change, you know, as far as the DDAs, I'm wondering if you could help us understand how do you expect that trajectory. DDAs, you know, definitely still outflowing, which is expected. In terms of mix and then just how you expect the deposit rate of change or the downside beta to act through the cycle, can you help us understand that, Mike? Thanks.

Sure. When you look at what's happening just on deposits, the trend that we've been seeing now on the mix shift has been pretty consistent for the last two or three quarters at least. So at some point that will moderate more, but it's been pretty consistent. And so that's probably a decent assumption as you sort of go into the first part of the year at least. When you start looking at deposit pricing and later in the year, you know, as rates start to move, you know, on the commercial side, you know, rates and betas have been, you know, competitive now and pretty high for a while. And they'll be just as rate sensitive on the way back down. You know, that's part of the bargain on the commercial side is, you know, you get good competitive betas on the way up and you also get them on the way down. You know, and on the consumer side, there's been less movement on standard pricing across many of the products. But you've had, you know, the introduction of CDs and promo rates and all that stuff will start to move down pretty quickly as the expectation for rates do as well.

Okay, so if I think about that then, would you imply that, like, the first quarter starting point, we see a little bit more of an NII step down, and then as you get, you know, to that hopeful stabilization in the back half, like, just because of how that moves?

Well, I think based on what we gave you, right, so we are expecting a full year NII to be down 7% to 9%, hopefully. Okay. And if it starts to stabilize as you get to the end of the year, then that implies a step down in the beginning of the year. Exactly, you know, we're not going to give you a number by quarter, but, you know, you should expect a step down as you go in the beginning part of the year.

Okay, I understand. Okay, thanks, Mike.

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

Morning, everyone.

Thanks for taking the question. I was hoping you might be able to spend just another moment on the longer-term cost opportunity. I guess I'm just curious if there's a point where some of the investment spending pressures ease and there might still be an opportunity for costs to decline, you know, more visibly on an underlying basis. Or, you know, by contrast, is this level of investment spending, you know, that something that'll just be sort of pretty consistent year in and year out?

Yeah, Scott, it really is going to depend. I will highlight one thing, though. In the slide that we have there, I noted that part of what's driving the investment spend this year is the tech and equipment line moving up. And so that won't continue to move up at that pace forever. And so that does start to moderate as you go out into the future. But as you look at the other investments we're making, you know, we're going to try to be very thoughtful about, you know, looking at the opportunities that we have across each of the businesses, thinking about short, medium, long-term results, and making sure that, you know, we're sort of calibrating all that right. But I would expect us to continue to make investments in each of the businesses. And I think that ultimately that's what's going to drive, you know, great returns and better performance over time. Perfect.

Thank you. And then maybe just a question on credit. You all have been very proactive in dealing with sort of the office CRE situation. Just curious to hear what your thoughts are on how this cycle, that asset class sort of plays out from here. Does it just remain a long slog or is there perhaps a point where your conservatism has sort of gotten ahead of issues and you might actually be able to relieve a bit of that really healthy double-digit reserve?

Yeah, look, as we look at the reserve, and then I'll come back to the broader point there, at some point we'll start using the reserve more fully, and then that allowance coverage ratio will come down, no doubt. I mean, that's the way it should work when you think about CECL and the way the accounting should work. I think in terms of your broader point, it's a long movie. We're past the opening credits, but we're still in the beginning of the movie, and so it's going to take some time for this to play out. And as I noted, it'll be somewhat of an uneven and episodic sort of nature to the charge-offs and as you work through this, because every property has a different timeline in terms of events that it needs to sort of work through. So I do think that we've got a while for this to play out through the system.

Okay.

Perfect. Thank you very much.

Thank you. The next question comes from Ibrahim Poonawalla of Bank of America. Your line is open.

Good morning. I guess maybe just to thank for all the details on NI expenses and the ROTC. I guess it's not lost upon anyone with regards to the investments you made in the franchise. But when you look at the slide, fourth quarter 20 ROTC 8%, three years fast forward, it's gone from 8% to 9%. Assuming there's no real perfect world to operate a bank, from a shareholder perspective, quickly, do you think we can get from 9% to 15%? You've given us the moving pieces, but I'm just wondering, maybe, Charlie, Mike, how do you think about it? Is it a two-year slog? Is it longer than that? Love some perspective there.

Yeah, and I think maybe I'll start, and Charlie can chime in. So I think when you look at that page, Ibrahim, I think you really have to look at the impact of the special assessment that's in the results, right? And so that's four percentage points of ROTCE. So think of the underlying operating performance from a returns perspective more closer to that 13% range. And so there has been quite a bit of progress since Q420. And then as you sort of look forward, you know, we highlighted, you know, some of the key drivers on the right and in my commentary. Look, we've got a lot of excess capital despite whatever happens with Basel III, and so we've got room to continue to return that to shareholders. You know, we are in, you know, the middle of repositioning the home lending business, which will drive, you know, not only better returns in that business, but, you know, improvement across the franchise. We've got the card business, which we're seeing very good performance in as we've launched our new products over the last couple of years, and as that matures, we'll be a meaningful contributor. And then we've got to continue to get the benefit of all the other investments that we're making. And so we feel like we've made a lot of good progress since the 2020, and then we've got really clear plans to continue to see better performance.

And I'll just add a little bit to it, and to be a little bit repetitive. You know, when you look at that slide again, those are reported numbers. And so, you know, the way we think about it is, you know, the earnings power of the company today on an ROTCE basis, you know, you got to make your own assumptions for what's in and out and what normalized net interest income is, because we've been clear that we've been over-earning. But when you, you know, look at, you know, when you add back, you know, these expenses like FDIC, which, you know, relate to, you know, the past and this quarter and aren't going to go forward, you know, our ROTCE is up 50% from where it was. So, you know, that is significant change. On top of that, you know, when we look at the actions, as Mike said, that we've taken in the home lending business, when we see the trajectory of growth that we're seeing in the card business, just as those things mature, let alone being able to deploy the excess capital we have, You know, those are things that are in process. We don't have to really do anything more other than let them mature and let them play out. You know, that is, you know, continued movement towards the 15 percent ROTCE. And then the last thing I'd say is just, you know, away from those things. You know, when we got here, you know, these businesses were not on trajectories to grow. The card business wasn't growing. The corporate investment bank wasn't growing. You know, you can go through them one by one. And so, you know, as we've talked about making investments, offsetting some of these efficiencies that we've seen, and making determinations on whether or not they're paying off, you know, those things that we're seeing, these increases in share, you know, we're pretty confident that they are going to continue to drive, you know, improved results over time. And so, you know, as I said in my remarks, you know, we're clearly susceptible to, you know, the market environment, both for interest rates and the overall economic environment in the shorter term, but we feel both really good about the progress that we've made, we feel really good about what the path we see going forward is, recognizing that there's still a lot more that we have to do.

Got it. That was thorough. Thank you. And just one quick follow-up, Mike, on CRE. I'm assuming you had some assets moved off the balance sheet. Today, relative to a year ago, do you have better visibility on where the clearing price is for some of these non-performing CRE or challenged CRE loans? And are you seeing any pressure spreading beyond CRE offers to other parts of the portfolio in any meaningful way? Thank you.

Yeah. I mean, look, as time goes by, we get better and better information around where things are going to play out. But it is still... somewhat specific to the asset, and so I wouldn't try to generalize yet until we see more transactions and more data points. When you look at the broader CRE market, at least in our portfolio, we are not seeing the stress spread to other parts of it.

Helpful. Thank you.

The next question will come from Erica Najarian of UBS. Your line is open.

Hi, good morning. My first question is a follow-up to Ibrahim's line of questioning on ROTCE. You know, Charlie, Mike's right, obviously, you have plenty of excess capital. As we think about your outlook for not much loan growth in 2024, and obviously there's the asset cap still in place, how should we think about what you're looking for as guideposts to you know, potentially accelerate that buyback in the $2.4 billion level. Is it, you know, as far out as the Basel III end-game finalization, or would you wait for more clarity near term on the default results in June?

It's Mike. I'll take a shot at that, Erica. And, you know, when you look at the, when you look at our, you know, full year numbers, you know, we, I tried to highlight in my comments that we do expect that our our repurchases will be higher than what we did in 2023. The exact timing and pace, you know, I'm not going to get into, but, you know, and then we'll look at all of, you know, as we do every quarter, we look at all of the different, you know, risks that could be out there, including, you know, thinking about where CCAR or, you know, the stress tests will come out. And, you know, from a Basel III perspective, we are We're in really good shape. As we said last quarter, we're already above where we need to be if it was fully implemented as is, and we're hopeful that that won't be the case. And we're going to generate more capital as we go through the year. And so we've got, as I said, we've got plenty of excess capital. We plan to buy back more stock than we did in 2023, and we'll leave the exact timing paced to future calls.

Thank you. Um, and my, my thought question is another one on NII, you know, I did notice that your short-term borrowings went up a lot, um, in 2023 and just looking at the asset side, it seemed like it was, you know, funding that increase in liquidity to 204 billion, um, cash in cash at the fed at period end. And I'm wondering as we're thinking about your liability mix in, you know, in 2000 and 24. And then I think your average balance sheet size is 1.91 trillion at the end of the year. I'm just wondering if, you know, we, we should expect the balance sheet to shrink because you don't, you may not need all those short-term borrowings, or is there a reason why you feel like you want to hold that much liquidity at the site at this time?

Well, it's certainly possible, you know, the balance sheet will get smaller throughout the year. I think that'll just be a function of what we ultimately see on, you know, loan growth, how much we end up deploying into securities as we go, you know, through the year. And, you know, where it makes sense, we will, you know, let the balance sheet just, you know, ebb and flow back down. And I think that's the way we're sort of thinking about it now. And I think at this point, you know, there's not a lot of cost to leaving at the Fed, given where IORB is. And so that'll change as rates start to come down, and we'll calibrate the overall size based on what we think the opportunity is.

Thank you.

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

Good morning. On the NII outlook of down 79, can you maybe help us think about the expected miniaturist margin trajectory through the year, how we should think about that in the context of what you're expecting in terms of earning asset yields and the dynamic on funding costs? Thanks.

Well, we don't. We're not going to try to predict exactly where the NIM's going to go quarter by quarter, but I think as you would guess, assuming the balance sheet's at a relatively stable size as NII starts to come down, the NIM will compress. There'll be tailwinds and headwinds related. As the securities portfolio reprices, that'll be a tailwind as you know, as you start to see variable rate loans come down, as rates come down, that'll be a headwind. And so, you know, I think most of it should be relatively simple to kind of estimate as you sort of, you know, plug the assumptions into your model. But there's no sort of magic to it. But you would expect them to continue to come down as the balance sheet stays stable and NII comes down.

Okay. All right. Thanks. And then separately on commercial real estate, Can you maybe give us a little more color in terms of where you saw the stress, what types of office properties, and what type of marks to the underlying assets are you seeing as you're reappraising the properties? And does that give you a, you know, I guess maybe just talk about the level of confidence you have in the updated 7.9% office reserve at this level?

Yeah, and really the allowance coverage ratio I would pay attention to on this slide is our CIB CRE office portfolio, which is close to 11%. And that's really the institutional-style office buildings where really the stress is coming through. When you look at the charge-offs, it was across a number of properties. It wasn't one or two. It was pretty geographically dispersed across different cities and across different parts of the country, so there wasn't an over-concentration anywhere. Each of the properties have very specific situations, and so there was a pretty wide range in terms of where the price cleared or where the appraisal came in. A good chunk of these properties are being marked because we've got new appraisals for various reasons. A small amount of it was actually realized because the note or the property was sold. For a good amount of it, we'll see how it ultimately plays out. There could be recoveries as we go. But it was a pretty – as you would expect, it was a substantial decline in what people thought the value of the properties was just a year or two ago.

Okay, got it. Thanks, Mike.

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

Good morning, Mike. Good morning, Charlie. Mike, on the guide for the net interest income on the forward curve – If the forward curve is incorrect and we're sitting here a year from now and rather than seeing a 415 or 416 Fed funds rate, if it's close to the 5% or 490, how much of a positive would that be for a higher net interest income for you guys? Have you guys, I'm assuming, used different sensitivity analysis to, you know, to kind of give yourself a sense of where net interest income could go under different rate scenarios?

Yeah, you know, I would, you know, just like I think John at McDonald asked it earlier, you know, I would look at our interest rate sensitivity, Gerard, and As I said, you know, we're still modestly asset sensitive, a little bit less, you know, at the end of the fourth quarter than the third quarter. And, you know, I think it is a pretty linear sort of equation there. And so I would just look at the 100 basis point move that we have in there. It's around a couple billion dollars of move when you look at that as of the end of the third quarter. Again, it will come in slightly from that, likely at the end of the fourth quarter. And just use whatever assumption you want, and it is a pretty linear – within reason, it's a pretty linear equation.

Okay. And then you guys obviously have been very focused on the expense reduction and the admirable jobs since you guys all got there, obviously. Is there any way that you could bring down the operating losses? I think they've been pretty consistent at $1.3 billion for a bit. Is there anything in there that down the road you could change where it would actually fall, or is it just something that's just the cost of doing business with fraud, theft, and et cetera?

Well, there's certainly some portion of that that is just the cost of doing business. Now, even on the fraud and BAU operating losses, You know, we, as most people, I would think, work, you know, or continue to invest in capabilities to reduce those more and more. And we continue to do that as well. And then I think as we continue to put more of, you know, the issues, the historical issues behind us, you know, hopefully the overall number, you know, continues to trend downward. Great. I appreciate it. Thank you.

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

Hi. Any thoughts on where card charge-offs go in 24? I think you're about 4% this quarter, and I guess you've had really good growth. So if we lag it like we used to do in the old days, maybe we get about 4.5%. I don't know if that's a good starting point or just any way to frame losses from here. Thanks.

Yeah, I won't give you a specific number, but the way you're thinking about it is exactly right. I think as you look at the portfolio that we have, which might be a little different than others, is we launched the new product set starting a little over two years ago, but you've sort of seen more meaningful new account growth starting about two years ago. And so you're in that normal maturation curve and seasoning of sort of losses as they come on. And so we would expect that it would continue to trend a little bit higher from where it is.

And then, you know, we're seeing this obviously not just with you guys, but kind of across the board in terms of car losses go up, even though we're still in this really good environment in terms of employment and wealth and still a bit of excess savings, you know, just thoughts on like what's driving losses again, not just for you, but just for everybody. You know, there's, there's life events that always happen and, But it just feels like maybe car losses are getting a little higher than I would have thought with unemployment where it is. And again, like jobs available and all those dynamics. Thanks.

Yeah. And maybe I'll start. And I think as Charlie kind of highlighted in his script, the averages all look fine when you look at liquidity or deposit balances. And certainly, even when you look at the cumulative wage growth that you've seen over the last few years, you know, in aggregate, you'd go, it paints a pretty good picture. But when you go below that, and we've tried to highlight this a few times over the last year or so, when you go below that, there are certainly, you know, cohorts of clients or people that are stressed. You know, and the further you go down in income levels or the further you go down in wealth levels, The cumulative impact of inflation has really taken a toll, and so you're going to have some percentage of people that are feeling much more stressed than what the aggregate numbers would imply. In some cases, their liquidity is going to be lower than it was pre-COVID. In some cases, they've been having to build bigger credit card balances. And so for us, it's not a big part of the overall portfolio, but you're going to continue to see that, which is something we should all, you know, have expected and expect to see as you go forward.

And the only thing I would add is that, you know, that is, you know, that's something that has always, you know, always existed pre-COVID, right? There were always people that were doing better and there were people that were doing worse. And I think what's important, I feel, speak for ourselves when we look at our when we look at our card losses, what we actually are looking at is how they're performing on a vintage basis versus pre-COVID levels. And the curves are right on top of what that is. And so when we talk about getting back to normal in terms of what we're seeing, that's what we're actually seeing in card losses. We're not seeing at this point anything that goes beyond that.

Okay, that's helpful. And then just lastly, if I can squeeze in, remind me like a targeted customer. I think it's like Prime Plus, but any way to frame that in terms of whether it's FICO or Wealthmetric or Homeowner Percent or any way just to frame it, you know, it is becoming a bigger part of the company, obviously. So thanks.

Yeah, you know, look, you know, we're not going to get that specific, but when you look at like individual products, they're targeted towards different cohorts of clients. But what I would say overall, we feel really good about the, you know, the credit quality of the new accounts we're putting on. And in most cases, in most products, you know, the credit profile is better than what we have, you know, from the historical back book.

Okay. Thanks for all the call.

The next question will come from Dave Rochester of Compass Point Research. Your line is open.

Hey, good morning, guys. Sorry for one more question on the NII guide here, but I was just curious, how much of that decline that you're expecting for this year is driven by that continued remix of deposits and the lower non-interest-bearing deposits you talked about? And where are you assuming that that DDA mix settles out this year?

Yeah, as you would guess, like, you know, when you lose – non-interest-bearing deposits or they shift into higher-yielding products, that's going to have a pretty substantial impact. And so that is a big driver of what the decline is for the rest of the year. We haven't really talked about exactly where it bottoms, but it should stabilize at some point.

Okay. And then on capital, I was curious what more buybacks means for capital ratios and that 2.5% buffer you talked about. By the end of 2024, all else equal, is the thought that you'll take those ratios and that buffer lower this year?

We'll see. But I think I won't try to give you a buyback number. Lots of things go into figuring that out throughout the year. But as we said, we expect buybacks to be bigger than last year. And, you know, the level, you know, assuming, you know, that nothing significant happens in the macro environment, the level that we're at is higher than we need to be. Great. Thanks. Appreciate it.

And our last question will come from Manan Gosalia of Morgan Stanley. Your line is open.

Hey, good morning. Two quick ones from me. I know you said your guide includes stable deposits, but a shift towards interest-bearing deposits. Would an end to QT stop that share shift, or is it different given you're seeing that share shift from the consumer side?

Yeah, what we said is we expect stable deposits on the wealth and the commercial side. We do expect some declines on the consumer side. and an end to QT would be a positive.

And can you expand on that a little bit? Why would that be?

Well, QT will at some point more meaningfully drain liquidity out of the banking system, right? So once Once you get the RRP facility down to a smaller number, which is likely to happen, then any further QT starts to really remove liquidity more directly out of the banking system. And so that stops, that's a positive for deposits.

Got it. Okay. And then just on credit, how do falling rates impact your outlook for CRE losses? You know, at the margin, do you feel better about working with borrowers and mitigating losses and NPLs and, you know, how long this takes to work out? Or have things not changed that meaningfully yet?

It hasn't changed that meaningfully yet. Really, you know, we're dealing with, you know, what is a structural change in sort of demand for real estate in some parts of the country. So, you know, you've got to work through that. And then I think on the margin, lower rates are helpful. But the bigger issue needs to get worked through first. Great, thank you. Okay, thanks everyone for the questions. See you next time.

Thank you all for your participation on today's conference call.

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