Wells Fargo & Company Q1 2022 Earnings Results & Report

Wells Fargo & Company EPS Results

• Actual EPS: $0.88
• Consensus EPS: $0.81
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $1.05
• EPS Beat Rate: 8 of last 8 quarters

Wells Fargo & Company Revenue Results

• Actual Revenue: $17.59 billion
• Expected Revenue: $17.82 billion
• Beat/Miss: Missed by -$232.38 million
• YoY Revenue Growth: -5.20%

Wells Fargo & Company (NYSE:WFC) is a diversified financial services company offering banking, lending, investment, and wealth management services. Its products include checking and savings accounts, credit cards, mortgages, auto loans, commercial financing, investment services, and financial advice.

The company serves consumers, businesses, and institutions, primarily in the United States. Its operations include consumer and small business banking, commercial banking, and corporate and investment banking, as well as wealth and investment management.

Wells Fargo traces its origins to 1852, when Henry Wells and William G. Fargo founded the company to provide express and banking services during the California Gold Rush. The company is headquartered in San Francisco.

Wells Fargo & Company Q1 2022 Earnings Call Transcript

Key Takeaways

• We earned $3.7 billion in Q1, or $0.88 per share, including a $1.1 billion CECL allowance release, and net interest income rose 5% YoY with expectations for mid-teens NII growth driven by higher rates and loan demand.
• Mortgage banking revenue plunged due to one of the largest quarterly origination declines on record, pressuring margins and volumes and leading to further Q2 declines as the industry sheds excess capacity.
• Credit performance remained exceptionally strong with a 14 bp net charge-off ratio and net recoveries in commercial portfolios, while nonperforming assets fell 4% sequentially as loans exited forbearance.
• We returned capital via $6 billion in common stock repurchases, boosted the quarterly dividend to $0.25, and maintained a 10.5% CET1 ratio—well above the 9.1% regulatory minimum.
• Digital adoption accelerated with mobile active customers up 4% YoY, Zelle send volume up 33%, and strategic partnerships like the BILT Mastercard and an expanded Ncino platform to streamline small business lending.

Presentation

[Operator]

Welcome, and thank you for joining the Wells Fargo First Quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star one. If you would like to withdraw your question, press star two. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

[John Campbell, Director of Investor Relations at Wells Fargo]

Thanks, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, 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.

[John Campbell, Director of Investor Relations at Wells Fargo]

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.

[Charlie Scharf, CEO at Wells Fargo]

Thanks, John, and good morning, everyone. I'll make some brief comments about our first quarter results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review the first quarter results in more detail before we take your questions. Let me start off with some first quarter highlights. We earned $3.7 billion or $0.88 per common share in the first quarter. Our results included $0.21 per share impact from a decrease in the allowance for credit losses. We had broad-based loan growth with both our consumer and commercial portfolios growing from the fourth quarter. While net interest income was down modestly from the fourth quarter, driven by fewer days in the quarter, it grew 5% from a year ago.

[Charlie Scharf, CEO at Wells Fargo]

Higher interest rates, along with our expectations for continued loan growth, should drive higher net interest income growth than we anticipated at the beginning of the year. Mike will provide more details regarding our current view later on in the call. However, the increase in rates negatively impacted our mortgage banking business. The mortgage origination market experienced one of its largest quarterly declines that I can remember, and it will take time for the industry to reduce excess capacity. Credit performance remained incredibly strong, and our net charge-off ratio declined to 14 basis points. While we have minimal direct exposure to Russia or Ukraine, we're monitoring certain industries that have the potential to be impacted by the conflict and economic sanctions, but thus far don't have concerns.

[Charlie Scharf, CEO at Wells Fargo]

In addition, we returned a significant amount of capital to our shareholders in the first quarter, including repurchasing $6 billion of common stock and increasing our common stock dividend to $0.25 per share. The significant changes we've made across the company have put us in a position to increase the dividend, and our work continues. The health of our consumer and businesses so far has remained strong, though we're entering a period of uncertainty. March was the 8th straight month in which inflation outpaced income, with lower-income consumers being most impacted by rising energy and food prices. That said, higher deposit balances and rising wages have thus far allowed consumers to weather these headwinds. We continued to see median deposit balances above pre-pandemic levels, up approximately 25% compared to 2020, but down from the highs observed in 2021.

[Charlie Scharf, CEO at Wells Fargo]

Consumer credit card spend remained strong, up 33% from a year ago. All spending categories were up with the highest growth in travel, entertainment, fuel, and dining. After strong growth in the first quarter of 2021 driven by stimulus payments, debit card spending increased 6% in the first quarter of 2022. Discretionary spending remained strong with entertainment up 39% and travel up 29% from a year ago. The increase in energy prices was reflected in a 27% increase in fuel spending. Loan demand from our commercial customers increased with growth in both commitments and loans outstanding as customers' borrowing needs are increasing to fund working capital expansion. Credit quality remains strong with net recoveries in our commercial portfolio. Now let me update you on progress we've made on our strategic priorities.

[Charlie Scharf, CEO at Wells Fargo]

Building an appropriate risk and control infrastructure remains our top priority, and I continue to believe that we're making significant progress. Early in the first quarter, we named Derek Flowers our new Chief Risk Officer following Mandy Norton's retirement announcement. Derek has extensive experience managing risk, including the work he's done over the last several years of managing the build-out of Wells Fargo's risk and control framework. Derek has been with Wells Fargo for over 20 years and his familiarity with the company and his risk background make him the ideal candidate to succeed Mandy, who I'd like to thank for the tremendous progress she made in transforming the risk organization.

[Charlie Scharf, CEO at Wells Fargo]

We also continue to make progress in resolving legacy regulatory issues with news in January that the OCC had terminated a consent order regarding add-on products that the company sold to retail banking customers before 2015. We have much more work to do to satisfy our regulatory requirements, and we will likely have setbacks, but I'm confident in our ability to continue to close the remaining gaps over the next several years. We remain focused on improving our financial performance while investing to drive growth across our businesses. Providing our customers with simple, easy-to-use, and fast digital experiences is one of our most important strategic priorities. In the first quarter, we began rolling out our new mobile banking experience for our customers in our consumer businesses, and feedback has been very positive.

[Charlie Scharf, CEO at Wells Fargo]

Digital adoption, which is critical to both delivering seamless digital experiences that our customers expect and reducing the cost to serve, has continued to increase, with mobile active customers up 4% from a year ago. We added approximately 500,000 new mobile active customers in the first quarter alone. We continue to invest to improve our digital capabilities with additional enhancements planned for this year. We're also focused on reducing friction in moving money. We've continued to invest in Zelle and made changes to expand customer usage, including increasing sending limits. These changes have helped to drive 21% growth in active send customers and a 33% increase in send volume from a year ago. We continued to enhance our credit card offerings with our partnership with Bilt Rewards and Mastercard.

[Charlie Scharf, CEO at Wells Fargo]

This first-of-its-kind co-brand card allows members to pay rent and earn points with no transaction fees on rent payments at any apartment in the U.S. In the first quarter, we selected nCino to streamline our origination, underwriting, and portfolio management for our small business customers. This collaboration is expected to provide our customers with a more streamlined lending experience and builds on our existing relationship that we announced last year to accelerate our digital transformation within our commercial banking and corporate investment banking businesses.

[Charlie Scharf, CEO at Wells Fargo]

Let me just make some summary comments before I turn it over to Mike. As we sit here today, our internal indicators continue to point towards the strength of our customers' financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation, and this will certainly reduce economic growth.

[Charlie Scharf, CEO at Wells Fargo]

In addition, the war in Ukraine adds additional risks to the downside. Wells Fargo is positioned well to provide support for our clients in a slowing economy. While we will likely see an increase in credit losses from historical lows, we should be a net beneficiary as we will also benefit from rising rates. We have a strong capital position, and our lower expense base creates greater margins from which to invest. We remain diligent in extending credit and are focusing on managing the other risk types within the company as well. We remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we've discussed in the past on a run rate basis at some point this year. We continue to focus on a broad set of stakeholders in our decisions and actions.

[Charlie Scharf, CEO at Wells Fargo]

As we have all seen, the reports and images coming out of Ukraine are deeply concerning. In order to support those most impacted, we announced $1 million in donations across three nonprofits in support of humanitarian aid for Ukraine and Ukrainian refugees, as well as services that support the U.S. military. Earlier this week, we also announced plans to introduce HOPE Inside centers in select branches to increase access to financial education and guidance. Working with Operation HOPE is one important way that we can remove barriers to financial inclusion as part of our Banking Inclusion Initiative, which is focused on helping more people who are unbanked gain access to affordable mainstream banking products. Since the pandemic began, close to 100,000 of our employees never left the workplace, and last month, we started to welcome the rest back to the office.

[Charlie Scharf, CEO at Wells Fargo]

It's been great to be back together again, and I want to thank all of our employees as they work together to better serve our customers, our communities, and each other. I will now turn the call over to Mike.

[Mike Santomassimo, CFO at Wells Fargo]

Thank you, Charlie, and good morning, everyone. Net income for the quarter was $3.7 billion or $0.88 per common share, and our results included a $1.1 billion decrease in the allowance for credit losses, predominantly due to reduced uncertainty around the economic impact of COVID on our loan portfolios. Our effective income tax rate in the first quarter was approximately 16%, which included net discrete income tax benefits due to stock-based compensation. We expect our effective income tax rate for the full year to be approximately 18%, excluding any additional discrete items. Our CET1 ratio declined to 10.5%, still well above our regulatory minimum of 9.1%. We highlight capital on Slide 3.

[Mike Santomassimo, CFO at Wells Fargo]

The decrease in our CET1 ratio from the fourth quarter reflected a $5.1 billion reduction in cumulative other comprehensive income, driven by higher interest rates and wider agency MBS spreads, which reduced the ratio by approximately 40 basis points, higher risk-weighted assets driven by growth in loan balances and commitments. We adopted the standardized approach for counterparty credit risk, which had a minimal impact on total risk-weighted assets, and we continued with our strong capital returns. We repurchased $6 billion of common stock in the first quarter, bringing our total repurchases since the third quarter of 2021 to $18.3 billion, which is in line with our 2021 capital plan.

[Mike Santomassimo, CFO at Wells Fargo]

While we have flexibility under the stress capital buffer framework to exceed the share repurchases contemplated in our capital plan, we will be disciplined in our approach given the current rate volatility and currently expect to have significantly lower levels of share buybacks in the second quarter. Finally, we've submitted our 2022 capital plan, and as I've called out before, it's possible that our stress capital buffer could increase when the Federal Reserve publishes our official stress capital buffer in the third quarter, while our GSIB surcharge of 1.5% will remain the same for 2023. Turning to credit quality on Slide 5. Our net loan charge-off ratio declined to 14 basis points in the first quarter. Commercial credit performance was strong again with $29 million of net recoveries in the first quarter, driven by recoveries in energy, asset-based lending, and middle market.

[Mike Santomassimo, CFO at Wells Fargo]

Consumer credit performance was also strong. Credit losses were down $59 million from the fourth quarter, which included $152 million of net charge-offs related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans. The first quarter included higher auto losses and seasonally higher credit card losses. Non-performing assets decreased $323 million, or 4% from the fourth quarter. Commercial non-accruals were down $423 million, declining again this quarter and are now below pre-pandemic levels. Consumer non-accruals increased $82 million, driven by an increase in residential mortgage non-accruals, primarily resulting from certain customers exiting COVID related accommodation programs. Overall, early performance of loans that have exited forbearance have exceeded our expectations.

[Mike Santomassimo, CFO at Wells Fargo]

Our allowance for credit losses at the end of the first quarter reflect a continued strong credit performance, less uncertainty around the economic impact of COVID, the economic recovery thus far, and an outlook that reflects the increasing risks from high inflation and the Russia-Ukraine conflict. On Slide 6, we highlight loans and deposits. Average loans grew 3% from a year ago in the fourth quarter. Period end loans grew for the third consecutive quarter and were up 6% from a year ago with growth in both our commercial and consumer portfolios. I'll highlight the specific growth drivers when discussing business segment results. Average deposits increased $70.6 billion or 5% from a year ago with growth in our consumer businesses and commercial banking, partially offset by continued declines in corporate and investment banking and corporate treasury, reflecting targeted actions to manage under the asset cap.

[Mike Santomassimo, CFO at Wells Fargo]

Turning to net interest income on Slide 7. First quarter net interest income increased $413 million or 5% from a year ago and declined $41 million from the fourth quarter. The decline from fourth quarter was driven by $178 million of lower income from EPBO and Paycheck Protection Program loans, as well as two fewer days in the quarter, which offset the impact of higher earning asset yields and higher securities and loan balances. Last quarter, we highlighted that net interest income for full year 2022 could potentially increase by approximately 8%, driven by loan growth and other balance sheet mix changes, as well as the benefit from rising rates, which was based on the forward curve at that time. Obviously, a lot has changed over the past three months.

[Mike Santomassimo, CFO at Wells Fargo]

Loan growth has been solid and average loan balances were up 3% versus the fourth quarter and 2% at period end. If we continue to see increased demand, it's possible that average loan balances will be up in the mid single digits from the fourth quarter of 2021 to fourth quarter of 2022, up from our prior outlook earlier this year of low to mid single digits. The rate increases currently included in the forward rate curve would also drive stronger net interest income growth than we anticipated earlier in the year. However, it's important to note that the benefit from rising rates is not linear, and we would expect deposit betas to accelerate after the initial rate hikes. Customer migration from lower yielding to higher yielding deposit products would also likely increase.

[Mike Santomassimo, CFO at Wells Fargo]

Higher rates will also have a negative impact on mortgage volumes and potentially on market related fees in corporate and investment banking, private equity and venture capital businesses, and in wealth management. Given our current expectations for higher loan growth and recent forward rate curves, net interest income for full year 2022 could be up mid-teens on a percentage basis from 2021. That said, net interest income growth will ultimately be driven by a variety of factors, including the magnitude and timing of Fed rate increases, deposit betas and loan growth. Now turning to expenses on Slide 8. Non-interest expense declined 1% from a year ago. We continue to make progress on our efficiency initiatives, and expenses also declined due to divestitures last year.

[Mike Santomassimo, CFO at Wells Fargo]

The first quarter included approximately $600 million of seasonally higher personnel expenses, including payroll taxes, restricted stock expense for retirement eligible employees, and 401(k) matching contributions. We also had $673 million of operating losses, which were primarily driven by higher customer remediation expense, predominantly for a variety of historical matters. Our full year 2022 expenses are still expected to be approximately $51.5 billion. However, as we experienced this quarter, operating losses can be episodic and hard to predict, and we will continue to update you on our expense expectations throughout the year. Turning to our operating segment, starting with Consumer Banking and Lending on slide 9.

[Mike Santomassimo, CFO at Wells Fargo]

Consumer and small business banking revenue increased 11% from a year ago, primarily due to higher deposit balances, higher deposit related fees, primarily reflecting lower fee waivers and an increase in debit card transactions. We continue to reduce the underlying cost to run the business and serve customers. Customers have continued to migrate to digital channels, and correspondingly, teller transactions are down 45% from pre-pandemic levels. Over the same period, we've decreased our number of branches by 12% and branch staffing by approximately 30%, and we have more opportunities to improve our efficiency while we continue to make enhancements to better serve customers. Earlier this year, we announced changes we are making to help our customers avoid overdraft fees. We began to implement some of these new policies and will be rolling out the rest of the changes this year.

[Mike Santomassimo, CFO at Wells Fargo]

We eliminated fees for non-sufficient funds and overdraft protection transactions in early March, so these changes didn't have a meaningful impact on the first quarter results. We still expect the annual decline in these fees to be approximately $700 million. However, as we highlighted last quarter, this is an annualized estimate and the reduction may be partially offset by higher levels of activity, and we will observe how customers respond to the new features that will be introduced in the latter part of the year. Home lending revenue declined 33% from a year ago and 19% from the fourth quarter, driven by lower mortgage originations and compressed margins, given the higher rate environment and competitive pricing in response to excess capacity in the industry.

[Mike Santomassimo, CFO at Wells Fargo]

Mortgage rates increased 156 basis points in the first quarter and are above rate levels observed for most of the last decade. Reflecting this environment, we expect second quarter originations and margins to remain under pressure and mortgage banking revenue to continue to decline. We've started to reduce expenses in response to the decline in volume and expect expenses will continue to decline throughout the year as excess capacity is removed and aligned to lower business activity. Credit card revenue was up 6% from a year ago, driven by higher loan balances and point of sale volumes. Auto revenue increased 10%, and personal lending was up 2% from a year ago, primarily due to higher loan balances. Turning to some key business drivers on Slide 10. Our mortgage originations declined 21% from the fourth quarter.

[Mike Santomassimo, CFO at Wells Fargo]

We believe the mortgage market experienced its largest quarterly decline since 2003, primarily due to lower refinance activity in response to higher mortgage rates. Home lending loan balances grew modestly from the fourth quarter, driven by the third consecutive quarter of growth in our non-conforming portfolio, which more than offset declines in loans purchased from securitization pools or EPBOs. Turning to auto. Origination volume increased 4% from a year ago, but was down 22% from fourth quarter due to credit tightening in higher risk segments and increased price competition as interest rates rose, and we targeted solid returns for new originations. Turning to debit card. Transactions declined 7% from the fourth quarter due to seasonality and were up 3% from a year ago, with double-digit growth in travel and entertainment.

[Mike Santomassimo, CFO at Wells Fargo]

Credit card point of sale purchase volume continued to be strong, was up 33% from a year ago, but down 5% from the fourth quarter due to seasonality. While payments rates remain elevated, balances grew 14% from a year ago due to strong purchase volume and launch of new products. New credit card accounts increased over 80% from a year ago, and we continue to be pleased by the quality of the accounts we're attracting. Turning to commercial banking results on Slide 11. Middle market banking revenue increased 8% from a year ago, driven by higher deposit and loan balances, as well as the impact of higher interest rates. Asset-based lending and leasing revenue increased 17% from a year ago, driven by higher loan balances, stronger net gains from equity securities, and higher revenue from renewable energy investments.

[Mike Santomassimo, CFO at Wells Fargo]

Non-interest expense declined 6% from a year ago, primarily driven by lower personnel and occupancy expense due to efficiency initiatives and lower lease expense. After declining during the first half of last year, average loan balances have grown for three consecutive quarters and were up 6% from a year ago. Revolver utilization rates have increased, but are still well below historical levels. Loan demand has been driven by larger clients who are increasing borrowing due to the impact of inflation on material and transportation costs, as well as to support inventory growth. We're also seeing new demand from some clients who are catching up from underinvestment in projects and capital expenditures over the past couple years. Turning to corporate investment banking on Slide 12. Banking revenue increased 4% from a year ago, primarily driven by higher loan balances and improved treasury management results.

[Mike Santomassimo, CFO at Wells Fargo]

Average loan balances were up 18% from a year ago, with increased demand across most industries, driven primarily by capital expenditures and growing working capital needs. Commercial real estate revenue grew 9% from a year ago, driven by the higher loan balances and higher revenue in our low-income housing business. Average loan balances were up 17% from a year ago, and originations in the first quarter outpaced volumes from a year ago, and loan pipelines continued to be strong. Markets revenue was down 18% from a year ago, primarily due to lower trading activity in residential mortgage-backed securities and high-yield products. Average deposits in corporate investment banking were down $25.3 billion or 13% from a year ago, driven by continued actions to manage under the asset cap.

[Mike Santomassimo, CFO at Wells Fargo]

On Slide 13, Wealth and Investment Management revenue grew 6% from a year ago, driven by higher asset-based fees on higher market valuations and higher net interest income from the impact of higher interest rates, as well as higher deposit and loan balances. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first quarter results reflected market valuations as of January first, and second quarter results will reflect the lower market valuations as of April first. The 5% increase in expenses from a year ago was primarily driven by higher revenue-related compensation, which was more than offset by higher revenue. Average deposits were up 7% from a year ago, and average loans increased 5% from a year ago, driven by continued momentum in securities-based lending. Slide 14 highlights our corporate results.

[Mike Santomassimo, CFO at Wells Fargo]

Both revenue and expenses declined from a year ago, driven by the sale of our student loan portfolio and divestitures of our Corporate Trust Services business and Wells Fargo Asset Management. These businesses contributed $791 million of revenue in the first quarter of 2021, including the gain on sale of our student loan portfolio, and they accounted for approximately $400 million of the decline in expenses compared with a year ago, including the goodwill write-down from the sale of our student loan portfolio. We will now take your questions.

[Operator]

At this time, we will now begin the question and answer session. If you would like to ask a question, please first unmute your phone and then press star one. Please record your name at the prompt. If you would like to withdraw your question, you may press star two to remove yourself from the question queue. Once again, please press star one and record your name if you would like to ask a question at this time. Please stand by for our first question. Our first question comes from Scott Siefers of Piper Sandler. You may go ahead.

[Scott Siefers, Managing Director and Senior Research Analyst at Piper Sandler]

Morning, guys. Thank you for taking the question. Mike, we appreciated the commentary on reiterating the expense guidance for the full year. Was just hoping, given sort of the lumpiness between the seasonality and the comp expenses and then some of the operating losses, if you could maybe give a little bit more of a fine point on the trajectory. In other words, how much could we or should we expect things to come down in the second quarter? Is it gonna be just a progressive decline through the end of the year, or how will things ebb and flow in your mind?

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. Great. Thanks, Scott. You know, as I said in the remarks, we had about $600 million of seasonal expenses in there, you know, related to 401(k) and stock comp and all the associated stuff in the first quarter. That starts to fall away. Then obviously the other piece in there that I mentioned was operating losses, and that can be a little lumpy as you go throughout the year. When you sort of take a step back, as you saw last year as well, as we execute our efficiency initiatives, you generally don't get all those benefits starting day one, and so you'll continue to get more and more impact throughout the year.

[Mike Santomassimo, CFO at Wells Fargo]

You should expect the expense trajectory to be down as we go throughout the year. Now every quarter may not be down in a linear way, but nonetheless, you'll see a trend downward. Just to you know reinforce what you know what we said in the remarks, you know, we still believe the $51.5 billion for the full year is achievable despite the fact that we had you know the higher operating losses in the quarter. I'll just you know reiterate the other piece of guidance we gave on NII. You know, we do think you know as we said in January, we thought you know operating NII would be up about 8%.

[Mike Santomassimo, CFO at Wells Fargo]

We're almost doubling that to kind of the mid-teens as we look, you know, throughout the year, both given, you know, due to the loan growth we've seen and as well as the substantial move in rates.

[Scott Siefers, Managing Director and Senior Research Analyst at Piper Sandler]

Perfect. Thank you. Just maybe to follow, I think you guys talked in the past about an expectation for expenses to decline next year as well. You know, just given how lasting some of these inflationary pressures seem to be, do you see any risk to that outlook of another down year in costs next year?

[Charlie Scharf, CEO at Wells Fargo]

Hey, it's Charlie. You know, I would say a couple things. I think it's still the way we think about the way we want to plan for the year for sure, as we sit here today. You know, on inflationary pressures, I would say, and it's still early and I still think you know, things will still continue to evolve. But our own experience here is that the wage pressures that we've seen today are not as great as they were in the fourth quarter of last year, though they you know, still exist. But they do seem to be slowing. And obviously, the Fed is gonna, as I said, do everything they can to bring that down.

[Charlie Scharf, CEO at Wells Fargo]

As we sit here today, by the time we get to next year, I think we'll be in a very, very different position relative to where inflation is. You know, we're still very focused on, you know, use the word efficiency, but we're really focused on running the place better. That's what these expense reductions actually result in.

[Scott Siefers, Managing Director and Senior Research Analyst at Piper Sandler]

Perfect. All right. Thank you guys very much.

[Charlie Scharf, CEO at Wells Fargo]

Sure.

[Operator]

The next question comes from Steven Chubak of Wolfe Research. Your line is open, sir.

[Steven Chubak, Managing Director at Wolfe Research]

Hi, good morning. Wanted to just start off with a question on NII and excess liquidity deployment. Specifically, I was hoping you could just speak to your appetite to deploy some of the excess liquidity that you guys still retain and where reinvestment yields are currently, just given spread widening in MBS in particular, and what securities you might look to purchase given some of the sensitivities on the duration side?

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. Thanks, Steve. It's Mike. You know, look, the first, you know, when it comes to deploying liquidity, it's gonna be, you know, loans first, right? If you think about the waterfall. As we see, you know, more loan growth, that's where it's gonna go, you know, first. Obviously, you know, that's the preferred path, anyway. Then based on what we see there, you know, we will, you know, decide, you know, if we're gonna grow the securities portfolio, throughout the year. You know, I would say our, you know, the guidance we gave, you know, for NII does not assume that we grow the portfolio in any substantial way.

[Mike Santomassimo, CFO at Wells Fargo]

That'll, you know, we'll have to see how that goes, you know, based on, you know, what we see from a loan growth perspective. You can see where yields are, you know, across the, you know, both Treasuries and MBS, which are the two primary asset classes we have in the portfolio. You know, I think obviously we're now investing at higher rates than we've seen certainly in a while, and that's additive as we go forward.

[Steven Chubak, Managing Director at Wolfe Research]

Got it. Just one follow-up relating to deposit beta specifically. Certainly a big area of focus given the more aggressive pace of Fed tightening as well as QT. I was hoping you could just speak to your relative stickiness of your deposit base versus last cycle, given the liability optimization you guys have been executing under the asset cap for a number of years now. Is there a credible case in your view that deposit betas could in fact be lower this cycle just given some of that favorable deposit remixing.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah, I know. I think you highlighted the right points. You know, as you look at what we've had to do over the last couple years to manage under the asset cap, you know, we've really pushed away some of our most interest rate sensitive deposits during that time. We've seen the least rate sensitive deposits on the retail side and consumer side, you know, grow as a percentage of the overall deposit base. That's definitely gonna help you know lower the average betas that we'll see relative to what we saw in the last cycle. You know, I think our expectations as you sort of think about the different you know slices of the deposit base, you know, haven't really changed much you know over the last couple months.

[Mike Santomassimo, CFO at Wells Fargo]

You know, I think as we look at the first 100 basis points, we don't think, you know, deposit rates are gonna move that much, which is pretty similar to what we saw last go around. I think on the consumer side, you know, you'll have, you know, slower betas and you'll have higher betas on the wholesale side. You know, likely given our position, you know, we'll lag a little bit on pricing, given the asset cap and what we've got to do to continue to manage that.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

The only thing I would add is that I think it also depends on what the other alternatives for folks are out there, you know, certainly on the consumer side. When you look at the environment that we're heading into and the volatility that we'll see, I just, you know, I think that's a very different kind of environment than if you're in a very stable market and rates are just moving up relatively slowly. I think it is different in that respect as well.

[Steven Chubak, Managing Director at Wolfe Research]

All right. That's great. If I could just squeeze in one more quick one. I would just be remiss if I didn't ask about, given some of the fee income commentary that you guys had highlighted, particularly some of the headwinds on both mortgage as well as wealth management, how we should be thinking about the right jumping off point for 2Q fee income, just given a lot of volatility in a few of those line items in the quarter.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah, a couple. I'll give you a couple points there. As you think about the advisory assets, you know, if you look at what's happened in both the fixed income and equity markets in terms of the valuation at 3/31, you know, being down, you know, I think roughly 5% or 6%, is probably not a bad place to start the modeling on advisory assets. You know, given the fact that, you know, a large chunk of them are billed in advance based on that value. You know, on the mortgage business, we will see a step down, given the pretty abrupt slowdown in the refinance market in particular.

[Mike Santomassimo, CFO at Wells Fargo]

We still expect to have you know decent volumes in the purchase market, but you know gain-on-sale margins will definitely be impacted given there's still a lot of excess capacity in the system. Now, I would just you know keep that in context of the backdrop that you know we laid out in terms of the growth in NII as you look through the rest of the year. Even if you start to see a little bit of pressure on those line items, you know the growth in NII you know it will position us pretty well throughout the rest of the year.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah, this is Charlie. I would just add to that. I think when you think about how we are, you know, and I, you know, kind of said this in the quote and in my remarks. You know, the way we're positioned going into an environment like this is we feel, you know, very positive about, you know, where we stand. You know, mortgage banking income is going to decline because rates are going up, and we're going to make, you know, much more on the increase in rates than we will on the decline in mortgage banking income. You know, we're continuing to focus on reducing expenses.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Credit is still exceptionally good, and you know, certainly will be into the next quarter based on everything that we see and, you know, possibly beyond, even though at one point they will go up. You know, while we're not sure what the overall economic environment will look like, that doesn't, you know, change our point of view on the fact that we're well positioned for it.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. Just a reminder, I said in my script, Steven, too, on the impact of the reduction in non-sufficient funds fees and some of the overdraft changes we made. You'll start to see the impact of that in the second quarter as well.

[Steven Chubak, Managing Director at Wolfe Research]

Got it. Thanks so much for taking my questions.

[Mike Santomassimo, CFO at Wells Fargo]

Yes.

[Operator]

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

[John Pancari, Senior Managing Director at Evercore ISI]

Morning. On the expense side, appreciate you helping us out with the $51.5 billion in terms of the reiteration of the guide. On the operating loss side, how do you feel about that $1.3 billion expectation, given the pressure on the number in the quarter? Then separately, I guess also on the cost savings, want to see how you're feeling about the $3.3 billion in gross saves and $1.6 billion net. Any changes to that expectation? Thanks.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

I'll take the first part, Mike, and maybe you take the second. On the first one, you know, the things that we saw in the first quarter are very specific to remediations. What we saw in the first quarter really has nothing to do with, you know, what we'll see in the next series of quarters. Those kind of stand on their own, and it's not something that, you know, gets built on from there. Yeah. As you look at the efficiency, you know, and I think hopefully this was implied in the guidance we gave. You know, we're executing well on the efficiency program that we've got.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

As I've said a number of times over the last couple of quarters, it's not a static program. Like, this is something that, you know, we're embedding in the DNA of how we run the place, and it continues to evolve. We feel good about executing on that.

[John Pancari, Senior Managing Director at Evercore ISI]

Okay. On the capital side, I know the CET1 decline of 90 basis points this quarter. You also mentioned the SCB surcharge could increase. You did flag the lower levels of buyback expected for the second quarter. Maybe can you talk about your thoughts on capital return beyond the second quarter, just given how things are shaping up and your earnings outlook, just want to get updated thoughts there. Thanks.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah. I mean, I'll start, Mike, and then you can chime in. I think what we're just trying to do is just, you know, we do have, you know, the reality of, you know, the impact on OCI during the quarter. So you see where CET1 is. You know, our dividend is about, you know, $1 billion a quarter or so. So we do have, you know, plenty of room inside there for, you know, any other further changes to OCI or the ability for us to grow RWA, which we want to do as loan growth continues to, you know, show the demand that we're seeing. So I think, you know, just where we are specifically in the second quarter, you know, will depend on where rates come out.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Beyond that, you know, we'll still, obviously, we're going through CCAR, but we still should have, you know, capacity to figure out what we want to do with the excess capital that the company generates.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. As earnings capacity grows, as NII grows, and we go through the year and we execute on our efficiency program, you know, there's. We're still operating under the asset cap. You know, there's, you know, I think you'll see us be prudent, but we've got plenty of flexibility to as we look through the rest of the year.

[John Pancari, Senior Managing Director at Evercore ISI]

Okay, great. Thanks. Take my questions.

[Operator]

The next question comes from Ken Usdin of Jefferies. Your line is open, sir.

[Ken Usdin, Managing Director and Equity Research Analyst at Jefferies]

Great. Thanks. Good morning. Hey, just a couple follow-ups on the cost side. Mike, the business sales from last year and you know kind of the stranded costs and the transition agreements, can you walk us through again how much of that you know was in the first quarter, and then how you know how does that kind of decline, and is that also you know built into your full year expectation for the cost numbers?

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. What we said, you know, Ken, as you look at the first quarter is about $400 million of expenses fell away in the quarter as the exit business exited. The remainder is about $300 million of that was from the ongoing run rate of the businesses. About $100 million was, you know, a charge we took last year for the student loan business. The remainder, you know, falls either under the TSAs, which are in place today and likely run most of the year, if not into early next year. Remember, there's revenue on the other side of that. Then you have the stranded cost.

[Mike Santomassimo, CFO at Wells Fargo]

You know, the numbers we laid out at the end of the fourth quarter last year haven't changed. You know, as the TSAs roll off, you know, we'll do our best to, you know, highlight that, you know, if it's meaningful. Then we're going to continue to work on the stranded costs and get them out. That'll take a little bit of time as we said last quarter.

[Ken Usdin, Managing Director and Equity Research Analyst at Jefferies]

Right. Okay. Just two little things on net interest income. You did mention that you had the EPBO sales this quarter, and I think related lower net interest income. Plus, you did show the decline in premium am. I'm wondering if you can just help us understand, you know, how much the EPBO sales took out of NII, and are you still expecting those to go out through the year? How do you expect premium amortization to trend from here? Thanks, Mike.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. The combo of PPP, you know, PPP loans and EPBOs, you know, came down, you know, sequentially or linked quarter about $178 million. That was the impact on revenue there on NII. We'll reiterate that in the Q when it comes out. You know, as you look at premium amortization for mortgage-backed, you know, you can look at the slide for reference when you have time. I know it's a busy day today, but it came down, you know, roughly a little over $100 million, you know, $110 million, $15 million of decline in the quarter.

[Mike Santomassimo, CFO at Wells Fargo]

That'll continue to decline as prepay slows, you know, throughout the year. It's come down quite a bit since where we were last year.

[Ken Usdin, Managing Director and Equity Research Analyst at Jefferies]

Okay. Thanks, Mike.

[Operator]

Thank you. The next question comes from John McDonald of Autonomous Research. Your line is open.

[John McDonald, Senior Research Analyst at Autonomous Research]

Hi, Mike. Just on the fee income front, you made a couple of comments already about the core fee lines. What about some of the more volatile lines on the capital market side? I think the venture capital came in a little bit better than expected in a tough market this quarter. You know, what should we be thinking about in terms of investment banking, trading, and, you know, maybe the Norwest Venture line?

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. As you know, predicting investment banking fees and market fees is fraught with you know lots of issues. You know, I think, look, it's clear that on the investment banking side, you know, some of the capital markets, particularly on the equity side, have slowed quite a bit this year, you know, given some of the volatility we've seen. You know, our pipeline really hasn't changed much. It's still pretty strong, you know, for where we stand coming into the quarter.

[Mike Santomassimo, CFO at Wells Fargo]

Some of that, you know, realization of that pipeline is just, you know, somewhat market dependent and dependent on the timing of you know some of the deals closing. We'll see. You know, the Markets revenue is somewhat dependent on the volatility that we see and the demand we see. I think as others have gone through this, you know we will benefit from some of that as we go through it. It's hard to predict exactly where we'll end up.

[Mike Santomassimo, CFO at Wells Fargo]

On Norwest Venture, you know, like, if you go back a number of years and you look at, you know, there's some number, you know, like, stability to that line, you know, when you look at over the last three or four years. I think when you look at some of what happened this quarter, we did have a bunch of realized, you know, like business being sold or, you know, going public or in one or two cases, of some of the investments. That was really good to see that that's still continuing despite some of the market volatility. I think, you know, we'll see how it goes. I think, you know, we won't...

[Mike Santomassimo, CFO at Wells Fargo]

It's hard to imagine we'll see some of the peaks that we saw last year in that revenue line item. I do expect we'll continue to see some good performance across those businesses.

[John McDonald, Senior Research Analyst at Autonomous Research]

Okay, thanks. Also, on the NII, any comments you could make about your expectations for the cadence of the NII improvement throughout the year, and maybe a little bit of what you're baking in on premium amortization, and maybe how much benefit you get from, on a spot basis, like a hike of 25 or 50 basis. Just any framework there. Thanks.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. No, you know, a lot of it's gonna be dependent on how fast the Fed moves. As you know, when the Fed moves, the impact of that is immediate. You start realizing that, you know, the day after. You know, obviously the expectations there have changed quite a bit, so that'll be the case. I think, you know, in the Q, we give you the shock, you know, the numbers on a 100 basis point moves. Those are pretty close to what you should expect for the first few rate rises in terms of the impact. Again, it's pretty immediate for the most of us.

[John McDonald, Senior Research Analyst at Autonomous Research]

The premium amortization, Mike, you assume that that comes down throughout the year?

[Mike Santomassimo, CFO at Wells Fargo]

Yeah. It has to, yeah. I mean, absolutely. It'll continue to come down as we see rates go up and prepay slow. Sorry about that. But yeah, I think you'll start to see that come down. You know, will it? You know, I think it'll be. It's a little bit dependent upon, again, you know, how things progress, but it's not unreasonable to think as we look at the next quarter that it's, you know, somewhere in the ballpark of what we saw from on a linked quarter basis this quarter.

[John McDonald, Senior Research Analyst at Autonomous Research]

Got it. I guess I was wondering, did you improve the assumptions for that? Is that part of the NII upgrade or is that more-

[Mike Santomassimo, CFO at Wells Fargo]

Yeah

[John McDonald, Senior Research Analyst at Autonomous Research]

Just rates and kinda okay.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah.

[John McDonald, Senior Research Analyst at Autonomous Research]

A little bit better.

[Mike Santomassimo, CFO at Wells Fargo]

That's baked in. That's baked into the increase in NII that we gave, John.

[John McDonald, Senior Research Analyst at Autonomous Research]

Okay, thank you.

[Operator]

The next question comes from Ebrahim Poonawala of Bank of America. Your line is open.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Good morning. I guess first question, Charlie, you've in the past talked about the 15% ROTCE as needing the asset cap to lift and some level of higher rates. We're getting a lot more in terms of higher rates than we expected six months ago. Just doing rough math in terms of how we've talked about expense outlook, mid-teens NII growth, do you think it's conceivable that we hit 15% ROTCE at some point over the next fourth-six quarters, even without the asset cap being lifted?

[Charlie Scharf, CEO at Wells Fargo]

You know, I don't wanna talk about a timeframe yet because I think what we've consistently said, and we'll stick to that, is we'll get to 10% and then we'll talk a little bit more about the 15% and try and hone a little bit more in on timing. I do think it is fair to assume that the rate rises that we're seeing are more than we would've thought was necessary to get to 15%. You know, I think the question of the asset cap not still being with us. I think that's just you know, that is the reality, and it's quite possible that the rate rises will be more of a benefit than we would've hoped in terms of offsetting that.

[Mike Santomassimo, CFO at Wells Fargo]

I think we should just wait until we get to 10%. Certainly, these rate rises that we're seeing and the asset sensitivity that we have are certainly a meaningful positive for us and more than we would've expected.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Appreciate that response. Just one quick question on credit, Mike. When we think about another quarter of sizable reserve release, we've seen one of your peers yesterday build reserves talking about just putting a higher weight on a stress case scenario. Give us a sense in terms of your outlook for the economy and how that leads to loan loss reserves where they are today versus, I think, your day one CECL was about 95 basis points. Just any thought process around how you're thinking through that would be helpful.

[Mike Santomassimo, CFO at Wells Fargo]

Yeah, this is Charlie. I'll take a stab at it first. You know, I think understanding what's in our CECL assumptions is, you know, something which is important. As hard as it is to predict, it does give you a sense for how we're thinking about things and how our loan book and other items play out in that reserving calculation. It is very hard to compare across companies because we have different scenarios.

[Mike Santomassimo, CFO at Wells Fargo]

We put different probabilities on different things. The way, you know, the conservatism in models is different across companies. I think what we've seen consistently in our reserving levels is we've been on the more conservative side relative to others. That might just be, you know, a view of a more conservative set of assumptions or something which is embedded in our models, or the way we think about just the potential impacts of COVID and now the potential impacts of a slowing economy.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

You know, I would say, overall, sitting here today, if you were to look at the way we look at the assumptions that go into it, I think we were already assuming a reasonable percentage of probability on the downsides, and so that hasn't changed. We feel better about some of the assumptions we made relative to COVID, and we've added some assumptions relative to inflation. I think, you know, net, that's what drives the reduction in terms of where we are. I still think we feel very comfortable, and hopefully are at the more conservative end of what can come out of a CECL calculation.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

That's helpful. Should we then still assume that the reserves probably track lower over the next few quarters, at least, absent a big change in the macro?

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah. I think it's, you know, it's all dependent on the macro at this point.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Sure.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

You know, you know, CECL requires you to, you know, take a look at, you know, based upon what the, you know, the full amount of the losses embedded in the portfolio relative to what you see is, you know, the macroeconomic outlook and the specific performance. If our outlook gets better, reserves will come down. If it gets worse, they'll go up, and if it stays the same, it'll be flat there.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Got it. Thank you for taking my questions.

[Operator]

Thank you. The next question comes from Betsy Graseck of Morgan Stanley. Your line is open.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Hi. Good morning.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Hey, Betsy.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

I had another semi-technical question here, but on the NII outlook, I get your point that you should see improvement pretty near term from the rate environment. I'm just thinking about what you put in your release for the yields on loans, where at least this quarter, loan yields came down a bit. Now, I know part of that's probably day count, but, you know, we saw some declines in resi mortgage on first and second lien and also, you know, on the auto side. I just wanted to get a sense and also in C&I, right? I just wanted to get a sense what was playing into that quarter-over-quarter, and then how quickly that could revert, you know, as we go through this year.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah. Hey, Betsy. It's Mike. I'll try to take a shot at that. I think on the resi mortgage side, what you're seeing is the impact of the EPBO loans, and so they're you know coming you know the impact of those coming down. That creates a little bit of noise, I think, there relative to you know the yield there. You know, as you look at the rest of the you know on the C&I book, you know directionally the percentage, but it's you know call it you know two-thirds of the C&I book in that neighborhood is floating rate. You know, maybe plus or minus a little bit there. But the but you know the...

[Charlie Scharf, CEO and Chairman at Wells Fargo]

That starts to react pretty, you know, obviously directly pretty quickly to rates moving. You know, in any given, you know, quarter, you see a little bit of noise on that yield, but you'll start to see that react as rates go up.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Okay. It's not like it's hedged out, and that's why we saw what we saw QQ.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

No.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Okay. The other message I'm getting from you this morning is that this rate improvement, you're expecting to drop to the bottom line. Is that fair?

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Well, I think we reiterated our expense guidance for the year, and NII is gonna be a lot better. Betsy, what's in your question? I'm not sure I understand.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Well-

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Make sure we're answering your problem.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

... you're getting an uptick in rates, and given the fact that your guidance on expenses is holding steady, it seems like you're gonna drop all that rate hike to the bottom line.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Well, I mean, yes, we're gonna make more money on NII. Mike went through the specifics on how non-interest income will likely come down, but, you know, obviously not nearly as much as the benefit that we'll get, you know, as you look out over NII. You know, charge-offs still will remain at low levels for the foreseeable future, even though those will go up at some point. Yes, expenses will continue to come down for us to meet that-

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Right

[Charlie Scharf, CEO and Chairman at Wells Fargo]

51.5 number.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Yeah. I mean, it feels like it's, you know, at least a mid-singles uptick on consensus EPS. That's what it feels like to me at least. I mean, I know if you drop all the NII to the bottom line, I get something closer to a high singles uptick on consensus EPS. You know.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Again, just, you know, just make sure you look at, you know, I mean, Mike tried to lay out a little bit of what's gonna happen on non-interest income. Again, charge-offs are at all-time lows. You see the delinquency numbers. Unless there's-

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Mm-hmm

[Charlie Scharf, CEO and Chairman at Wells Fargo]

You know, something on the commercial side or the wholesale side that we're not aware of. It's, you know, we feel that's one of. You know, when we talk about how we feel, I think it's, you know, the economy is the economy. We are positioned, you know, well for this kind of environment. We also think people should just make sure that they're conscious of, you know, the movement in all the line items.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

On the customer remediation charge that you took this quarter, I guess that's the other, you know, kind of question that I've been getting is it's one-timey, but it feels like it's happened a lot, so, you know, how much more is left?

[Charlie Scharf, CEO and Chairman at Wells Fargo]

You know, it's really hard to answer, and I understand the frustration and, you know, I would say every quarter we go through this. We say we wanna make sure that we've got everything. You know, we have to make sure that when we look at these remediations, they're aligned with what makes sense for the customer and that we've captured all the portfolios. You know, some of these remediations require us to go back and recreate a scenario from, you know, 10-15 years ago. That's part of the complication that we see. We're not gonna say that there's no more, but they're very case specific. At some point, you know, they will be behind us, but we have to do what we have to do.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

You know, at least in the big scheme of things, relative to, you know, the benefits that we'll see from things like NII, you know, these aren't overwhelming and, you know, we understand, you know, the, you know, how this fits into the guidance that we've given on full year expenses.

[Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley]

Yep. Okay. Thank you.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Thanks.

[Operator]

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

[Matt O'Connor, Managing Director and Equity Research Analyst at Deutsche Bank]

Hi. I guess just following up on the regulatory line of questions. You know, as usual, I'm gonna ask some questions that are tough to answer. Look, you've acknowledged you're making significant progress. The regulators have acknowledged you're making significant progress. The fundamentals are clearly moving in the right direction in a meaningful way. You know, in the prepared remarks, you still say need to continue to close these gaps over the next several years. I guess the question is, like, is this just cautionary language or are there still things that you are implementing on kind of a daily and ongoing basis to address some of the legacy issues? I guess I thought you had implemented kind of the fixes and it's kind of in the oversight and execution situation.

[Matt O'Connor, Managing Director and Equity Research Analyst at Deutsche Bank]

Maybe you could just talk to that.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah. I don't recall saying the words that you just used. I think we have been trying to be very clear that we have a lot of ongoing work to do, that we feel very good about the frameworks that we have in place. Once you develop the framework, the implementation of the frameworks takes a significant amount of time. We continue to do that. As we develop stronger controls inside the company, we will potentially find things that then have to get fixed and remediated because this is, you know, many years of work that we're, you know, doing at this point.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

As the regulators look at the amount of time that it takes to do it, at the things that we find as we put these controls in place, and just some of these legacy things that, you know, continue to remain out there, I just think it's, you know, it's prudent that, you know, we expect to have things. You know, I think we say, you know, it's, you know, it's possible or likely, but, you know, if there was something specific, we would say it. But I think it is. That's just, that's the reality of the situation that we're on. It is, you know, the where we find ourselves is, you know.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

I'll speak for ourselves, not the regulators. We have made significant progress from where we were when we got here, but there is still a significant amount more work to do.

[Matt O'Connor, Managing Director and Equity Research Analyst at Deutsche Bank]

Okay. Then just a follow-up on a different topic. Apologies if I missed it, but you did talk about slowing buybacks in the second quarter, partly rates, partly loans, and obviously you've bought back a lot this quarter. Did you give the magnitude that you expect to buy back or remind us your targeted capital at least until the next CCAR comes out? Thank you.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah. Matt, I'll take that. As we've said a few times in the past, you know, we plan to run, you know, the CET1 ratio at somewhere between 100 and 150 basis points over our reg minimum, which right now is 9.1%. I think as we look forward, you know, given the way the framework works, we'll have plenty of flexibility to do what we think is prudent on buybacks as we go throughout the rest of the year.

[Matt O'Connor, Managing Director and Equity Research Analyst at Deutsche Bank]

Okay. Thank you.

[Operator]

Thank you. The next question comes from Erika Najarian of UBS. Your line is open.

[Erika Najarian, Managing Director and Equity Research Analyst at UBS]

Hi. Good morning. My question has been asked and answered. Thank you.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Thank you. Thanks, Erika.

[Operator]

Thank you. The next question will come from Charles Peabody of Portales Partners. Your line is open.

[Charles Peabody, Co-founder and Director of Research at Portales Partners]

Yeah. Most of my questions have been asked, but let me ask one question about how you manage your mortgage banking operation. Because you're one of the few large banks that still has a relatively balanced origination and servicing sides. Historically, you know, servicing was kind of viewed as a balance to origination. When originations didn't do well, servicing would do well. That hasn't been the case recently in your recent history, so can you talk about how you're managing it and why there isn't a balance to those two pieces?

[Charlie Scharf, CEO at Wells Fargo]

Yeah. I'll start. This is Charlie. Mike, and then you can pipe in. I think, you know, we think about our mortgage business in the context of the whole company, not as a separate, independent entity that has to stand by itself. When we think about the interest rate risk position of the entire company, that's where we think about what potentially happens on the production side versus what happens in the MSR. You know, the management of the MSR is difficult. It's got some very different types of risks embedded in it. You know, if all you did was look at those two as offsets, you could be kidding yourselves as to what the value of the servicing is.

[Charlie Scharf, CEO at Wells Fargo]

As I said, net, when we look at the position of the company, I would look at the reduction of mortgage banking income not being offset by the MSR, but being offset by the rest of, you know, the benefit that we'll get as a company at NII.

[Charles Peabody, Co-founder and Director of Research at Portales Partners]

Just as a follow-up, when you gave guidance about a material step-down in mortgage banking in the second quarter, were you talking strictly on the origination side or as a whole entity?

[Mike Santomassimo, CFO at Wells Fargo]

As a whole, think of the mortgage banking income line as what we were referring to. Remember, included in there is the fact that the MSR is fairly well hedged.

[Charles Peabody, Co-founder and Director of Research at Portales Partners]

Mm-hmm.

[Mike Santomassimo, CFO at Wells Fargo]

It's basically the whole, but it's also what's really driving it.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Origination

[Mike Santomassimo, CFO at Wells Fargo]

is origination.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yes.

[Operator]

Thank you. Our final question for today will come from Gerard Cassidy of RBC Capital Markets. You may go ahead.

[Gerard Cassidy, Managing Director at RBC Capital Markets]

Thank you. Good morning. Charlie and Mike, you both referenced in your comments about the excess capacity in mortgage banking, and you're anticipating or waiting for some of that excess capacity to come out as originations, of course, for the industry have come down to higher rates. What are some of the metrics you guys are monitoring and keeping an eye on to show you that capacity is coming out of the system?

[Mike Santomassimo, CFO at Wells Fargo]

Well, you know, I think as you start thinking about the industry as a whole, it's hard, Gerard, to look at any specific metrics per se. I think where you're gonna see that first is likely gain-on-sale margins as people, you know, as those start to normalize as, you know, excess capacity comes out, right? I think that's probably one of the areas I would look at.

[Charlie Scharf, CEO and Chairman at Wells Fargo]

Yeah. Listen, I mean, everyone in the industry looks around at, you know, the amount of, you know, volume being down substantially. They look at the amount of expense that they have. You know, people then rationalize the expense that they have, and that naturally, you know, changes the competitive dynamics about where people are pricing. You know, we're focused on making sure that we've got the right level of expense relative to the revenue and volume that we're seeing, and that's exactly what everyone else does.

[Gerard Cassidy, Managing Director at RBC Capital Markets]

Very good. Mike, just following up on your gain-on-sale and margin, gain-on-sale margins, what would you consider normal, and where are they for you guys today?

[Mike Santomassimo, CFO at Wells Fargo]

Well, we don't disclose the margin itself, as you sort of look forward. You know, normal varies, right? As you sort of look through the cycle, in the mortgage business. You know, I think we're certainly, if you start thinking about, you know, primary, secondary spreads, you know, that's one indicator of sort of where gain-on-sale margins will go, I think. We're now back to, you know, what is likely more historical levels, right around 100 basis points or so when you look at that. That's, you know, so I think you're kind of back to, you know, a more normal level there.

[Mike Santomassimo, CFO at Wells Fargo]

I think as excess capacity goes out, like, you'll start to see the gain-on-sale come back up. I think it's hard to say exactly what normal will look like there as we go through this cycle.

[Gerard Cassidy, Managing Director at RBC Capital Markets]

Okay. Just a follow-up question, Mike. You alluded to the possibility that the stress capital buffer following this year's CCAR could be a little higher for you folks. Can you give us some color what is making you think that way?

[Mike Santomassimo, CFO at Wells Fargo]

It's just the severity of the, you know, of the variables that went into it, Gerard. You know, obviously, it's a bit of a black box in terms of what exactly the answer is. You know, we do our best to try to look at, like, how that might impact us and how the Fed might look at it. It's really based on the severity of the scenario that played through.

[Gerard Cassidy, Managing Director at RBC Capital Markets]

Great. Always appreciate the color. Thank you.

[Mike Santomassimo, CFO at Wells Fargo]

I appreciate it. I think that's the last question. We know it's a really busy day for everyone, so we thank you for spending the time, and we'll talk soon.

[Operator]

Thank you for your-

Participants

Analysts

• John Campbell, Director of Investor Relations at Wells Fargo
• Charlie Scharf, CEO at Wells Fargo
• Mike Santomassimo, CFO at Wells Fargo
• Scott Siefers, Managing Director and Senior Research Analyst at Piper Sandler
• Steven Chubak, Managing Director at Wolfe Research
• Charlie Scharf, CEO and Chairman at Wells Fargo
• John Pancari, Senior Managing Director at Evercore ISI
• Ken Usdin, Managing Director and Equity Research Analyst at Jefferies
• John McDonald, Senior Research Analyst at Autonomous Research
• Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America
• Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley
• Matt O'Connor, Managing Director and Equity Research Analyst at Deutsche Bank
• Erika Najarian, Managing Director and Equity Research Analyst at UBS
• Charles Peabody, Co-founder and Director of Research at Portales Partners
• Gerard Cassidy, Managing Director at RBC Capital Markets