Wells Fargo & Company Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 14, 2022

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.
AI Generated. May Contain Errors.
Earnings Conference Call
Wells Fargo & Company Q1 2022
00:00 / 00:00

There are 14 speakers on the call.

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 speakers' remarks, there will be a question and answer session. 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.

Operator

Sir, you may begin the conference.

Speaker 1

Thanks, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf and our CFO, Mike Santamassimo, We'll discuss Q1 results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our Q1 earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com.

Speaker 1

I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8 ks 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.

Speaker 2

Thanks, John, and good morning, everyone. I'll make some brief comments about our Q1 results, the operating environment and update you on our priorities. I'll then turn the call over to Mike to review the Q1 results in more detail before we take your questions. Let me start off with some Q1 highlights. We earned $3,700,000,000 or $0.88 per common share in the Q1.

Speaker 2

Our results included $0.21 per share impact from a decrease in the allowance for credit losses. We have broad based loan growth with both our consumer and commercial portfolios growing from the 4th quarter. While net interest income was down modestly from the 4th quarter, driven by fewer days in the quarter, it grew 5% from a year ago. Higher interest rates, along with our expectations for continued loan growth, should drive Higher net interest income growth than we anticipated at the beginning of the year. Mike will provide more details regarding our current view later on in the call.

Speaker 2

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 We're monitoring certain industries that have the potential to be impacted by the conflict and economic sanctions, but thus far don't have concerns. In addition, we returned a significant amount of capital to our shareholders in the Q1, including repurchasing $6,000,000,000 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.

Speaker 2

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. Consumer credit card spend remained strong, up 33% from a year ago.

Speaker 2

All spending categories were up with the highest growth in travel, entertainment, fuel and dining. After strong growth in the Q1 of 2021 driven by stimulus payments, debit card spending increased 6% in the Q1 of 2022. Discretionary spending remains strong with entertainment up 39 percent 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.

Speaker 2

Now let me update you on progress we've made on our strategic priorities. Building an appropriate risk and control infrastructure remains our top priority And I continue to believe that we're making significant progress. Early in the Q1, we named Derek Flowers our new Chief Risk Officer, Following Mandy Norton's retirement announcement, Derek has extensive experience managing risk, including the work he's done over the last several years of managing the build out of Wells Fargo's risk and control framework. Derek has been with Wells Fargo for over 20 years and his familiarity with the company And his risk background make him the ideal candidate to succeed Mandy, who I'd like to thank for the tremendous progress she made in transforming the risk organization. We also 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.

Speaker 2

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 Q1, we began rolling out our new mobile banking experience for our customers in our consumer businesses and feedback has been very positive. Digital adoption, which is critical to both delivering seamless digital experiences that our customers expect and reducing the cost to serve has continued to increase With mobile active customers up 4% from a year ago, we added approximately 500,000 new mobile active customers in the Q1 alone. We continue to invest to improve our digital capabilities with additional enhancements planned for this year.

Speaker 2

We're also focused on reducing friction and moving money. We've continued to invest in Zelle and made changes to expand customer usage, including increasing sending limits. These changes have helped to drive 21% growth in active send customers and a 33% increase in send volume from a year ago. We continued to enhance our credit card offerings with our partnership with BILT Rewards and Mastercard. This first of its KIND co brand card allows members to pay rent and earn points with no transaction fees on rent payments at any apartment in the U.

Speaker 2

S. In the Q1, 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. 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.

Speaker 2

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 We have a strong capital position and our lower expense base creates greater margins from which to invest. We remain diligent in extending credit 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.

Speaker 2

We continue to focus on a broad set of stakeholders We announced $1,000,000 in donations across 3 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 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.

Speaker 2

Since the pandemic began, close to 100,000 of our employees never left the workplace. And last month, we started to welcome the rest back to the office. It's been great to be back together again, and I want to thank All of our employees as they work together to better serve our customers, our communities and each other. I will now turn the call over to Mike.

Speaker 3

Thank you, Charlie, and good morning, everyone. Net income for the quarter was $3,700,000,000 or $0.88 per common share and our results included a $1,100,000,000 decrease in the allowance for credit losses, predominantly due to reduced uncertainty around the economic impact COVID on our loan portfolios. Our effective income tax rate in the Q1 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.

Speaker 3

The decrease in our CET1 ratio from the 4th quarter reflected A $5,100,000,000 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 $6,000,000,000 of common stock in the Q1, bringing our total repurchases since the Q3 of 2021 to $18,300,000,000 which is in line with our 2021 capital plan. While we have flexibility under the stress capital buffer framework to exceed the share It's possible that our stress capital buffer could increase when the Federal Reserve publishes our official stress capital buffer in the 3rd quarter, while our G SIB surcharge of 1.5 percent will remain the same for 2023.

Speaker 3

Turning to credit quality on Slide 5. Our net loan charge off ratio declined to 14 basis points in the Q1. Commercial credit performance was strong again With $29,000,000 of net recoveries in the Q1 driven by recoveries in energy, asset based lending and middle market. Consumer credit performance was also strong. Credit losses were down $59,000,000 from the 4th quarter, which included $152,000,000 of net charge offs related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans.

Speaker 3

The Q1 included higher auto losses and seasonally higher credit card losses. Non performing assets decreased $323,000,000 or 4% for the 4th quarter. Commercial non accruals were down $423,000,000 declining again this quarter and are now below pre pandemic levels. Consumer non accruals increased $82,000,000 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.

Speaker 3

Our allowance for credit losses at the end of the Q1 reflected continued strong credit performance, less uncertainty around the economic impact of COVID, The economic recovery thus far and an outlook that reflects the increasing risks from high inflation in the Russian Ukraine complex. On Slide 6, we highlight loans and deposits. Average loans grew 3% from a year ago in the 4th quarter. Tieried end loans grew for the 3rd 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.

Speaker 3

Average deposits increased $70,600,000,000 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. Turning to net interest income on Slide 7. 1st quarter net interest income increased $413,000,000 or 5% from a year ago and declined $41,000,000 from the 4th quarter. The decline from the 4th quarter was driven by $178,000,000 of lower income from EPBO and Paycheck Protection Program loans, as well as 2 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.

Speaker 3

Obviously, a lot has changed over the past 3 months. Loan growth has been solid and average loan balances were up 3% versus the 4th 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 Q4 of The rate increases currently included in the forward rate curve would also drive stronger net interest income growth than we anticipated earlier in the year. However, it's important to note that the benefit from rising rates is not linear and we would expect deposit betas to accelerate after the initial rate hikes And customer migration from lower yielding to higher yielding deposit products will also likely increase. Higher rates will also have a negative impact on mortgage volumes and potentially on market related fees in Corporate and Investment Banking, Private Equity and Capital Businesses and in Wealth Management.

Speaker 3

Given our current expectations for higher loan growth and recent forward rate 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 Expenses also declined due to divestitures last year.

Speaker 3

The Q1 included approximately 600,000,000 seasonally higher personnel expenses including payroll taxes, restricted stock expense for retirement eligible employees and 401 matching contributions. We also had $673,000,000 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 Turning to our operating segments starting with Consumer Banking and Lending on Slide 9. Consumer and Small Business Banking revenue 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 Continue to migrate to digital channels and correspondingly teller transactions are down 45% from pre pandemic levels.

Speaker 3

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 While we continue to make enhancements to better serve customers. Earlier this year, we announced changes to we are making to help our customers avoid overdraft fees. We began to implement some of these new policies and we'll be rolling out the rest of the changes this year. We eliminated fees for non funds and overdraft protection transactions in early March, so these changes didn't have a meaningful impact on the Q1 results. We still expect the annual decline in these fees to be approximately $700,000,000 However, as we highlighted last quarter, this is an annualized estimate and the reduction maybe 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.

Speaker 3

Home lending revenue declined 33% from a year ago and 19% from the 4th quarter driven by lower mortgage originations and press margins Given the higher rate environment and competitive pricing in response to excess capacity in the industry, mortgage rates increased to 156 basis points in the Q1 and are above rate levels observed for the most of the last decade. Reflecting this environment, we expect 2nd quarter originations and margins remain under pressure and mortgage banking revenue to continue to decline. We started to reduce expenses in response 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.

Speaker 3

Turning to some key business drivers on Slide 10. Our mortgage originations declined 21% from the 4th quarter. We believe the mortgage market experienced its largest quarterly from the Q4 driven by the 3rd 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 4th 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.

Speaker 3

Turning to debit card, Transactions declined 7% from the 4th quarter due to seasonality and were up 3% from a year ago with double digit growth in travel and entertainment. Credit card point of sale purchase volume continued to be strong, was up 33% from a year ago, but down 5% from the 4th quarter due to seasonality. While payment rates remain elevated, balances grew 14% from a year ago due to strong purchase volume and the launch of new products. New credit card accounts increased over 80% from a year ago and we continue to be pleased by the quality of the accounts we're attracting. Turning to Commercial Banking results on Slide 11.

Speaker 3

Middle Market Banking revenue increased 8% from a year ago, driven by higher deposit loan balances as well as the impact of higher interest rates. Asset based lending and leasing revenue increased 17% from a year ago, driven by higher loan balances, Stronger net gains from equity securities and higher revenue from renewable energy investments. Non interest expense 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 3 consecutive quarters and were up 6% from a year ago. Revolver utilization rates have increased, but are still well below historical route levels.

Speaker 3

Loan demand has been driven by larger clients who are increasing borrowing due to the impact Inflation of material and transportation costs as well as to support inventory growth. We're also seeing new demand from clients who are catching up from underinvestment in projects and capital expenditures over the past couple of years. Turning to Corporate and Investment Banking on Slide 12. Banking revenue increased 4% from a year ago, primarily driven by higher loan balances and improved treasury management results. Average loan balances were up 18% from a year ago with increased demand across most industries driven primarily by capital expenditures and growing working capital needs.

Speaker 3

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 Q1 outpaced volumes from a year ago and loan pipelines continued to be strong. Market revenues 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 $25,300,000,000 or 13% from a year ago, driven by continued actions to manage under the asset cap. On Slide 13, Wealth and Investment Management revenue grew 6% from a year ago, driven by higher asset based fees and higher market valuations And higher net interest income from the impact of higher interest rates as well as higher deposit and loan balances.

Speaker 3

As a reminder, the majority of WIM advisory assets are priced at the beginning quarter. So, Q1 results reflected market valuations as of Jan 1 and Q2 results will reflect the lower market valuations as of April 1. 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.

Speaker 3

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 $791,000,000 of revenue in the Q1 of 2021, including The gain on sale of our student loan portfolio and they accounted for approximately $400,000,000 of the decline in expenses compared with a year ago, including the goodwill write down of our student loan portfolio. We will now take your questions.

Operator

At this time, we will now begin the question and answer session. Our first question comes from Scott Siefers of Piper Sandler. You may go ahead.

Speaker 4

Good morning, guys. Thank you for taking the question. Mike, we appreciate the commentary on reiterating the expense guidance for the full year. I 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 Q2?

Speaker 4

And then is it going to be just a progressive decline through the end of the year? Or how will things ebb and flow in your mind?

Speaker 3

Yes, great. Thanks, Scott. As I said in the remarks, we had about $600,000,000 of seasonal Expenses in there related to 401 and stock comp and all the fall associated stuff in the Q1. That starts to fall away. And then obviously the other piece in there that I mentioned was operating losses and that can be a little lumpy as you go throughout the year.

Speaker 3

But 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 And so you'll continue to get more and more impact throughout the year. So you should expect the expense trajectory to be down as we go throughout the year. Now every quarter may not be down in a linear way, but nonetheless you'll see a trend downward. And Just to reinforce what we said in the remarks, we did we are still we still believe the 51.5 1,000,000,000 for the full year is achievable despite the fact that we had the higher operating losses in the quarter. And then I'll just reiterate the other piece of guidance we gave on NII.

Speaker 3

We do think as we said in January, we thought NII would be up about 8%. So

Speaker 4

Perfect. Thank you. And then just maybe to follow-up, I think you guys talked in the past about And expectation for expenses to decline next year as well. 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 cost next year?

Speaker 2

Hey, it's Charlie. I would say A couple of things. I think it's still the way we think about the way we want to plan for the year for sure as we sit here today. On inflationary pressures, I would say and it's still early and still thinking that 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 Q4 Last year, so they still exist, but they do seem to be slowing.

Speaker 2

And Obviously, the Fed is going to, as I said, going to do everything they can to bring that down. And so as we sit here today, by the time we get to the next year, I think we'll be in a very, very different position relative to where inflation is. And so we're still very focused on You used the word efficiency, but we're really focused on running the plays better, and that's what these expense reductions actually result in.

Speaker 4

Perfect. All right. Thank you guys very much.

Operator

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

Speaker 5

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

Speaker 3

Yes. Thanks, Steve. It's Mike. Look, the first one is when it comes to liquidity, it's going to be loans first, right? So if you think about the waterfall.

Speaker 3

And so as we see more loan growth that's where it's going to First and obviously that's the preferred path anyway. And then based on what we see there, we will Decide if we're going to grow the securities portfolio throughout the year. I would say our the guidance we gave For NII, it does not assume that we grow the portfolio in any substantial way. And so that will we'll have to see how that goes Based on what we see from a loan growth perspective. And then you can see where yields are across both The treasuries and MBS which are the 2 primary asset classes we have in the portfolio.

Speaker 3

And I think obviously we're now investing at At higher rates than we've seen certainly in a while and that's additive as we go forward.

Speaker 5

And 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 can just speak to your relative stickiness of your deposit base versus last cycle, Given the liability optimization you guys have been executing under the asset cap for a number of years now, and is there a credible case in your view that deposit betas Could in fact be lower this cycle just given some of that favorable deposit remixing?

Speaker 3

Yes. I think you highlighted The right point. As you look at what we've had to do over the last couple of years to manage on the asset cap, we've really pushed away some of our most interest Consumer side grow as a percentage of the overall deposit base. And so that's definitely going to help lower the average betas that we'll see relative to what we saw in the last cycle. I think our expectations as you sort of think about the different Slices of the deposit base haven't really changed much over the last couple of months.

Speaker 3

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

Speaker 2

And the only thing I would add is that I think a lot of also has to it also depends on what the other alternatives For folks that are out there, certainly on the consumer side, and when you look at The environment that we're heading into and the volatility that we'll see, I just I think that is 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. So I think it is different in that respect as well.

Speaker 5

That's great. If I could just squeeze in one more quick one, would just be remiss if I didn't ask about, given some of the fee income commentary that you guys had highlighted, particularly some of the headwinds on both mortgage as well as wealth management. How we should be thinking about the right jumping off point

Speaker 3

I3 Assets, if you look at what's happened in both the fixed income and equity markets in terms of the valuation at the threethirty one being I think roughly 5% or 6% is probably not a bad place to start the modeling on advisory assets Given the fact that a large chunk of them are built in advance based on that value. On the mortgage business, we will see a step down given the pretty abrupt slowdown in the refinance market in particular. We still expect to have decent volumes in the purchase market, but spreads will definitely or gain on sale margins will definitely be impacted given there's still a lot of excess capacity in the system. Now I would just Keep that in context of the backdrop that we laid out in terms of the growth in NII as you look through the rest of the year. So even if you start a little bit of pressure on those line items.

Speaker 3

The growth in NII will position us pretty well throughout the rest of the year.

Speaker 2

Yes. And this is Charlie Anil. I would just add to that. I think when you think about how we are and I kind of said this In the quote and in my remarks, the way we're positioned going into an environment like this is we feel Very positive about where we stand. And mortgage banking income is going to decline because rates are going up and we're going to make Much more on the increase in rates than we will on the decline in mortgage banking income.

Speaker 2

We're continuing to focus on reducing expenses. Credit is still exceptionally good and certainly will be into the next quarter based on everything that we see and Possibly beyond, even though at one point they will go up. And so while we're not sure what the overall economic environment will look like, That doesn't change our point of view on the fact that we're well positioned for it.

Speaker 3

Yes. Just a reminder, I said in my script, Steve, to you on the impact of the reduction in Non sufficient fund balance fees and some of the overdraft changes we made, you'll start to see the impact out in the second quarter as well.

Speaker 5

Got it. Thanks so much for taking my questions.

Operator

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

Speaker 6

Good morning. On the expense side, I appreciate you helping us out with the $1,500,000,000 in terms of the reiteration of the guide. On the operating loss side, how do you feel about that $1,300,000,000 expectation given The pressure on the number in the quarter. And then separately, I guess, also on the cost savings, I want to see how you're feeling about the $3,300,000,000 in gross saves and $1,600,000,000 net, any changes to that expectation? Thanks.

Speaker 2

So I'll just I'll take the first part, Mike and maybe take the second. On the first one, the things that we saw in the Q1 are very specific What we'll see in the next series of quarters. And so those kind of stand on their own and it's not something that gets built on from there.

Speaker 3

Yes. And as you look at the efficiency and I think hopefully this was implied in what we the guidance we gave. But we're executing well On the efficiency program that we've got, and as I've said a number of times over the last couple of quarters, it's not a static program. Like this is something that We're embedding in the DNA of how we run the place and it continues to evolve and we feel good about executing on that.

Speaker 6

Okay. And then on the capital side, I know the CET1 declined of 90 basis points this quarter. You also mentioned the SEB surcharge could increase. You did flag the lower levels of buyback expected for the Q2. Maybe can you talk about your thoughts on capital return beyond the Q2, Just given how things are shaping up and your earnings outlook, so I'm just going to get updated thoughts there.

Speaker 6

Thanks.

Speaker 2

Yes. I'll start, Mike, and then you can chime in. I think what we're just trying to do is just it's we do have the reality of The impact on OCI during the quarter and so you see where CET1 is. Our quarter Our dividend is about $1,000,000,000 a quarter or so. So we do have plenty of room inside there for Any other further changes to OCI or the ability for us to grow RWA, which We want to do as loan growth continues to show the demand that we're seeing.

Speaker 2

And so I think just where we are Typically in the Q2, it will depend on where rates come out. And then beyond that, we'll still obviously, we're going through CCAR, But we still should have capacity to figure out what we want to do with the excess capital that the company generates.

Speaker 3

Yes. And as earnings capacity grows, as NII grows and we go through the year and we execute on our efficiency program, there's And we're still operating under the asset cap. There's I think you'll see us be prudent, But we've got plenty of flexibility as we look through the rest of the year.

Speaker 6

Okay, great. Thanks for taking my questions.

Operator

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

Speaker 7

Great. Thanks. Good morning. Hey, just a couple of follow ups on the cost side. So Mike, The business sales from last year and kind of the stranded costs and the transition agreements, Can you walk us through again, how much of that was in the Q1?

Speaker 7

And then how does that kind of decline? And is that also built into your Full year expectation for the cost numbers?

Speaker 3

Yes. So what we said, Ken, as you look at the Q1, it's about And the remainder and so it's about $300,000,000 of that was from the ongoing run rate of the businesses, about $100,000,000 was a charge we took last year for the student loan business. But And the remainder falls either under the TSAs which are in place today and likely run most of the year if not into early next But remember there's revenue on the other side of that. And then you have the stranded costs. So the numbers we laid out at the end of the Q4 last year haven't changed.

Speaker 3

And as the TSA roll off, we'll do our best Highlight that if it's meaningful and then we're going to continue to work on the stranded costs and get them out, But that will take a little bit of time as we said last quarter.

Speaker 7

Right. Okay. And then 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 M, I'm wondering if you can just help us understand how much the EPBO sales took out of NII and are you still expecting those to go out through the year? And then how do you expect Premium M to trend from here?

Speaker 7

Thanks, Mike.

Speaker 3

Yes. And the combo of PPP loans and EPBOs came down sequentially or linked quarter about $178,000,000 and that was the impact On revenue there and NII. And so we'll reiterate that in the Q when it comes out. As you look at premium amort for mortgage backed, you can look at the slide for reference when you have time. I know it's a busy day today, but it came down Roughly a little over $100,000,000 $110,000,000 $15,000,000 decline in the quarter.

Speaker 3

And that will continue to decline as prepays slow throughout the year.

Operator

So it's come down quite a

Speaker 3

bit since where we were last year.

Speaker 7

Okay. Thanks, Mike.

Operator

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

Speaker 8

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

Speaker 3

Yes. As you know, predicting investment banking fees and market fees is fraught with lots of issues. But I think like the it's clear that on the Investment Banking side, some of the capital markets, on the equity side, it slowed quite a bit this year given some of the volatility we've seen. Our pipeline really hasn't Change much is still pretty strong for where we stand coming into the quarter. And so some of that realization of that pipeline is just somewhat market And dependent on some deals timing of some of the deals closing.

Speaker 3

So we'll see. The market revenue markets revenue is somewhat dependent on the volatility that we see and the demand we see. And so I think as others have We've gone through this. We will benefit from some of that as we go through it, but that's hard to predict exactly where we'll end up. And then on the Norwest Venture, Look, if you go back a number of years and you look at, there's some number there's some like stability to that line when you look at Over the last 3, 4 years, I think when you look at some of what happened this quarter, we did have a bunch of realized Like business being sold or going public in 1 or 2 cases of some of the investments.

Speaker 3

And That was really good to see that that's still continuing despite some of the market volatility. And I think we'll see how it goes. I think we won't It's hard to imagine we'll see some of the peaks that we saw last year in that revenue line item, but I do expect we'll continue to Yes, see some good performance across those businesses.

Speaker 8

Okay, thanks. And also on the NII, any comments you could make about your expectations for the cadence of the ANII improvement throughout the year and maybe a little bit of what you're baking in on Premium M and Maybe how much benefit you get from on a spot basis like a hike of 25 or 50 bps, just any framework there? Thanks.

Speaker 3

Yes. So a lot of it's going to be dependent on how fast the Fed moves. And as you know, when the Fed moves, the impact of that is immediate. You start realizing that the day after. And so obviously the expectations there have changed quite a bit.

Speaker 3

So That'll be the case. I think in the queue, we give you the shock numbers on 100 basis And those are pretty close to what you should expect for the first few rate rises in terms of the impact. And again, it's pretty immediate for most of us.

Speaker 8

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

Speaker 3

Yes. It has to, yes. I mean, absolutely. It will continue to come down as see rates go up and prepaid slow. Sorry about that.

Speaker 3

But yes, I think you'll start to see that come down. Will it I think it will be it's a little bit dependent upon again how things progress, but it's not unreasonable to think as we look at the next quarter that it's Somewhere in the ballpark of what we saw from on a linked quarter basis this quarter.

Speaker 8

Got it. I guess I was wondering did you improve the assumptions for that? Is that part of the NII upgrade or is that more just Great. Or is that more just rates? Yes.

Speaker 3

Okay. A little bit better. That's baked into the increase in NII that we gave, John.

Speaker 4

Okay. Thank you.

Operator

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

Speaker 9

Good morning. I guess first question, Charlie, you've in the past talked about the 15% ROTCE as Needing the asset capital lift and some level of higher rates, we're getting a lot more in terms of higher rates than we expected 6 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 4 to 6 quarters even without the asset cap being lifted?

Speaker 2

I don't want to talk about a timeframe yet because I think what we've consistently said and we'll stick to that is, as we'll get to 10% And then we'll talk a little bit more about the 15% and try and hone a little bit more on timing. But I do think it is Fair to assume that the rate rises that we're seeing

Speaker 9

are more

Speaker 2

than we would have thought was necessary to get to 15%. But, so I think the question of the asset cap not still being with us, I think that's just that is the reality. And so it's quite possible that The rate rises will be more of a benefit than we would have hoped in terms of offsetting that, but I just think we should just wait until we get to 10%. But certainly, these rate rises that we're seeing in the asset sensitivity that we have Are certainly a meaningful positive for us and more than we would have expected.

Speaker 9

Appreciate that response. And Just one quick question on credit, Mike. When we think about another quarter of sizable reserve delays, 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 losses where they are today versus I think at day 1 CECL was about 95 basis points. Just any thought process around how you're thinking through that would be helpful.

Speaker 2

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

Speaker 2

We put different probabilities on different things. And the way 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 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 the slowing economy. So I would say, overall, I don't sitting here today, if you were to look at our 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.

Speaker 2

But we feel better about some of the assumptions we made relative to COVID and we've added some assumptions relative to inflation. So I think net net net that's what drives the reduction in terms of where we are. And I still think we feel very comfortable And hopefully you're at the more conservative end of what can come out of the CECL calculation.

Speaker 9

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

Speaker 2

Yes, I think it's all dependent on the macro at this point. CECL requires you to take a look at based upon what the where the full amount of the losses embedded in the portfolio It gets better, reserves will come down. If it gets worse, they'll go up. And if it stays the same, it'll be along there.

Speaker 9

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.

Speaker 10

Hi, good morning. Hi, Betsy. 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 we saw some declines in resi mortgage On first and second lien and also on the auto side.

Speaker 10

And I just wanted to get a sense and also on C and I, Right. So I just wanted to get a sense what was playing into that Q on Q? And then how quickly that could revert As we go through this year.

Speaker 3

Yes. 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 The impact of the EPBO loans and so they're coming the impact of those coming down. So that creates a little bit of noise, I think, there relative The yield there.

Speaker 3

As you look at the rest of the on the C and I book, I'm going to get the Directionally as a percentage, but it's call it 2 thirds of the C and I book in that neighborhood is floating rate, Maybe plus or minus a little bit there. But the and so that starts to react pretty, Obviously, direct pretty quickly to rates moving. And in any given quarter, you see a little bit of noise On that yield, but you'll start to see that react as rates go up.

Speaker 10

Okay. It's not like it's hedged out and that's Why we saw what we saw QQ? No. Okay. And then the other message I'm getting from you this morning is that This rate improvement you're expecting to drop to the bottom line, is that fair?

Speaker 3

Well, I think we reiterated our expense guidance for the year and NII is going to

Speaker 2

be a lot better. Just Betsy, what's in your question? I'm not sure I understand.

Speaker 10

Well, you're getting an uptick in rates. And given the fact that your guidance on Expenses is holding steady. It seems like you're going to drop all that rate hike to the bottom line.

Speaker 2

Well, I mean, yes, we're going to make more money on NII. We Mike went through the specifics on how non interest income will likely come down, but not obviously not nearly as much as the benefit that we'll get As you look out over NII and charge offs still will remain at low levels for the future even though those will go up at some point. And yes, expenses will continue to come down for us to meet that 51.5 number. So?

Speaker 10

Yes. I mean, it feels like it's at least a mid singles uptick on consensus EPS. That's what it feels like to me at least. I mean, I know that if I drop all the NII to the bottom line, I get something closer to a high singles uptick on consensus EPS. But Again, just make sure

Speaker 2

you look at, I mean, we might try to lay out a little bit of what's going to happen on non interest income. And again charge offs are at all time lows. You see the delinquency numbers. So unless there's something on the commercial side or the wholesale side that we're not aware of, It's we feel that's one of when we talk about how we feel, I think it's the economy is the economy. We are positioned Well for this kind of environment, but we also think people should just make sure that they're conscious of the movement in all the line items.

Speaker 10

And then on the customer remediation charge that you This quarter, I guess that's the other kind of question I've been getting is, it's one timey, but it feels like it's happened a lot. Yes. How much more is left?

Speaker 2

It's really hard to answer and I understand the frustration and I would say We have to make sure that when we look at these remediations, they're Align with what makes sense for the customer and that we've captured all the portfolios. And some of these remediations require us And so we're not going to say that there's no more, but they're very case specific. And at some point, they will be behind us, but have to do what we have to do and at least in the big scheme of things relative to the benefits that we'll see from things like NII, these aren't overwhelming and We understand how this fits into the guidance that we've given on Full year expenses.

Speaker 10

Yes. Okay. Thank you.

Operator

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

Speaker 7

Hi.

Speaker 11

I guess just following up on the regulatory line of As usual, I'm not going to ask some questions that are tough to answer. But, look, you've acknowledged you're making significant progress. The regulators have You're making significant progress. The fundamentals are clearly moving in the right direction in a meaningful way. But in the prepared remarks, you still say, you need to continue to close these gaps Over the next several years.

Speaker 11

And I guess the question is, like is this just cautionary language or are there still things that You are implementing on kind of a daily and ongoing basis to address some of the legacy issues. I guess I thought you had implemented

Speaker 2

Yes. 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. But we are as you once you develop the framework, the implementation of the frameworks That takes a significant amount of time. We continue to do that.

Speaker 2

And as we Develop stronger controls inside the company, we will potentially find things that then have to get Fixed and remediated because this is many years of work that we're Doing at this point. And as the regulators look at the amount of time that it takes to do it, At the things that we find as we put these controls in place, and just some of these legacy things that continue to remain out there, I just think It's prudent that we expect to have things. I think we say it's possible or likely, but there was something specific we would say it. But I think it is that's just that's the reality of the situation that we're on. And so It is where we find ourselves is, and I'll speak for ourselves, not the regulators.

Speaker 2

We are have made significant progress from where we were when we got here, but there is still a significant amount more work to do.

Speaker 11

Okay. And then just a follow-up on a different topic. And apologies if I missed it, but You did talk about slowing buybacks in the Q2, partly raised, partly loans and obviously you've bought back a lot this quarter. Did you give the magnitude that you expect to buyback or remind us your targeted capital at least until the next fee card comes out? Thank you.

Speaker 3

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

Speaker 11

Okay. Thank you.

Operator

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

Speaker 10

Hi, good morning. My questions have been asked and answered. Thank you.

Speaker 3

Thank you. Thanks, Eric.

Operator

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

Speaker 12

Yes. 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, servicing was kind of viewed as a balance to origination. When originations didn't do well, servicing would do well. But that hasn't been the case recently in your recent history.

Speaker 12

And so can you talk about how you're managing it and why there isn't a balance to those two pieces?

Speaker 2

Yes, I'll start. This is Charlie, Mike, and then you can pipe in. I think we think about our mortgage business in the context of the whole company, NADA is a separate independent entity that has to stand by itself. And so when we think about the interest rate risk position of The entire company, that's where we think about what potentially happens on the production side versus what happens in the MSR. The management of the MSR is difficult.

Speaker 2

It's got some very different types of risks embedded in it. And if all you did was look at those 2 as offsets, you could be kidding yourselves as to what the value of the servicing is. And so, as I said, net net net, when we look at the position of the company, I would look at the reduction of Mortgage banking income not being offset by the MSR, but being offset by the rest of The benefit that will get as a company NII.

Speaker 11

And just as a follow-up, when

Speaker 12

you gave guidance about a material

Speaker 2

As a whole, think

Speaker 3

of the mortgage banking income line as what we were referring to.

Speaker 2

And remember included in there is the fact that the MSR is fairly well hedged. So it's basically it's the whole, but it's also what's really driving it is origination.

Operator

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

Speaker 13

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 that capacity is coming out of the system?

Speaker 3

Well, I think as you think about the industry as a whole, it's hard, Troy, to look at any specific metrics But I think where you're going to see that first is likely gain on sale margins as people start to normalize as Excess capacity comes out, right? So I think that's probably one of the areas I would look at. Yes.

Speaker 2

And listen, I mean, people just everyone in the industry looks around it. The amount of volume being down substantially, they look at the amount of expense that they have. People then rationalize the expense that they have and that naturally changes the competitive dynamics about where people are pricing. So 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.

Speaker 13

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

Speaker 3

Well, we don't disclose the margin itself as you sort of look forward. But Normal varies, right, as you sort of look through the cycle in the mortgage business. And so I think we're certainly, If you start thinking about primary, secondary spreads, that's one indicator of sort of where gain on sale margins We'll go I think and we're now back to what is likely more historical levels right around 100 basis I think as excess capacity goes out, like you'll start to see the gain on sale come back up. So I think it's hard to say exactly what normal will look like there as we go through this cycle.

Speaker 13

Okay. And then just as 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. Is there can you give us some color what is making you think that way?

Speaker 3

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

Speaker 13

Great. I always appreciate the color. Thank you.

Speaker 3

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

Operator

Thank you for your

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