Wells Fargo & Company Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 14, 2022

Key Takeaways

  • Despite reporting net income of $3.5 billion ($0.85/share), Wells Fargo incurred $2 billion in operating losses (≈$0.45/share) for litigation, remediation and regulatory matters tied to historic issues.
  • Rising interest rates drove net interest income up 36% year-over-year, while expenses excluding those operating losses declined for the sixth straight quarter on ongoing efficiency initiatives.
  • Credit performance remained strong with just 17 bps of net charge-offs and continued low non-performing assets, though management is closely monitoring inflation-sensitive industries and expects losses to normalize over time.
  • Wells Fargo is prioritizing its risk and control framework, allocating significant resources to remediate legacy issues and rolling out customer-friendly programs (extra-day overdraft grace, early payday, new short-term credit product).
  • Capital remained solid with a 10.3% CET1 ratio (110 bps above requirements); the dividend was raised 20%, and management plans to present 2023 guidance on expenses, net interest income and its path to a 15% ROTCE in January.
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Earnings Conference Call
Wells Fargo & Company Q3 2022
00:00 / 00:00

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Operator

Welcome, and thank you for joining the Wells Fargo 3rd quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star 1. If you would like to withdraw your question, press star 2. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

John Campbell
John Campbell
Director of Investor Relations at Wells Fargo

Good morning. Thank you for joining our call today, where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, will discuss 3rd quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our 3rd quarter earnings materials, including the release, financial supplement, and presentation deck, are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website.

John Campbell
John Campbell
Director of Investor Relations at Wells Fargo

I will now turn the call over to Charlie.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Thanks, John, and good morning, everyone. I'll make some brief comments about our 3rd quarter results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review 3rd quarter results in more detail before we take your questions. Let me start with the 3rd quarter highlights. Our solid business performance this quarter was significantly impacted by $2 billion or $0.45 per share in operating losses related to litigation, customer remediation, and regulatory matters, primarily related to a variety of historical matters. As you know, we've been and remain focused on increasing our earnings capacity and see the positive impact of rising interest rates driving strong net interest income growth and our continued focus on improving operating efficiencies, resulting in lower expenses, excluding operating losses.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Credit quality remains strong, and we continue to invest in our technology platforms, digital capabilities, and delivering additional products to our customers and clients. While we're closely monitoring trends with economic conditions expected to weaken given inflation, geopolitical instability, energy price volatility, and rising interest rates, our customers continue to be resilient with overall strong credit performance and solid cash flow. When looking at simple averages across the entire consumer portfolio, deposit balances per account decreased from the 2nd quarter, but were still higher than a year ago and remained above pre-pandemic levels. However, we continue to closely monitor activity by segment for signs of potential stress and for certain cohorts of customers. We've seen average balances steadily decline and are now below pre-pandemic levels, and their debit card spend continues to decline.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

This is a continuation of what I referenced last quarter, but it's important to note that this remains a small percentage of our total customer base. Overall, our consumer deposit customers' health indicators, including cash flow, payroll, and overdraft trends, are still not showing elevated risk concerns. Debit card spending remains significantly above pre-pandemic levels and was up 3% in the 3rd quarter compared to a year ago, consistent with the 2nd quarter increase. Entertainment and fuel spending had the largest increases from a year ago, but the recent decline in fuel prices drove fuel spending to decline compared to the 2nd quarter. Apparel and home improvement spending declined from both a year ago and 2nd quarter. Credit card spend remained strong in the 3rd quarter, up 25% from a year ago, with double-digit increases coming across all spending categories.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Spending was up modestly on a linked quarter basis. Remember, the significant portion of this growth is from our new products, which continue to have strong credit profiles. Period-end and commercial loan balances were stable compared to the 2nd quarter, with continued growth in commercial banking offset by declines across our businesses in corporate and investment banking. Credit performance remained strong with net charge-offs and non-accrual loans continuing to decline from exceptionally low levels. Clients do tell us that they continue to be impacted by persistent inflation, rising interest rates, and tight labor market. While credit quality remains strong, we're actively monitoring inflation-sensitive industries and taking proactive actions where warranted. Now, let me update you on the progress we're making on our strategic priorities.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

We continue to devote significant resources to implementing an appropriate risk and control framework across the company, and this remains our top priority. We continue to make progress and are executing on our plans, but significant work remains. As a reminder, though I'm confident in our ability to complete the work, it remains a significant body of work and the primary focus of the company. We have set high standards for success, and given the long-standing nature of much of our work, we have said that we remain at risk of setbacks until it is complete. Expenses in the quarter reflect these ongoing risks and our efforts to resolve them.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

As we continue our work to put our historical issues behind us and to address issues that are identified as we advance our risk control infrastructure work, outstanding issues still remain that will likely result in additional expense in the coming quarters, which could be significant. We are working to close these as quickly as possible, and we remain committed to doing right by our customers and working closely with our regulators and others to resolve these matters. We recognize the importance of moving forward, and the expenses in the quarter are representative of these efforts. At the same time, we're implementing changes to better serve our customers and investing in our businesses to help drive growth.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

As part of the announcement we made earlier this year to limit overdraft-related fees and give customers more options to achieve their financial goals, we implemented extra day grace period in the 3rd quarter, which provides consumer customers an extra business day to turn negative balances and avoid overdraft fees. We also began to roll out early payday, which provides consumer customers who receive eligible direct deposits, the ability to access funds up to two days earlier than scheduled, further reducing the potential to incur overdrafts. Notably, while this enhancement was rolled out in only 6 states in the 3rd quarter, during the first two weeks of offering this enhancement, we provided customers early access to $2 billion in funds from 1.3 million eligible direct deposits.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

We're on track for a 4th quarter rollout of an easy-to-access short-term credit product that will give qualifying customers another option to meet their personal financial needs. These actions build on services that we've introduced over the past several years, including offering an account that does not charge any overdraft fees. We now have over 1.6 million of those Clear Access Banking accounts, up 57% from a year ago. As I mentioned last quarter, we developed a new integrated banking, lending, and investment offering that is geared towards the more complex financial needs of our affluent clients called Wells Fargo Premier. During the quarter, we introduced Wells Fargo Premier across our entire branch footprint, initiated a branded digital experience, and launched marketing programs to help affluent customers learn more about how we can better serve them.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

We'll continue to build the Wells Fargo Premier offering in the coming quarters. In the 3rd quarter, we continued to launch new APIs, providing our commercial and corporate clients more flexibility in helping them drive efficiencies. For example, we launched a new real-time payment API, allowing clients to send a digital request to a payer that can be approved to easily send a real-time credit transfer. We also launched a virtual card API, which enables clients to create and configure virtual cards for B2B vendor payments and purchases. In our CIB Markets businesses, we're accelerating our investment into our electronic trading capabilities across multiple asset classes to better meet the evolving needs of our clients, which is helping to drive strong gains in trading volumes.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

We're selectively adding talent in our investment banking coverage and product areas as we focus on leveraging our strong existing relationships to build our fee-based businesses. We also continue to make progress on the environmental, social, and governance work that is underway at Wells Fargo. In the 3rd quarter, we published our latest ESG report, which highlights the progress we made in 2021 on our ESG efforts. We consider this work a sustained long-term commitment and believe Wells Fargo is well-positioned to make a difference. We issued our second sustainability bond in the amount of $2 billion that will finance projects and programs supporting housing affordability, economic opportunity, renewable energy, and clean transportation.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

During the 3rd quarter, we officially launched a new grant program in Houston, San Diego, and Milwaukee to help improve racial equity in homeownership, and we have more markets coming before the end of this year. This is part of the $60 million commitment we made earlier this year through the Wells Fargo Foundation to Wealth Opportunities Restored through Homeownership, or WORK. This effort aims to create 40,000 homeowners of color across 8 markets by the end of 2025. We announced a $1 million donation to provide urgent relief to Florida following the aftermath of Hurricane Ian. In addition, customer accommodations and employee support are available to those directly impacted by the storm.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

In summary, continued high inflation has kept the Federal Reserve aggressive with rate hikes, leading the housing market to slow rapidly, and the heightened uncertainty about the economic outlook and geopolitical events caused the financial market to be volatile. However, labor demand remains robust, consumer balance sheets remain healthy, and customers have capacity to borrow. Wells Fargo is positioned well as we will continue to benefit from higher rates and ongoing disciplined expense management. Both consumer and business customers remain in a strong financial condition, and we continue to see historically low delinquencies and high payment rates across our portfolios. We're closely monitoring risks related to the continued impact of high inflation and increasing rates, as well as the broader geopolitical risks. We do expect to see increases in delinquencies and ultimately credit losses, but the timing remains unclear.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

As we look forward, we remain bullish on our business opportunities. Our higher operating margins and strong capital ratios have prepared us for a wide range of macroeconomic scenarios. In the 3rd quarter, we increased our common stock dividend by 20%, and our CET1 ratio was 10.3%, 110 basis points above our current regulatory minimum, including buffers. We will continue to prudently manage our capital levels to be appropriately prepared for slowing economy and market volatility. Finally, I know many of you are interested in our 2023 expectations and on our next earnings call, we plan to provide our 2023 expense and net interest income outlook, as well as more color on our path to over-the-cycle 50% ROTCE.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

I will now turn the call over to Mike.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Thank you, Charlie, and good morning, everyone. Net income for the quarter was $3.5 billion or $0.85 per diluted common share. As Charlie highlighted, our results included $2 billion or $0.45 per share of accruals, primarily related to a variety of historical matters. These accruals drove our total expenses higher. However, if you exclude operating losses, our expenses would have declined as we continue to execute on our efficiency initiatives. Revenue grew in the 3rd quarter, driven by higher net interest income, while non-interest income also increased from the 2nd quarter. Our effective income tax rate for the 3rd quarter was 20.2%. We highlight capital on slide 3.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Our CET1 ratio is 10.3%, down 6 basis points from the 2nd quarter as the 21 basis point decline from AOCI, as well as the impact from dividend payments, was nearly offset by our 3rd quarter earnings. Our CET1 ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to 9.2% at the start of the 4th quarter as our new stress capital buffer took effect. As a reminder, our G-SIB surcharge will not increase in 2023. We did not buy back any common stock in the second or 3rd quarters, and we will continue to be prudent regarding the amount and timing of any share repurchases. Turning to credit quality on slide five. Credit performance remained strong, with only 17 basis points of net charge-offs in the 3rd quarter.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

However, as expected, losses are slowly increasing from historical lows, and we expect them to continue to normalize towards pre-pandemic levels over time as the Federal Reserve continues to take actions to combat inflation. We are closely monitoring our portfolio for potential risks and are continuing to take some targeted actions to further tighten underwriting standards. Commercial credit performance remained strong across our commercial businesses, with only $6 million of net charge-offs and net recoveries in our commercial real estate portfolio for the third consecutive quarter. We also had net recoveries in our consumer real estate portfolios. However, total consumer net charge-offs increased $72 million from the 2nd quarter to 40 basis points on average loans driven by an increase in net charge-offs in the auto portfolio.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Higher loss rates on certain auto loans originated primarily in the latter part of 2021 contributed to the linked quarter increase in charge-offs and delinquent loans in the auto portfolio. Lower loan balances also impacted the loss rate. We started taking credit tightening actions earlier this year, which have improved the quality of 2022 originations. As a result of these actions, increased pricing competition, and continued industry supply chain constraints, the 3rd quarter origination volumes were down over 40% compared to a year ago. Non-performing assets declined again in the 3rd quarter and were down $411 million or 7% from the 2nd quarter and down 20% from a year ago.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

While commercial non-accruals continued to decline, lower levels of consumer non-accruals were the primary driver of lower non-performing assets due to a decrease in residential mortgage non-accrual loans from the impact of customers' sustained payment performance after exiting COVID-related accommodation programs. Our allowance for credit losses increased $385 million in the 3rd quarter, primarily reflecting loan growth in a less favorable economic environment. On slide 6, we highlight loans and deposits. Average loans grew 11% from a year ago and 2% from the 2nd quarter. Period-end loans increased for the 5th consecutive quarter, but growth slowed as expected, with commercial loan balances holding relatively stable from the 2nd quarter, while consumer loans grew, driven by credit card and first-lien residential mortgage loans, partially offset by continued declines in our auto portfolio. I'll highlight the specific growth drivers when discussing our operating segment results.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Average loan yields increased nearly 100 basis points from a year ago and 76 basis points from the 2nd quarter, reflecting the higher rate environment. Average deposits declined 3% from both a year ago and the 2nd quarter, with declines across our deposit gathering businesses. Compared with the 2nd quarter, Wealth and Investment Management had the largest decline by dollar amount as clients looked for higher yielding alternatives. Declines in our commercial businesses were driven mostly by outflows of non-operational deposits, which can be more price sensitive and are a less stable source of funding. Outflows in consumer and small business banking were driven by continued customer spending and increased outflows from customers seeking higher yielding products. Our average deposit cost increased 10 basis points from the 2nd quarter to 14 basis points.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Pricing has been consistent with our expectations, with deposit costs holding relatively stable in consumer banking and lending while trending higher across other businesses. As rates continue to rise, we would expect deposit betas to continue to increase and customer migration from lower yielding to higher yielding deposit products to also increase. Turning to net interest income in slide seven. Third quarter net interest income increased $3.2 billion or 36% from a year ago and $1.9 billion or 19% from the 2nd quarter. The growth from the 2nd quarter was primarily driven by the impact of higher rates, which increased earning asset yields and reduced premium amortization from mortgage-backed securities. We also benefit from higher loan balances and one additional day in the quarter. These benefits were partially offset by higher funding costs.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

In the first nine months of this year, net interest income was up 19% compared with a year ago. We currently expect full year 2022 net interest income to be approximately 24% higher than a year ago, with 4th quarter 2022 net interest income expected to be approximately $12.9 billion. Turning to expenses on slide 8. The increase in non-interest expense from both a year ago and from the 2nd quarter was due to the higher operating losses that I highlighted earlier. Excluding operating losses, other non-interest expense was down 5% from a year ago as we had lower revenue-related compensation, expenses related to divestitures came out of the run rate, and we continue to make progress on our efficiency initiatives. Excluding operating losses, our expenses would have been down on a year-over-year basis for six consecutive quarters.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Another way you can see the impact of our efficiency initiatives is through lower headcount, which has declined for nine consecutive quarters and was down 6% from a year ago. We've also reduced professional and outside services expense by 10% and occupancy expense by 4% during the first nine months this year. The higher level of operating losses in the 3rd quarter will cause us to exceed our $51.5 billion expense outlook for 2022, which included $1.3 billion of operating losses for the full year. We currently expect our 4th quarter other expenses, excluding operating losses, to be approximately $12.3 billion. As Charlie highlighted, outstanding litigation, customer remediation, and regulatory matters still remain and will likely result in additional expense in the coming quarters, which could be significant.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Turning to our operating segments, starting with consumer banking and lending on slide 9. Consumer and small business banking revenue increased 29% from a year ago, driven by the impact of higher interest rates and higher deposit balances. Deposit-related fees were impacted by the overdraft policy changes we rolled out earlier this year, which eliminated non-sufficient funds and some other fees. The extra day grace period launched in the beginning of August, and early payday began in select dates in mid-September, so we would expect our deposit-related fees to decline further in the 4th quarter. Industry mortgage rates have increased over 300 basis points since the beginning of the year and ended the quarter at the highest level since 2007, driving weekly mortgage applications as measured by the Mortgage Bankers Association to a 25-year low at quarter end.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

As a result, our home lending revenue declined 52% from a year ago, driven by lower mortgage originations and gain on sale margins, as well as lower revenue from the re-securitization of loans purchased from securitization pools. While the mortgage market adjusts to lower volumes, we expect it to remain challenging in the near term, and it's possible that we have a further decline in the mortgage banking revenue in the 4th quarter when originations are seasonally slower. We continue to remove excess capacity to align with the reduced demand and expect these adjustments will continue over the next couple quarters. Credit card revenue was up 8% from a year ago due to higher loan balances, which benefited from higher point-of-sale volume and new product launches. Auto revenue declined 5% from a year ago, driven by loan spread compression and partially offset by higher loan balances.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Personal lending was 9% from a year ago due to higher loan balances driven by growth in origination volumes. Turning to some key business drivers on slide 10. Mortgage originations declined 59% from a year ago and 37% from the 2nd quarter, with declines in both correspondent and retail originations. Refinances as a percentage of total originations declined to 16% in the 3rd quarter. Average home lending loan balances grew 2% from the 2nd quarter, driven by growth in our non-conforming portfolio. I already highlighted the drivers of decline in auto originations, so turning to debit card. While debit card spend increased 3% from a year ago, spending declined 2% from the 2nd quarter. As Charlie highlighted, credit card point-of-sale purchase volumes were up 25% from a year ago, with the largest percentage increases in fuel and travel.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Average balances were up 21% from a year ago, reflecting the strong point-of-sale volume which also benefited from the launch of new products with new accounts up 11%. We will continue to remain disciplined in our underwriting of new credit card accounts. Turning to commercial banking results on slide 11. Middle market banking revenue increased 54% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances. Asset-based lending and leasing revenue increased 27% from a year ago, driven by higher net gains from equity securities, higher loan balances, and higher revenue from renewable energy investments. Non-interest expense increased 9% from a year ago, primarily driven by higher operating costs and operating losses. Average loan balances have grown for 5 consecutive quarters and were up 17% from a year ago.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Line utilization rates were fairly stable relative to the 2nd quarter. Inflation and our customers' continued efforts to rebuild inventory as supply chain challenges remain drove the growth in asset-based lending and leasing. Loan growth in the middle market banking continued to come from larger clients, which more than offset declines from smaller clients. Turning to corporate investment banking on slide 12. Banking revenue increased 28% from a year ago, driven by stronger treasury management results reflecting the impact of higher interest rates as well as higher loan balances. Investment banking fees declined from a year ago, reflecting lower market activity. Compared with the 2nd quarter, the increase in investment banking fees was due to the write down of unfunded leveraged finance commitments last quarter.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Commercial real estate revenue grew 29% from a year ago, driven by higher loan balances, the impact of higher interest rates, as well as improved commercial mortgage-backed securities gain on sale margins. Markets revenue increased 6% from a year ago, reflecting volatility and strong client demand in equities, rates and commodities, and foreign exchange trading. Average loans grew 19% from a year ago with broad-based growth across our businesses to fund clients' working capital needs, but the pace of growth slowed in the 3rd quarter with average balances up 3% in period alone than 3% in 2nd quarter . On slide 13, Wealth and Investment Management revenue grew 1% from a year ago as the increase in net interest income driven by the impact of higher rates offset the decline in asset-based fees driven by lower market valuations.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

As a reminder, the majority of WIN advisory assets are priced at the beginning of the quarter, so 3rd quarter results reflected the lower market valuations as of July 1st. While the S&P 500 and fixed income indices declined again in the 3rd quarter, the decrease was not as steep as the 2nd quarter decline. While there'll be another step down in asset-based fees in the 4th quarter, it will be less significant than the 3rd quarter decline. Expenses decreased 4% from a year ago due to lower revenue-related compensation. Average loans increased 3% from a year ago, driven by continued momentum in securities-based lending. Slide 14 highlights our corporate results. Both revenue and expenses were impacted by the divestitures last year of our corporate trust services business and Wells Fargo Asset Management.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

These businesses contributed $459 million of revenue and accounted for approximately $305 million of expense in the 3rd quarter of 2021. Revenue also declined from a year ago due to lower equity gains in our affiliated venture capital and private equity businesses. Given current market conditions, we don't expect equity gains to improve in the 4th quarter. Expenses increased from a year ago due to higher operating losses. In summary, although the high level of operating losses we had in the quarter significantly impacted our results, the underlying results in the quarter continue to reflect our improving earnings capacity. We had strong net interest income growth from rising rates, and if you exclude operating losses, our expenses would have declined as we continue to execute on our efficiency initiatives. Both our credit performance and capital levels remain strong.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

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 2 to remove yourself from the question queue. Once again, please press star 1 and record your name if you would like to ask a question at this time. Please stand by for our first questions. Our first question for today will come from John McDonald of Autonomous Research. Your line is open, sir.

John McDonald
Senior Analyst at Autonomous Research

Thank you. Good morning, guys. Mike, I wanted to ask on the expenses. The first, in terms of the operating losses, I know it's tough to answer, but should we think of the op loss accrual this quarter as you reassessing what you might have to pay in the future, or you got, you know, hit with some stuff that you didn't expect and you've already paid up, you know? Is there some combination of those? How should we think about what happened this quarter with the op loss accrual?

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Hey, John, it's Charlie. Listen, I guess the way I would describe it is, I mean, like, I think you all know the accrual rules on when you accrue things are pretty clear based upon generally when you know something or have a pretty good sense that something is gonna be done and it's probable and you can put an estimate on it. As we've said, we've tried to be very, very transparent that we do have things that will be lumpy that could be significant and you know it's in our best interest to get as much behind us as quickly as we possibly can.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

It's what we've been trying to do both with our work, but also the financial impact of these things, and that's what you're seeing in the quarter.

John McDonald
Senior Analyst at Autonomous Research

Okay. Like, maybe, Mike, I could follow up on the non-op expense outlook for $12.3 in the 4th quarter. You know, price up from the $12.1 this quarter. Maybe just some context of what's driving that. Is it seasonality? Can we think of that jumping off point of the 4th quarter as, you know, the beginning of annualizing that for next year? What would be the, you know, roughly the puts and takes for thinking about next year from the 4th quarter? Thanks.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. No, thanks. Thanks, John. You know, I think when you think about the change from 3rd quarter to 4th quarter, it's really just some seasonal things. I think if you go back over a long period of time, you just see year-end accruals related to a bunch of different items that sort of end up in the 4th quarter. There's no story there other than that. You know, we continue to be on track on the efficiency work that we laid out at the beginning of the year, and so you'll see some of that come through those numbers as well in there.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

You know, as it relates to 2023, you know, as Charlie said in his remarks, you know, we'll lay that out in more detail in January.

John McDonald
Senior Analyst at Autonomous Research

Okay. Maybe a broader comment just on efficiency and where you are relative to, you know, your longer-term targets.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. No, I think we're right on track, you know, on the plan that we laid out, John. You know, we said we would deliver about $3.3 billion of impact in 2022, and that's, you know, we're on track to do that. You know, as Charlie and I have both said a number of times, you know, we're not done. I think there's still more opportunity. We're, you know, we're going through those conversations, you know, as we go through our budget process now, and continuing to unpick the onion around, you know, where there's more opportunity.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

I think that program will continue to evolve, but we still feel we've got more opportunity to drive incremental efficiency, and we're on track for the things we laid out.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

John, the only thing I would add, because I know it's on a lot of people's minds, is that there's, I mean, from our standpoint, there's nothing new in our thinking from what we've talked about last quarter. Both in terms of where the opportunities are and how we're thinking about the future. We just do think that it makes sense if, when we get to the end of next quarter when we talk about our path to a 15% sustainable through different cycles ROTCE. That's also an opportunity to, you know, talk more specifically about expenses and how that fits in, including what it looks like for next year. By that point, we will have finished our budget process.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

We'll understand all the puts and takes and be in a really good position to talk about it.

John McDonald
Senior Analyst at Autonomous Research

Got it. Okay, thanks.

Operator

Thank you. The next question will come from Scott Siefers of Piper Sandler. Your line is open.

Scott Siefers
Scott Siefers
Managing Director and Senior Research Analyst at Piper Sandler

Morning, guys. Thank you for taking the question. I just wanted to ask broadly on NII. Once the Fed stops raising rates, can you sort of discuss broadly how and for how long you could maintain positive NII momentum?

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Well, you know, Scott, I think there's a lot that needs to play out, you know, for us to answer that with, you know, any degree of accuracy, right? In terms of what we're seeing in the economy, loan growth, you know, what's happening with deposits and so forth. The only thing I would, you know, point out, that you do need to keep in mind as you think about it, is there will be a lag on deposit pricing. That happens in every cycle, happened in the last cycle and will happen again here. Once the Fed, you know, stops raising rates, you will see a lag before deposit pricing stops going up, and that's just normal and to be expected.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

You know, as it relates to overall NII at that point, you know, I think there's a lot of what-ifs that need to, like, go into that scenario. And as we all have seen, even over the last few days, some of those expectations continue to evolve. But I would keep in mind, as you think about that, the deposit pricing lag.

Scott Siefers
Scott Siefers
Managing Director and Senior Research Analyst at Piper Sandler

Yeah. Okay. Makes sense. Thank you. Now, just returning to the operating losses for a second, just to help put the $2 billion in 3rd quarter charges in context. Just, I guess, given the magnitude of charges that Wells had already taken, what, at this point, what is pushing those losses so high, and what could keep them high going forward? I guess I ask it within the backup, but I know, like, you guys weren't really there when these issues, you know, took place. Just given how high they've been for so many years, just curious, like, what's keeping them at such a level?

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yeah. Scott, this is Charlie. I'll take a shot at it and Mike, feel free to pipe in. Listen, I think you know again, if you go through, you know, things that we've said in the past and go through, you know, our disclosures, we, you know, we still have open regulatory matters that do relate to the past. We do have litigation that relates to a series of those things which, you know, we do, you know, cover a lot of it in our disclosures. The other thing which I just, you know, as we continue to make progress and move forward and build the control environment, we do find things ourselves that do relate to, you know, the environment that we had in the past, and those things have to be remediated.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

As I said earlier, you know, we would like to get, you know, both operationally and financially, these things done as quickly as we can. You know, the accounting rules dictate when it's appropriate to take the charges. We just again wanna try and, you know, be as clear as we can that we're not surprised. I mean, when I say, you know, we don't like the charge for sure. It is just the reality of the position that we're in to get these things behind us and tried to be clear in the remarks that this isn't the end of it. We would like to, you know, move as quickly as we can on everything that's remaining to get behind us.

Scott Siefers
Scott Siefers
Managing Director and Senior Research Analyst at Piper Sandler

Mm-hmm. Okay.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yeah. Mike

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

One thing overall, you know, and I think even with, you know, these costs and the charges, you know, we're continuing to make sure that we invest in the underlying businesses too. You know, I think Charlie highlighted a little bit of that in his remarks. You know, we've got to keep making sure that, you know, we're adding people where we need to. We're building out the capabilities where we need to. We've talked some about some of those opportunities in the past, but we are also doing that as well as executing on the efficiency agenda to make sure the earnings capacity of the company continues to get better.

Scott Siefers
Scott Siefers
Managing Director and Senior Research Analyst at Piper Sandler

Yes. Okay, perfect. Thank you, guys, very much. I appreciate it.

Operator

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

Ken Usdin
Ken Usdin
Managing Director at Jefferies

Thank you. Good morning, Charlie and Mike. Charlie, I wanna ask you a follow-up on your comments about, you know, protecting your capital in an uncertain environment. Going back to the CCAR when you correctly stated you've got a lot of excess room, a lot of flexibility. Just wondering how you expect that CET1 to traject relative to where you wanna keep it, and what does that mean in this environment for the prospects of doing share repurchase? Or do you just, you know, is it a build it and just, you know, keep it in the protected environment? Thank you.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. Maybe I'll start, Ken, and then Charlie can add anything. You know, I think you know, our thinking hasn't changed much since last quarter. You know, we don't feel like we need to build from here. You know, as you know, we've got about 110 basis points of cushion over our reg minimum and buffers together. I think as you sort of look at the environment we're in, we just wanna be, you know, continue to be prudent about, you know, how and when we do buybacks.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

I think, you know, even if you know, think about the 3rd quarter and look at the rate volatility we saw in the last three weeks of the quarter, and even in the last, you know, number of days of the 4th quarter now in the beginning, we've seen quite a bit of volatility happening. It's just.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Things that go into the calculus we do every quarter to look at where the risks and opportunities are and make sure that, you know, we're just being smart about managing it.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

The only thing I would add is I think, you know, as Mike said, you know, we feel very good about the growing earnings capacity of the company. Certainly as we sit and look forward based upon what we actually see, you know, we feel very good about the position that we're in. We just also, you know, and in those comments, you know, try and point out, you know, that, you know, when it comes to managing capital, we should be extremely conscious of what the risks are that are around us. There's swings in AOCI that have impacted, you know, many of us.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

There are, you know, these geopolitical risks out there which, you know, something could trigger something which could, you know, ultimately have a broader impact on the economy. Those are all reasons just, you know, given where we sit today to be, you know, more conservative on capital rather than less conservative. Combination of those things with, you know, our own issues just lead us to say, "Let's just see how those things play out." That, you know, for, you know, this environment that we're in is, you know, probably the best use of that capital.

Ken Usdin
Ken Usdin
Managing Director at Jefferies

Yeah. A follow-up just in terms of other uses of that capital. Just a question of, you know, you did build the reserve a little bit this quarter and alluded to the potential for a greater uncertainty. Just can you help us understand just where you live now in a you know scenario weightings in terms of your reserve? And Charlie, your point in your prepared remarks is just, you know, things might turn, but it's just unclear to say how. So how do you contemplate, how do we get a better sense of what that might mean for reserves and how your view on potential losses has changed?

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yes, I think that's a hard one to answer. I'd say, you know, when we go through the process to set reserves, I think we do what, you know, everyone else does with the CECL calculations, which is we have a series of scenarios that we look at, that are, you know, economically driven, based upon, you know, economists' view of what will happen to a series of, you know, variables that'll, you know, impact you know our credit. We then go through and figure out what we think the right weighting is for those depending on, you know, as we sit here in the environment, and then models produce a bunch of results.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

You know, there's just so many factors that go into it. You know, there's a lot of science behind it, but there's also, you know, judgment that sits on top of it relative to how you weight these things and, you know, whether the models are ultimately right. You know, we think that, you know, on a relative basis, just the way we think about things, you know, to the extent you can build, you be conservative, you try and be, but it's gotta be, you know, fairly formulaically driven. I would say as we sit here today, you know, we're not assuming we say differently. I think the comments that we're making about the risks in the environment factor into how we weight the different scenarios.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

We, you know, do have weightings to, you know, the, you know, the different downside scenarios and, you know, I think that's.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Probably as much as we can say.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

May I just add, you know, and we've said this now for the last couple quarters, you know, our. We've had a pretty significant weighting on the downside scenarios for a while and haven't changed that. You know, I think if you look at, you know, what we've built over the, you know, during COVID, I guess a couple years ago now, relative to where we are today, we have, you know, we're, you know, we hadn't, we haven't released all of that build that happened. So at this point, we still feel very comfortable with where we are.

Ken Usdin
Ken Usdin
Managing Director at Jefferies

Understood. Okay. Thanks, guys.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yeah. The only thing I wanna just be clear about, and that is, you know, again, you know, we try and be, and you have to be forward-looking. We try and be very realistic about what potential outcomes are. At the same time, you know, if our view deteriorates on, you know, the level of risk out there, you know, that could change. Getting back to the capital comment, I do think it's kind of weird that all, you know, that this all runs through the income statement and, you know, it's, you know, you know, for that level, it's hard to predict.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

From our perspective, you know, we have, you know, the way we think about reserving and the way we think about capital are, you know, very much in sync.

Ken Usdin
Ken Usdin
Managing Director at Jefferies

Right. Thanks again.

Operator

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

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

Hey, good morning. I guess just quick follow-up around credit. I think from a fundamental standpoint, one, are there any areas in particular, I think you've talked about seeing some weakness in auto lending in the past. Are there any areas within the portfolio seeing any signs of cracks on credit or where you're being a little bit more careful in extending new lending? Also if Charlie or Mike, you can talk about just your exposure within the C&I book to sort of financial sponsors, how your comfort level around that book, and whether any of that comes back to create some credit volatility over the coming quarters. Thank you.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Sure. I think, Ebrahim, I'll start on the last piece. I think you're referring to leverage finance, bridge, the bridge book. It's very immaterial in terms of any impact this quarter. Nothing, no story there in terms of, you know, anything significant in the quarter. As it relates a little bit more broadly on credit, you know, for the most part performing really well, right? If you go look in the commercial bank, you know, customers are still in really good shape on average. You know, same thing in the corporate investment bank. On the consumer side, you know, Charlie pointed out a lot of the health indicators still look really good. We're not seeing, you know, systemic stress.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

You're certainly seeing a little bit more stress on the lower end wealth spectrum, which isn't a big part of the portfolio for us. Overall, so far, so good in terms of the, you know, the performance to date.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Well, I would say, Ebrahim, that, you know, we're we spend a lot of time on the wholesale side looking at inflation sensitive industries, as I mentioned in my remarks, and just, you know, try and, you know, get ahead where we can. We don't see problems, but we're just trying to be very, very forward looking. On the consumer side, we are, we're just digging. We're digging through all of the information that we have to look for signs of stress. You know, I think if you were to change the scale and, like, blow the scales up significantly, you might, you know, you start to see, you know, very, very small impact on some payment rates.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

You know, we saw, you know, impacts to the lower end consumer several quarters ago, and those haven't progressed, you know, as quickly as we would have thought. You know, again, it's just, you know, we don't have our heads in the sand. You know, we sit here and you know, we listen to the Fed, you know, and take them, you know, at their word. You know, what they're doing is extremely powerful. You know, things will slow. You know, we're just trying to be prudent. The last thing I would just say is, you know, some of our products I would say we're tightening up on the edges.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Again, just to be prudent of, you know, some of the higher risk categories that have, you know, multiple risk layers to them. Not a big part of our production in any of our products, but just trying to, you know, be smart relative to, you know, who could be impacted, but at the same time, you know, continuing to be in the markets and providing credit.

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

Got it. Just a quick follow-up, Mike. What I was referring to on the C&I book is the disclosures around exposure to financials except ex banks. When I'm thinking about, like, asset management, real estate finance, anything there that we should worry about in a world where there's some uncertainty around how private equity holds up in this environment of higher rates? That's what I was sort of getting at.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

If you look at the Q, you know, there's some breakdown of those exposures, and you can see that. At this point, those are all performing really well, you know, both in the asset-backed finance space as well as the subscription finance space, and nothing to call out.

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

Got it. Thank you.

Operator

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

John Pancari
John Pancari
Senior Managing Director at Evercore ISI

Good morning. I know you mentioned that you're still seeing substantial opportunity on the efficiency side for improvement. On that end, can you talk about the gross cost saves? I know you increased the target from $8 billion-$10 billion early this year in January. Can you talk about you know the potential that you know could that number move higher yet again as you look at all the opportunities in front of you?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah, John, look, we'll, I'm sure we'll provide more guidance on that or more disclosure on that in January. I'll leave any specific remarks there. I just go back to, like, what, you know, what we've been saying. You know, we're not done on the efficiency journey. You know, as we execute on, you know, the stuff that's in front of us, we continue to find more opportunity really across most parts of the company. I think that'll continue to evolve.

John Pancari
John Pancari
Senior Managing Director at Evercore ISI

Okay, Mike, thanks. In terms of the mortgage expectation, I mean, you indicated that you could see some incremental downside pressure there. Can you maybe help us size up the magnitude that you could see in the 4th quarter in terms of an incremental decline?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. Well, I mean, if you look at the consumer banking and lending segment, you know, we've got the mortgage banking income there. It's only a little over $200 million for the quarter. So, you know, even a relatively substantial percentage decline is a pretty small dollar decline these days given the run rate. You know, but I think, you know, if you look at what happened this quarter, we probably came in a little bit better than what we guided in July. You know, spreads were a little bit better in August than what we had forecasted. But they came back down in September and so we would expect that to continue.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

While I think there could be some downside there, it's off a pretty low run rate at this point.

John Pancari
John Pancari
Senior Managing Director at Evercore ISI

Got it. Okay. Thank you. Just one more follow-up on the balance sheet. Sorry if you had pointed to this already, but in terms of the deposit, you know, the pressure on deposit balances, can you talk about maybe how we should think about potential incremental declines in deposits as we see the impacts of the rate hikes continuing to take hold?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Well, I think, you know, one, I think you're gonna continue to see, you know, pricing increase from here, as we have said now for a while. And so you'll see, you know, pricing go up as rates continue to increase. And then on the deposit side, you know, all of it's somewhat natural, right? Given, you know, the environment we're in. You know, as I pointed out in my remarks, we saw

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Business, which is, you know, clients moving to higher yielding cash alternatives. Now we're also seeing more broadly clients move into cash there in a couple areas where we've seen, you know, cash alternatives grow substantially, not just as they migrate away from deposits. That's a piece of it. I think on the rest of the book, you know, it's, you know, what we're seeing on the consumer side is a lot of spending, not as much people migrating away from us. Maybe there's a little bit of that, but it's really people out there spending.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

You know, on the corporate investment banks, which are gonna be your, you know, some of your most rate sensitive deposits, we're seeing, you know, the activity we expected to see, which is there are some clients, you know, moving into, you know, other alternatives. But we still see, you know, many clients staying in cash with us as well. I would expect that there's gonna be, you know, there could be some further declines as we go.

John Pancari
John Pancari
Senior Managing Director at Evercore ISI

Got it. Okay, thanks, Mike. Appreciate the call.

Operator

The next question comes from Erika Najarian of UBS. Your line is open, miss.

Erika Najarian
Erika Najarian
Managing Director at UBS

Hi, good morning. Just another question on expenses, if I may. You know, I guess the market - what the market is telling us today is that, you know, so long as the core expenses are, as expected, the market seems to be looking through, you know, higher OP losses, you know. And as we look forward, and Charlie and Mike, as you think about the budgeting process for next year, you know, I think the Street expects operating losses to be, you know, improving to be a strong contributor to, you know, expense improvements going forward, even off of that original $1.3 billion expectation. I'm just wondering, as you think about the budgeting, do you continue to contemplate, you know, adjustments on the core? Meaning, you know, cutting core earning cores.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Operating losses or expenses excluding operating losses, Erika?

Erika Najarian
Erika Najarian
Managing Director at UBS

I meant expenses excluding operating losses. I think your investors are expecting OP losses to be down meaningfully even from that $1.3 billion original number. I'm wondering if you're-

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yeah.

Erika Najarian
Erika Najarian
Managing Director at UBS

Continuing to contemplate on the core.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Let me take a shot at it. I would say, again, first of all, I just wanna remind you that we said in the prepared comments that, you know, we just want to be as transparent as we can, that it's quite possible, and we said, I think, likely, highly likely, that we'll have more significant, potentially significant, losses related to some of these historical matters. We just want that to be on the radar screen. No question, excluding that our ops losses are still high.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

What I would just encourage people to think about is, I personally wouldn't model them coming down until we actually see them coming down because again, as we go through and build the control environment, we're gonna find things, and we need to get that behind us. I think that should be very much of a show me proposition because, again, we know what you know, and you know we'll see it when it happens. You know, we've got a little bit of advance notice because we see all the work that we're doing, but we continue to need to work through those things.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

On the rest of OpEx expenses, as you said, you know, we're gonna provide more specific guidance for that in the 4th quarter relative to next year, and also talk about how it plays into 15% sustainable ROTCE. You know our budget. I just also want to make the point because, you know, I think this is important to everyone. On the one hand, everyone wants, you know, we all want our expenses to go down, because of what it does to earnings. We are, you know, extremely. I mean, even, you know, we live in these two worlds, which is we're, you know, we're rectifying these issues from the past, which are both, you know, building the risk and control work that's necessary and all the regulatory work and fixing the expense structure.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

You know, we also very much have no intention of falling behind in our businesses. The two paths of conversations that we have through the budget process is what are we investing in, and where are we gonna see efficiencies? You know, we obviously have to make sure that, you know, we're getting, you know, the appropriate amount from each of those categories. You know, overall, there's no question that, you know, our efficiency ratios are, you know, not where they want them to be. Directionally, that just tells you how we're thinking about how, you know, where that goes. When we finish the process, we'll provide more clarity, but just know that we're thinking about both sides of that equation, but understand what the, where we should be more long term.

Erika Najarian
Erika Najarian
Managing Director at UBS

No, I think that makes sense. I think the conversation with investors, Charlie, is sort of the, you know, the next step for Wells Fargo in terms of, you know, accelerated investment spend, right? Efficiencies are obviously a ratio. That makes sense. My follow-up question maybe is for you, Mike. You know, I'm squeezing two parts in my second question. The first is, could you tell us what unemployment rate your ACL ratio today contemplates? Second, if you could just give a comment on where you see deposit betas trending relative to your previous expectation now that we have added 100 basis points onto the expectation for Fed Funds since we talked to you last in a quarterly earnings setting.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yeah. Well, let me take the first one first. If you look at our view, we do give you a kind of weighted blend of the economic scenarios. We give you a few data points, unemployment rate's one of them. As of the end of June, the weighted number for the end of this year was 4.1%.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

You know, growing to 6% at the end of 2023. We'll update that, you know, based on 3rd quarter in the Q when we get there. On the second part of the question, what was the second? Can you just repeat the second part, Erika? Sorry about that.

Erika Najarian
Erika Najarian
Managing Director at UBS

Deposit betas.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Sorry.

Erika Najarian
Erika Najarian
Managing Director at UBS

Has your thinking on cumulative deposit betas changed as we've contemplated 2023? You know, given that we added 100 basis points to the Fed funds outlook since we spoke to you last in this quarterly earnings setting.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Well, I think you know, so far the betas have played out the way we expected them to do at this point in the cycle. I think as rates continue to go up, we would expect them to increase. That was part of you know, the playbook and the analysis we had done going into the environment. You know, that's to be expected, right? If rates are gonna go up even higher than we originally thought, then you know, the betas will continue to go up with that. I think it's you know, largely at this point playing out the way we thought it would.

Erika Najarian
Erika Najarian
Managing Director at UBS

Thank you.

Operator

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

Matt O'Connor
Matt O'Connor
Managing Director at Deutsche Bank

Good morning. Can you give us an update on your rate positioning and thoughts on, you know, whether you wanna lock it in, the kind of rate level that we're at here with expected or how you're thinking about, you know, protecting yourself from potentially lower rates or what your perspective is on that? Thanks.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. I mean, we still have, you know, we're still asset sensitive as where we stand today, and so that'll, you know, we'll continue to get the benefit as rates go up. As you suggest, you know, I think most banks are thinking about not just about today, but also, you know, about the other side of, you know, when rates start to peak and come back down. I think the expectations around that have changed quite substantially, you know, you know, certainly since the 2nd quarter. Even throughout the 3rd quarter and into where we stand today, those expectations have changed a lot.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

I'd say at this point, we are spending a lot of time thinking about that question and how we want to, you know, protect part of the balance sheet from when rates would start to decline. We haven't done anything in a material way at this point.

Matt O'Connor
Matt O'Connor
Managing Director at Deutsche Bank

Okay. Thank you.

Operator

The next question will come from Betsy Graseck of Morgan Stanley. Your line is open.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Hi. Good morning.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Morning.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Two questions. One on loans. How should we think about how much more room there is for you to grow loans within the context of the asset cap, realizing that, you know, TLACs there is a constraint, so you can't get to, you know, maybe the level as a percentage of total assets or total earning assets that you could before, you know, GFC. I know that's a long time ago, but I'm just trying to understand what running room you think you have in the loan book to grow that.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. You know, Betsy, I think as we've said, I think even last quarter, you know, we've got room to continue to grow and be there for clients, and we've got leverage to pull, you know, if and when we think we need to create more capacity to do that. At this point we're comfortable that we're gonna be able to continue to be there for clients. There's always, you know, discretionary stuff that you can do in certain pockets of your loan portfolio. I think we've got, you know, we feel comfortable at this point that we can still be there.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Okay. Separately on the AOCI pull to par, can you give us a sense as to, you know, what we should put in the model for how long that should take?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

How long what part of that should take?

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Oh, you know, the underwater AFS box, right? Like, if rates were flat with quarter end 3Q, you know, you've got-

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

When you start to accrete back the AOCI?

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Yeah. How long does it take to accrete back the AOCI?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

It takes a while.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

So-

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

You got, you know, I think we've mentioned, and this came up last quarter, and the expectations really haven't sort of changed much. It will take a while to come back. It'll come slowly back year by year as the maturity of the volumes gets shorter.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Okay. All right. No, I was just wondering 'cause we've seen some, you know, portfolio restructurings at other places and didn't know if you had put hedges on that would've changed the pace. 'Cause obviously it's, you know, meaningful to the capital outlook. I was just wondering if there was any color there, but I guess not. All right. Thanks.

Operator

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

Charles Peabody
Director of Research at Portales Partners

I wanted to follow up on the deposit data question. As I'm sure you're aware, Treasury is talking to the TBAC committee and trying to get some advice on a Treasury buyback. I just was curious what your thoughts are about how that would affect liquidity flows, you know, potentially out of money market funds into the banking system, and therefore how that might affect your deposit beta assumptions next year.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

I think cause and effect and how that will play into deposit betas would be a really hard question to answer. I mean, that will, you know, if that comes to bear, that would be one of, like, many different factors that will go into, you know, what to expect from deposit levels and therefore betas over time. I wouldn't attempt to try to put some math behind that at this point.

Charles Peabody
Director of Research at Portales Partners

At the very least, would you view it as a net positive or?

Charles Peabody
Director of Research at Portales Partners

You know, in isolation or is it a non-event in isolation?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

I mean, it really depends on what it is and how big and size. I think it could be that full range. It could be a non-event or matter. I think until you have better clarity, it's hard to say.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Assuming it's a $1 trillion type of Treasury buyback, which I think is the capacity they have.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. I think it's just a really hard, you know, question to try to put math behind at this point.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Okay. Thank you.

Operator

Thank you. The next question comes from Vivek Juneja of J.P. Morgan. Your line is open, sir.

Vivek Juneja
Vivek Juneja
Analyst at JPMorgan

Thanks. Charlie, Mike. Charlie, I wanted to just follow up on your comment earlier about you're seeing declines in deposits to below pre-pandemic levels in certain cohorts. Can you talk a little bit about that? What level of balances, kind of cohorts are you talking about? And how much have they gone down below pre-pandemic levels?

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

Yeah. I'll turn it over to Mike. Just, this is the same thing that we had talked about in the prior quarter, where it's those that entered the pandemic with the lowest of balances to begin with, where they had balances for a period of time that remained above pre-pandemic levels. We started to see declines, ultimately in spend and deposit levels for that group now that are averaging below pre-pandemic levels. As I said in the prepared remarks, we would have expected that to, you know, I would have expected that to exacerbate and spread. It hasn't really. It's still a small part of our customer base.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Yeah. Vivek, these are customers generally that have $500,000-$2 million kind of average balances per month. And there's a percentage of those customers that have seen, you know, some declines. And there's also a percentage, you know, some of those customers that haven't, right? It is just one of the, you know, the different cohorts we've looked at. As Charlie said, that hasn't really started to go up in higher wealth cohorts or income cohorts.

Vivek Juneja
Vivek Juneja
Analyst at JPMorgan

Okay. That sounded like, from your comments, that decline has happened this quarter. I guess for that group that we are seeing it probably gets worse as inflation remains high.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

No, this is a continuation of a trend we saw in the 2nd quarter as well. You know, it's not necessarily accelerating in any way. It's a continuation of a trend we've seen now for a number of months.

Vivek Juneja
Vivek Juneja
Analyst at JPMorgan

Okay. Mike, a little one for you. Card delinquencies, you give 30+. Can you break that down to 30-89 days? The early delinquencies, what those did this quarter?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

There'll be more in the queue, I think, Vivek, on that.

Vivek Juneja
Vivek Juneja
Analyst at JPMorgan

Okay. Okay. A suggestion to just have it out at earnings, because obviously, given that we're starting to change environment, it's an important metric to keep an eye on. Okay, thanks.

Operator

The final question for today will come from Gerard Cassidy of RBC. Sir, your line is open.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Thank you. Good morning, Mike. Good morning, Charlie. Mike, can you share with us the trends you're seeing in the commercial real estate area? You guys have very strong revenue growth, of course, in commercial real estate this quarter. Year-over-year, the commercial real estate mortgage balances were slightly down. We're hearing from different folks that the commercial real estate market is starting to tighten up. Banks aren't being as aggressive in lending. Give me any color around the risk dynamics that you might be seeing and trends you're seeing in commercial real estate mortgage.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Sure. Let me start with just, you know, what's driving some of the growth you've seen, right? Loan balances are up year-to-date and year-over-year. Really driven by two things, growth in multifamily, so apartments, and some growth in some industrial properties. We still see really strong demand. I think even if you look at new housing, new multifamily housing starts, it is still growing. Hasn't really turned like single-family homes has over the last number of months. Really strong demand there. You know, I think when you look at the performance of the portfolio, you know, some of the categories that were most impacted by the pandemic, hotels, retail, you know, in most cases are back.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

Good cash flow, values are fine. We're seeing that hold up pretty well. You still have some forward-looking uncertainty in the office space, you know, just given, you know, the, you know, that hasn't really, you know, translated into significant stress yet because you still have long-term leases and other things. You always hear about an anecdotal issue with a property, but it has nothing systematic yet, rolling through the portfolio. You know, I can't speak about what others are doing, but I think for us, you know, you've seen good growth this year.

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

As you go into an uncertain environment, you're just, you know, you're going to try to be smart about what you put on new things you put on your balance sheet, and we continue to do that. That's in the context of seeing some good growth year to date.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Very good. Obviously, your guys' CET1 ratio is well above your required level. I think you pointed out your AOCI mark drew it down by about 21 basis points. Would you guys consider repositioning the available for sale portfolio since you're already taking the mark through your CET1 ratio? What kind of dynamics would you need to see if that would make sense for you to do that?

Mike Santomassimo
Mike Santomassimo
CFO at Wells Fargo

You know, sure. You always look at, you know, different ways to optimize. You know, we did do a little bit in the 2nd quarter where we, you know, traded out some mortgage-backed securities for Ginnie Mae. You know, you get a little better RWA treatment. So you do. You know, we have done some little bit of repositioning over the time. It's something we always sort of look at and think at. It's not something that we're contemplating in big size at this point.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

All right. Thank you.

Charlie Scharf
Charlie Scharf
CEO at Wells Fargo

All righty. Thank you very much, everyone. We look forward to talking to you next quarter. Take care.

Operator

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

Analysts
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