Wells Fargo & Company Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 13, 2022

There are 14 speakers on the call.

Operator

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.

Speaker 1

Thank you, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf And our CFO, Mike Santamassimo, will discuss 4th quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our 4th quarter earnings materials, including the release, financial supplement and presentation deck I'd also like to caution you that we may make forward looking statements during today's call

Speaker 2

that are subject to risks and uncertainties.

Speaker 1

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 3

Thanks very much, John, and good morning, everyone. I'll make some brief comments about our 2021 results, The operating environment and update you on our priorities. I'll then turn the call over to Mike to review Q4 results and some of our expectations for 2022 Before we take your questions, let me start with some 2021 highlights. We earned $21,500,000,000 or $4.95 Expenses declined 7% from a year ago, reflecting lower operating losses and progress on our efficiency initiatives. Revenue increased 6% as we benefited from strong gains from equity securities and gain from sales of our Student Lending, Asset Management and Corporate Trust businesses.

Speaker 3

We also have broad based revenue growth across our businesses, including Home Lending, Consumer and Small Business Banking, credit card, auto, commercial real estate, banking and wealth and investment management. Credit quality improved significantly as the economy improved and our customers had high levels of liquidity. Our loan charge off ratio declined from 35 basis points in 2020 to 18 basis points in 2021 And our allowance for credit losses declined by $5,700,000,000 Deposits increased $78,000,000,000 or 6% and loans grew 1%, with declines in the first half of the year offset by a 5% increase in the second half. We also returned a significant amount of capital to our shareholders, Including increasing our common stock dividend from $0.10 per share to $0.20 per share in the Q3 and we repurchased $14,500,000,000 of common stock predominantly in the second half of the year after the return to the SCB framework. Our results in the Q4 also showed continued broad based momentum.

Speaker 3

We earned $5,800,000,000 or $1.38 per common share. We grew loans by $32,600,000,000 or 4% and deposits by $12,100,000,000 or 1% from the 3rd quarter. Expenses declined 1% from the 3rd quarter and 11% from a year ago and we generated positive operating leverage over both periods. Most importantly, we continue to prioritize our risk and control work. And the strong economy continues to positively impact our customers and our results.

Speaker 3

Consumers continue to have more liquidity than prior to the pandemic, though we do see this declining As the median balances today are 27% higher than pre pandemic levels, but are down 10% from the 3rd quarter. Consumer credit card spend also continued to be strong, up 28% from the Q4 2020 and up 27% from the Q4 Holiday sales were strong with spending up 31%, the 3 weeks leading up to Thanksgiving and that momentum continued post Thanksgiving. All spending categories were up in the 4th quarter compared to a year ago with the largest increases in travel, fuel, entertainment and dining. Weekly debit card spend during the Q4 was up every week compared to both 2019 2020. This increase was driven by higher transactions, But also higher spend per transaction, reflecting inflationary impacts and increased spending in higher cost categories such as travel.

Speaker 3

We are watching the impact from Omicron on consumer spending. And while there is some softening in restaurant, Travel and entertainment in recent weeks. Overall spending remained strong in the 1st week of January with credit card up 26% and debit card up 29% versus the same week in 2020. And we saw strong loan growth from the Q3 across our commercial businesses, including Commercial Real Estate, Asset Based Lending, Middle Market Banking and our Markets and Banking businesses. So I've been at the company for a little over 2 years now and I thought I'd spend a few minutes giving you my thoughts on our progress.

Speaker 3

Overall, I feel great about what we've accomplished and continue to feel energized about the opportunities in front of us. I think about this along several dimensions: Talent leadership and culture, risk regulatory and control, financial and strategic progress and our work on ESG and broader reputational issues. I've spoken of the substantial talent changes we've made, But just to remind you, 11 of 18 members are new to the operating committee and 2 are new to their job since I arrived. Additionally, well over half of the senior most people at our company, meaning those who are one level below the operating committee are new to their roles And a significant proportion of them were hired from outside the company. This is a dramatic change in our leadership And with it, we've changed how we run the company, how we prioritize our work and how we view our responsibility broadly.

Speaker 3

We began a process 2 years ago to change the culture and priorities of the company, and the most significant part of this prioritization Who's the building and implementation of an effective risk and control framework across the company. Our approach and our progress are entirely different than they were when I arrived. We are laser focused on meeting our own expectations and those of our regulators. We have clear plans in place and clear owners for every regulatory deliverable we have. We have detailed reporting on how we're progressing on those plans.

Speaker 3

We review this reporting every single week at the operating committee level. The detailed involvement of the operating committee members is Very different from what was happening before I arrived. Our ability to identify issues has also improved from 2 years ago. I continue to believe that we're making significant progress and this is based on what we see in our internal reporting. It doesn't mean that we're perfect.

Speaker 3

The fact that we have multiple consent orders makes it complex. It takes time to build all of our capabilities and it's certainly in the regulators' purview to look at issues that have been outstanding for a long time like the OCC did in the Q3.

Speaker 4

But I would point you to

Speaker 3

the comment made by the OCC in their recent an order that highlights that we have taken steps to comply with their 2018 order and we're committed to addressing remaining requirements. I remain confident in our ability to continue to close the remaining gaps over the next several years. Having said that, it continues to be the case That were likely to have setbacks along the way, but that doesn't change the fact that we believe that the quality of the talent we now have and the processes we now have in place who will enable us to get the work done. We're making progress increasing the earnings power of the company and have also begun to invest in a more holistic and Aggressive way to drive stronger organic growth in all of our businesses. We're just now beginning to bring things to market that are differentiated And a number of significant opportunities are exciting.

Speaker 3

We're continuing to track to the financial return goals we've discussed. First, achieve a sustainable 10% ROTCE subject to the same assumptions we've discussed in the past and then target 15%. We continue to believe that we will achieve the 10% during 1 of the quarters in 2022 on an annualized basis. To achieve this, we're aggressively focused on driving efficiencies and we're seeing net expense reductions after significant investments in our control build out and our businesses. We are aggressively returning excess capital to shareholders now that we've returned to the SCB framework.

Speaker 3

We continue to manage credit well and we're seeing early benefits from higher interest rates, growing loan balances and higher fees in certain businesses. We're doing this while devoting significant resources to building our franchise. We have fallen behind in providing competitive digital capabilities for our clients. This is changing. In the Q4, we announced a rebuilt mobile banking experience for consumer and small business customers that is It's set to begin rolling out this quarter.

Speaker 3

It has a new modern look and feel and a simpler user experience that will help our customers more easily accomplish their banking needs. This platform is necessary to drive significantly higher digital adoption from our customers. Even with our existing capabilities, in the Q4, our customers logged in 1,600,000,000 times using a mobile device, Up 7% year over year. Teller transactions remained more than 30% lower than pre pandemic levels. We also announced that later this year we'll be adding an all new virtual assistant, Fargo, to the app.

Speaker 3

Customers will be able to get answers to their everyday banking questions, ask Fargo to complete the task for them, and Fargo will also provide personalized insights and recommendations help customers better manage their finances. We will also be introducing the first phase of the redesign of our public website early this year. In addition, we're beginning to become more active on the wholesale side. For example, we announced We're collaborating with HSBC to optimize the settlement of foreign exchange transactions through a blockchain based solution, which will reduce settlement risks and associated costs. We're also approaching payments and credit cards very differently.

Speaker 3

We believe credit cards will remain important as both a credit and as a payment vehicle. We are also doing additional work around non card payments and believe we must succeed here to be a key financial services provider. 2 years ago, our products and capabilities supporting those products were not as competitive as necessary. In 2021, we launched 2 products, including Active Cash, which we believe is the best cash back product in the marketplace and Reflect, which rewards customers for on time payments. We improved the core experience, including investing in advertising, simplifying our digital application and enhancing our underwriting.

Speaker 3

These efforts have driven an increase in digital card activation, paperless statements and enrollment alerts. We are opening approximately twice as many accounts As we were pre launch of these products and importantly, we're not competing on credit. In fact, the quality of applications And the accounts we're booking continues to be better than what we were booking historically. Away from card, we're beginning to invest in our broader digital payments across the platform enhancing our capabilities, increasing limits and broadly reducing the friction and moving money. As evidenced, Zelle momentum continued to accelerate with Zelle transactions up 46% from a year ago.

Speaker 3

We are also taking a very different approach in that we believe that for us to be successful, we must consider a broader set of stakeholders in our This is not in lieu of shareholders. In fact, we believe it will enhance our returns to shareholders over time. We have taken significant efforts to support small businesses since the beginning of the pandemic and recently fulfilled our roughly 420 million opened for business fund commitment to assist small businesses in recovering from the pandemic by working with not for profits to offer capital, Technical Assistance and Long Term Programs. The fund was created by donating the gross processing fees we made from administering the Paycheck Protection Program loans in 2020. Additionally, we made significant climate commitments in 2021.

Speaker 3

In the Q4, we joined the NetZero Banking Alliance, an industry led leadership group designed to foster collaboration and support banks and aligning their financing with the goal of achieving net zero greenhouse gas emissions. Climate change is one of the most urgent environmental and social of our time. And last year, we announced our goal to achieve net zero greenhouse gas emissions, including emissions attributable to financing by 2,050. We expect to announce our first finance emission targets for the oil and gas and power sectors later this year. We made our first solar plus Battery storage tax equity commitment.

Speaker 3

Once it is operational, it will be one of the largest solar and battery projects in the company. Last year, we surpassed $13,300,000,000 in cumulative tax equity investments in nearly 600 wind, Solar and fuel cell transactions. These investments have provided 13% of all utility scale wind and solar capacity in the U. S. Over the past 16 years.

Speaker 3

We continue to be one of the top investors in affordable multifamily housing in the U. S. As well as an active lender for affordable rental housing developments. Additionally, we're committed to expanding affordable homeownership. For example, in the Q4, we committed to invest $5,000,000,000 through the neighborhood lift program to help more than 300 Low and moderate income residents in Houston with home payment down assistance I'm sorry, home down payment assistance.

Speaker 3

We've also supported our employees and in December, we announced that as part of our commitment to providing comprehensive benefits In competitive pay, we're increasing U. S. Minimum pay hourly pay levels to a range of $18 to $22 effective at the end of this month. Just this week, we announced new efforts that will roll out over the course of 2022 to help our consumer customers avoid overdraft fees and cover short term cash needs, building on other changes we've made over the last several years. The changes we announced include the elimination of transfer fees for customers enrolled in overdraft protection, The elimination of non sufficient fund fees, early access to direct deposit by providing customer access funds up to 2 days before their scheduled deposit, a 24 hour grace period for customers that overdraw their account to cover the balance before incurring an overdraft fee and a new short term credit product for customers to meet personal financial needs.

Speaker 3

This builds on existing features we already have in place, including Clear Access Banking, our no overdraft checking account that we launched in September 2020, And we now have over 1,100,000 outstanding customer accounts. Overdraft rewind, which was introduced in 2017, which automatically rewinds overdraft fees when a covering direct deposit is received by the next morning, which will be replaced by our expanded 24 hour grace period. Balance alerts that help customers avoid overdrafts by sending more than 1,300,000 alerts every day. Putting all of these changes in perspective, these fees are down significantly since the financial crisis. We have alternatives for both customers that do not want to overdraft And those that do.

Speaker 3

This is a competitive marketplace. We continue to review our capabilities and pricing with the goal of providing value to our customers. And let me make a few comments now as we look forward. While there is a risk with the continued growth of the omicron variant or potentially other variance later this year, I expect to see continued strong economic trends in 2022. Consumers financial condition remains strong.

Speaker 3

Modest debt growth, strong asset appreciation and higher deposit balances have left household balance sheets in excellent condition, which should help drive continued strong consumer spending. Corporate America has demonstrated the ability to adapt to the ever changing pandemic conditions. Inventories remained unusually lean as businesses adopted a defensive posture and supply chains have been disrupted. This is expected to result in substantial gains in industrial production as they continue to restock. We're beginning to see loan growth and expect this to continue.

Speaker 3

In a moment, Mike will provide our thoughts on net interest income and expenses for 2022. I commented earlier that 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 and that once we've achieved this goal, we'll discuss our plan to continue to increase returns. But at a high level, we continue to believe we can further improve our returns through a combination of factors, including a modest increase in interest rates For further steepening of the curve, ongoing progress on incremental efficiency initiatives, a small impact from returns on growth related investments in our businesses, continued execution on our risk and regulatory control framework and moderate balance sheet growth once the asset cap is lifted. It's important to note we currently have the ability to grow loans even under the asset cap. The changes we made to the company and continued strong economic growth prospects make us feel good about how we're positioned entering 2022.

Speaker 3

We also remain cognizant that we still have a multi year effort to satisfy our regulatory requirements with setbacks likely to continue along the way and we continue our work to put exposures related to our historical practices behind us. As we look forward, we will continue to be aggressive in driving progress and improvement in our performance, Embrace our responsibility to our customers and communities and I remain incredibly optimistic about our future. I want to conclude by thanking our employees who continued to serve our customers through another challenging year. I appreciate their hard work and their resiliency while we made progress on making Wells Fargo better. I look forward to all that we accomplish in the year ahead.

Speaker 3

I will now turn the call over to Mike.

Speaker 5

Great. Thanks, Charlie, and good morning, everyone. Charlie summarized how we helped our customers, Communities and employees last year on slides 23. So I'm going to start with our 4th quarter financial results on slide 4. Net income for the quarter was $5,800,000,000 or $1.38 per share common share.

Speaker 5

Our 4th quarter results included A $943,000,000 net gain on the sales of our Corporate Trust Services business and Wells Fargo Asset Management, There could be future gains related to these sales due to post closing adjustments and earn out provisions. An 875,000,000 allowance for credit losses as credit trends continue to be strong and a $260,000,000 impairment of certain leased railcars due to changes in demand for these cars. We also had $2,500,000,000 or $1,900,000,000 after non controlling interest of equity gains primarily from our Affiliated Venture Capital and Private Equity Businesses, the 3rd consecutive quarter of strong returns in these businesses. Our effective income tax rate in the 4th quarter was approximately 23%, including the discrete impacts related to business divestitures. Our CET1 ratio declined to 11.4% in the 4th quarter, reflecting share repurchases and an increase in risk weighted assets primarily from loan growth in the quarter.

Speaker 5

We repurchased $7,000,000,000 of common stock in the 4th quarter, Partially offset by $1,400,000,000 of new issuances, predominantly for the annual matching contribution for our 401 plan. As a reminder, the regulatory minimum for our CET1 ratio will be 9.1% in the Q1 of 2022, reflecting A lower GSIB capital surcharge. Turning to credit quality on slide 6. Our net charge off ratio was 19 basis points in the 4th quarter. Commercial credit performance continued to be strong with net loan charge offs declining $10,000,000 from the 3rd quarter to 2 basis points.

Speaker 5

Despite the challenges created by the pandemic, the commercial real estate portfolios continue to perform well. Commercial real estate valuations and investment activity has rebounded off across all property types, although there still is some risk in office and select hotel and retail segments. Consumer credit performance also remains strong with higher collateral values for homes and autos and consumer cash reserves remain above pre pandemic levels. Consumer net charge offs of $393,000,000 increased $172,000,000 from the 3rd quarter. Dollars 152,000,000 of the increase It's related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans.

Speaker 5

Non performing assets increased 145,000,000 2% from the Q3 driven by an increase in residential mortgage non accruals primarily resulting from certain customers exiting COVID related accommodation programs. Loans that were modified in 2021 upon exiting forbearance are reported as non accrual until they perform for a period of time. Overall, early performance of loans that have exited forbearance have been aligned with our expectations. After increasing during the 1st 4 quarters of the pandemic, commercial Assets have declined for 4 consecutive quarters and we're back to pre pandemic levels in the 4th quarter. Our allowance level at the end of the Q4 reflected continued strong credit performance, the ongoing economic recovery and the uncertainties that still remain.

Speaker 5

If the economic recovery continues, we would expect to have additional reserve releases. On slide 7, we highlight loans and deposits. Average loans grew 2% from the 3rd quarter with growth in both our commercial and consumer portfolios. We had strong growth late in the quarter And period end loans grew $32,600,000,000 or 4% from the 3rd quarter with broad based growth across most of our commercial and consumer portfolios. I'll highlight the specific road drivers when discussing business segment results.

Speaker 5

Average deposits increased $89,900,000,000 or 7% 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 8. A year ago, we provided our expectation for 2021 net interest income to be flat to down 4% From the originally reported annualized 4th quarter 2020 level and we ended up being down 3% for the full year. 4th quarter net interest income was down $93,000,000 or 1% from a year ago and grew $353,000,000 or 4% from the 3rd quarter. The increase in the Q3 was driven by higher loan balances, including higher interest income from loans purchased from securitization pools or EPBOs.

Speaker 5

We also benefited from higher trading assets and a favorable funding mix. In the 4th quarter, we had $318,000,000 of interest income associated with EPBOs and at year end we had a total of $17,300,000,000 of these loans down from $34,800,000,000 a year ago. And as I highlighted last quarter, we expect these balances to decline substantially by the end of this year. We also had $130,000,000 of interest income in the 4th quarter from Paycheck Protection Program loans or PPP loans, And we're outstanding the NRS outstanding decline to $2,400,000,000 at year end. We've reflected the headwind from these portfolios running off in 2022 net interest income waterfall that I will review later on the call.

Speaker 5

The net interest margin increased 8 basis points from the 3rd quarter, 3 basis points of which was due to higher interest income from EPBOs. Now turning to expenses on slide 9. Non interest expense declined 11% from a year ago. The decrease reflected progress we made on our efficiency initiatives, including reductions in personnel costs, Consultant spend and occupancy expense. I will provide specific examples of the progress we made in our efficiency initiatives 2021 later on the call before updating you on our expense expectations for 2022.

Speaker 5

We also had lower restructuring charges and operating loss the Q4 compared with a year ago. 4th quarter expenses included 1 month or approximately $100,000,000 of operating expenses from our Corporate Trust Services business and Wells Fargo Asset Management prior to their sales on November 1. Now turning to our business segments starting with Consumer Banking Lending on slide 10. Consumer and Small Business Banking revenue increased 4% from a year ago, primarily due to higher deposit related fees as Q4 2020 included Some COVID related fee waivers. Q4 2021 also reflected an increase in consumer activity, including higher debit card transactions compared with a year ago And the benefit of strong deposit growth was largely offset by lower spreads.

Speaker 5

Charlie highlighted the enhancements and changes we're making to help our customers avoid overdraft fees, The impact from the fees that will be reduced, including the elimination of non sufficient fund or NSF fees as well as overdraft protection transfer fees He's estimated to be approximately $700,000,000 annually. Also, we expect that they may be partially offset by other fees due to higher levels of activity as well as the expiration of various fee related waivers that were in place in 2021. In terms of new features to be rolled out in the latter part of the year, including a 24 hour grace started to see a drop in application volume in December and we expect originations to decline in 2022, which will put pressure on margins as the industry adapts Credit card revenue was up 3% from a year ago, driven by higher point of sale volume, partially offset by higher rewards Costs including promotional offers on our new active cash card. Auto revenue increased 17% from a year ago and higher loan balances with the average balances up 6,800,000,000 Turning to some key business drivers on slide 11. Our mortgage originations declined 7% from the 3rd quarter.

Speaker 5

We expect our Q1 originations to continue to decline due to lower refinance activity and the typical seasonal slowdown in the purchase market. We increased our non conforming originations in the Q4 and have grown our non conforming portfolio for 7 consecutive months, Reflecting the improvements in our capabilities as well as the reintroduction of cash out refinancing late in the Q1 of 2021. Turning to auto. Limited vehicle inventories continued to constrain industry new car sales. However, we had our 3rd consecutive quarter of record Originations with volume up 77% from a year ago with the majority of our originations coming from used cars.

Speaker 5

Originations also benefited from the enhancements we continue to make in our capabilities. Importantly, we are maintaining our underwriting standards and continue to be cautious about the increase in vehicle Turning to debit card. Transactions were relatively stable from the Q3 and up 10% from a year ago with increases across nearly all categories. Credit card point of sale purchase volume continued to be strong and was up 28% from a year ago and 11% from the 3rd quarter. While payment rates remain elevated, balances grew 5% from a year ago due to strong purchase volume and the launch of new products.

Speaker 5

New credit card accounts more than doubled from a year ago driven by our new active Cash Card and we're pleased by the quality of the accounts we've been attracting. Turning to Commercial Banking results on slide 12. Middle Market Banking revenue increased 2% from a year ago. Results included higher deposit balances There's a modestly higher investment banking fees, partially offset by the impact of lower interest rates. Asset based lending and leasing revenue increased 1% from a year ago, driven by higher net gains from equity securities and higher revenue from renewable energy investments, partially offset by lower loan balances.

Speaker 5

Non interest expense declined 10% from a year ago, primarily driven by lower personnel and consulting expense due to the efficiency initiatives as well as lower lease expense. Loan balances started to increase late in the Q3 and now have grown for 4 consecutive months with growth accelerating in December. As with other portfolios, we are adhering to the same credit risk appetite. Increases in middle market banking were driven by growth from our larger clients, A modest uptick in revolver utilization and strong seasonal borrowing. Growth in asset based lending and leasing was driven by new client wins as well as increased levels from higher prices and some increases in inventory levels.

Speaker 5

Turning to Corporate and Investment Banking on Slide 13. Banking revenue increased 17% from a year ago. Investment Banking had a strong quarter with higher debt origination and advisory fees. Banking results also benefited from higher loan balances. Commercial real estate revenue grew 8% from a year ago, driven by higher loan balances Capital Markets results on stronger commercial real estate financing activity, loan originations returned to pre pandemic levels and we had a healthy pipeline as we started the new year.

Speaker 5

Markets revenue was relatively stable from a year ago. It was down 14% from the 3rd quarter, primarily due to lower trading activity in spread products and equity derivatives. Average deposits in Corporate and Investment Banking were down $23,700,000,000 from a year ago, driven by actions taken across all lines of business to manage under the asset cap. Average loans increased from both the Q3 and a year ago across all lines of business. On a period end basis, loans grew every month since June and growth accelerated in December.

Speaker 5

Wealth and Investment Management on slide 14. The revenue grew 6% from a year ago as higher asset based fees and market valuations more than offset a decline in net interest income due to lower interest rates. 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. This increase was partially offset by lower salaries expense reflecting progress on efficiency initiatives. Client assets reached a record $2,200,000,000,000 up 9% from a year ago, primarily driven by higher market valuations.

Speaker 5

Average deposits were up 7% from a year ago and average loans increased 5% from a year ago, driven by the continued momentum in securities based lending. Slide 15 highlights our corporate results. Revenue increased from a year ago, driven by strong results in our Affiliated Venture Capital and Private Equity And gains on the sales of our Corporate Trust Services business and Wells Fargo Asset Management. These businesses contributed $1,600,000,000 of revenue in Expenses associated with transition services agreements to remain in 2022 with offsetting revenue, so it's P and L neutral. We also expect approximately $300,000,000 of corporate overhead expenses related to these businesses to remain in 2022, which we expect to manage down over time.

Speaker 5

Turning now to our expectations for 2022, starting with net interest income on Slide 16. As the last couple of weeks have demonstrated, it's challenging this early in the year to predict the rate environment, loan demand and other variables that impact net interest income for the full year. Let me highlight the key drivers of our net interest income for 2022. We are assuming the asset capital remain in place throughout 2022. Moving left to right on the waterfall, as we have discussed previously, we have a headwind this year from the runoff of PPP and EPBO loans.

Speaker 5

However, our current outlook for loans is for average balances to grow low to mid single digits from the Q4 of 2021 to the Q4 of 2022. Along with other balance sheet and exchanges, this is expected to more than offset that headwind. This net result would increase net interest income approximately 3% in 2022 from the $35,800,000,000 we generated in 2021. Moving to rates and repricing. The recent forward curve includes approximately 3 25 basis point rate hikes this year beginning in May.

Speaker 5

Assuming this were to play out, net interest income has the potential to grow up to an additional 5%, resulting in approximately 8% net interest income growth in That said, the implied forward curve has changed a lot over the last 1.5 months, so it's very hard to forecast with any certainty. Another way to view our asset sensitivity is from the disclosure we provided in our Q3 10 Q filing. It shows that the estimated impact of our of an instantaneous fifty basis This increase in short term rates would increase net interest income by approximately $2,700,000,000 over the next 12 months. Ultimately, the amount of net interest income we earn in 2022 will depend on a variety of factors, including the absolute level of interest rates, The shape of the yield curve, loan demand and cash redeployment. Now turning to expenses on Slide 17.

Speaker 5

We made progress last year on our efficiency initiatives and we continue to identify new opportunities. Our portfolio of initiatives That includes realized and identified potential gross saves has grown from approximately $8,000,000,000 to $10,000,000,000 and we are continuing to work across the company. We expect to execute on our remaining identified initiatives over the next 2 to 3 years and we'll continue to invest across our businesses. Importantly, similar to last year, we are excluding from our efficiency initiatives the resources needed to address our risk and control work And we'll continue to add resources as necessary to complete this important work. We've been reducing expenses across our businesses, but let me highlight a few examples of the progress We eliminated management layers and increased span of control with a 20% decrease in managers with low span of control.

Speaker 5

We completed approximately 2 70 branch consolidations in 2021, a continuation of the progress we've made The last few years with branches down 11% since 2018, we've also optimized branch staffing levels to better reflect our customers how our customers are using our branches. Within our technology organization, we reduced non engineering roles by approximately 40%, driven by accelerated adoption of the Agile framework And headcount across the company declined approximately 6% from a year ago, excluding divested businesses. In addition to reducing the number of branches, We also reduced our office real estate portfolio by approximately 7% and occupancy expense was down 9% compared with a year ago. This year, we expect to continue to realize savings from these initiatives, including an incremental 5% reduction in office real estate. Additionally, the investments we're making in technology should drive improvements in operations, consumer banking, consumer lending, commercial banking.

Speaker 5

Importantly, these efforts should not only reduce But also improve the customer experience with enhanced fraud detection, more self-service capabilities and faster underwriting decisions. Now turning to our 2022 expense outlook on Slide 18. Following the waterfall from left to right, we reported $53,800,000,000 of non interest expense in 2021. This was largely in line with our most recent guidance except for higher operating losses. We had approximately $500,000,000 of expenses in 2021 related to business exits and restructuring charges and the civil money penalty associated with the OCC enforcement action in September.

Speaker 5

We also had approximately $1,000,000,000 of expenses in 2021 from the Wells Fargo Asset Management and our Corporate Trust Services business which were sold and that will not continue in 2022. So we believe a good starting point for the discussion of 2022 expenses Is the $52,300,000,000 We are assuming a modest increase in equity markets this year and expect revenue related expenses to grow by approximately 300,000,000 This includes expected increases in Wealth and Investment Management and Corporate Investment Banking, partially offset by expected declines in home lending, reflecting lower origination volumes. Higher revenue related compensation is a good thing and the associated revenue will more than offset any increase in expenses. We also expect approximately $500,000,000 of wage and benefits related inflationary increases in 2022 above and beyond The normal level of merit and pay increases, driven by higher personnel expenses, including the minimum wage increase that Charlie highlighted and other compensation changes. Through our efficiency initiatives, we expect to realize approximately $3,300,000,000 of gross expense reductions in 2022.

Speaker 5

This reduction is expected to be partially offset by approximately $1,200,000,000 of incremental investments, Primarily related to higher personnel in expenses in Commercial Banking, Corporate and Investment Banking and Technology as well as increased spending on risk management. We also expect approximately $500,000,000 in increased spending in other areas, including higher FDIC insurance assessments, Higher travel and entertainment expenses, which were significantly lower in 2021 due to the pandemic. Accordingly, our full year 2022 expenses are expected to be approximately $51,500,000,000 a net reduction of approximately $800,000,000 versus the 52 $300,000,000 Embedded in our assumptions are approximately $1,300,000,000 of operating losses for 2022, Which is the amount we had in 2021 excluding the $250,000,000 associated with the OCC enforcement action. While we've made significant progress on working through legacy issues, as we previously disclosed we still have outstanding litigation and regulatory issues and related expenses could significantly exceed the levels we had in 2021. We made substantial progress last year in executing our efficiency initiatives, but we still have significant opportunity to get more efficient across the company.

Speaker 5

We are focused on achieving net expense reductions while appropriately investing in our businesses. This remains a multi year process with the ultimate goal Achieving an efficiency ratio in line with our peers and based on our business mix. We'll now take your questions.

Operator

At this time, we will now begin the question and answer session. Our first question of the day will come from John McDonald of Autonomous Research. Sir, your line is open.

Speaker 6

Hi, good morning. Mike, I was wondering if you could give us some sense of if the asset cap remains in place, how much capacity do you have Obviously, the H and A debt is picking up. It feels like loan growth is getting better for the industry. I just want to make sure that you're invited to that party and you guys can grow loans while staying under the asset cap.

Speaker 5

Yes. Hey, John, thanks for the question. So just as you know, and I think it's implicit in what you asked, but the And to make sure we've got the room we need to particularly for our retail clients and we're continuing to do that. On the loan side, we still have We're not constrained on growth on the loan side. So we still have plenty of room to continue to grow with our clients.

Speaker 6

And could you give us some sense in your NII outlook, what kind of loan growth you're building in and also Liquidity deployment assumptions and how you're thinking about liquidity deployment given where the curve is here?

Speaker 5

Yes, sure. Embedded in Slide We've assumed that kind of low to mid single digit growth when you compare Q4 2021 to Q4 2022. And so hopefully, we're optimistic that we'll be able to get there and maybe there's some certainly some scenarios where it could be It could grow faster than that, but that's the assumption that we used there. Embedded in that column too on the chart, in the loan growth and other balance Stuff is some modest redeployment into the securities portfolio, I'd say modest. So sort of single low kind of mid to low single digit sort of increases

Speaker 2

And

Speaker 5

so those are the assumptions embedded there. And I think as we look at where the curve is today, We're still being overall pretty prudent and patient, but we are in a very kind of small way beginning to Buy some securities in the portfolio.

Speaker 6

Okay. Got it. Thanks, Mike.

Operator

Thank you. The next question will come from Ken Usdin of Jefferies. Your line is open.

Speaker 7

Thanks. Good morning, guys. Mike, you had mentioned that you did a little bit better last year, dollars 4,000,000,000 of gross saves versus what you originally thought at $3,600,000,000 And you just commented that you still have A good line of sight and as far as efficiency initiatives. Can you help us understand like 3.3 for this year, How you're feeling about that? But more importantly, that line of sight, how far out do you have that?

Speaker 7

And do you

Speaker 5

And Ken, what we're really trying to do is make sure we embed this in the DNA of how we operate the place. And so that's ultimately what's going to be really important for us over the long run. And I think you're seeing that the portfolio grew from $8,000,000,000 to $10,000,000,000 in terms of the initiatives that we've either executed on or about or in the process of And so I think you're seeing sort of that progress and growth there. So you can sort of do the math of what we've accomplished so far, what we've Identified for this year and what's left for next year. And I continue to believe that we've got more to do that we haven't sort of built into that portfolio yet.

Speaker 5

And so the team continues to work on that every day. As you look at our confidence level on the 3.3 that we put into the forecast. We feel good. We've got really good line of sight. And I think Given what the team was able to do last year, we have confidence that we'll be able to execute on that.

Speaker 3

And just let me just add to something that Mike said, which is I'm always I'm a firm believer on these efficiency initiatives, especially in a company like this. Even if you go back over a decade, One of the strengths of this company was never efficiency. It was far more on the revenue side. And so as we get the efficiencies That we're starting to see. It is like peeling the onion back where then the next set of opportunities become even clearer.

Speaker 3

And so we're ginning up the same process that we did at the beginning of this venture where we came up with the initial $8,000,000,000 to go back and Okay, now what's next in a very methodical way across the company. So we feel I feel really good about what's in our numbers for next year. And we're going to continue to pursue this. And I think it's just as you've seen in our numbers, we It gives us the ability to spend our investments and to Become more efficient overall as a company. So I personally don't feel like we're close to done.

Speaker 7

Got it. And if

Speaker 2

I could just ask the

Speaker 7

other side of that question too, which is that you're doing a little less than the incremental investments versus what you did last year. How do you get Comfortable that you're doing enough, especially what we're hearing from the industry pressures, not just inflation, but just on the need to continue to you mentioned this, Charlie, about all the new things you're rolling out, but how do you land on that number and how do you get the confidence that it's the right amount that you're reinvesting?

Speaker 4

Yes, it's a

Speaker 3

good question. I think we do I think what most good companies do, which is they sit around tables and they ask everyone to come back with What you want to spend money on and then figure out what you can actually do. I think we are we've accomplished a Tremendous amount on the technology side since Saul Van Burden, who runs technology for us, was brought in. And I think we're going to try and spend as much as we physically can get done. But I think we're always asking the question of what's next.

Speaker 3

But I think the different position that we're in versus others is we're still in the ramping up stage, which I also look at as opportunity because we have moved slower historically investing in some of these areas. And to the extent that We find more efficiency money. It gives us the opportunity to spend more broadly. But I do feel I think we as a company, we as a management team do feel good About what we're investing next year relative to where we stand as a company.

Speaker 8

Okay. Thanks a lot guys.

Operator

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

Speaker 9

Hi, good morning.

Speaker 5

Betsy.

Speaker 9

I had two questions. One was on the overdraft fees that you mentioned. I I think you said that it was like a $700,000,000 impact, but we look at the regulatory filings and the regulatory filings show A higher level of overdraft fee run rate like in the $1,000,000,000 kind of range. So I'm just trying to understand, what Why it would be only $700,000

Speaker 3

Well, first of all, I mean, we're not eliminating overdraft fees. We're making a series of changes that we think make sense for the consumer. We have an account that Doesn't allow overdraft, but we have an account that does allow overdraft. And so we think it's got it's more consumer friendly than it was in the past, But we do continue to believe that there are a substantial number of customers out there that want us to pay overdraft on their behalf after they've worked through a bunch of the buffers and benefits we're giving them and they're willing to pay for that.

Speaker 9

Got it. Okay. So the NSF fees will be eliminated, but you'll have a different product that comes in?

Speaker 3

Well, no, it's the same NSF fees will be eliminated entirely. Our overdraft fee will stay, but we've added a series of things such as We'll give you availability on direct deposits 2 days in advance. We'll give you an additional 24 hours After you would otherwise would have been charged for an overdraft, to cure it. So our overdraft fees will go down, but we're still going to be Providing the overdraft product and we'll still be charging for

Speaker 9

it. Okay. All right. So my bad. So I thought overdraft and NSF were Pretty similar, but that's not right.

Speaker 5

Yes. I think Betsy, think of the NSF fees as When you don't pay something into overdraft like a check and you return it, then historically you would have charged the fee for that returned item, That's an NSF fee. The overdraft fees come into play when you actually pay something in overdraft.

Speaker 9

Yes, yes, I got it. Okay. So I was using too much shorthand and that's my bad. All right. And then the second question is on the loan growth that you were talking about earlier in the prepared remarks with John.

Speaker 9

LIBOR is no longer able to be used as a reference rate for C and I or CRE Or any loan or any product right starting Jan 1, how does that impact you? Is that could that be a benefit to Your loan growth in C and I and CRE and how are you thinking about shifting the reference rate that you're going to be using with your clients?

Speaker 5

Well, I mean, we've started that shift already as you would imagine, right? And we started we stopped offering You effectively stopped ordering offering new LIBOR based loan products in the at some point in the 4th quarter. We've probably done in the wholesale side, maybe including WIM, so take out the consumer mortgage business, we've done something like 4,500 or Just under that new facilities based on SOFR, with the large majority and obviously there's different ways to calculate SOFR, the large So I think we're seeing clients start to get used to it and start to use it. Complementing what we're doing on the wholesale side is we've got We stopped our offering LIBOR based ARMs last year and so we've got tens of thousands a couple Tens of 1,000 at this point in terms of arms on the books using SOFR there as well. And so I think it's starting to take hold.

Speaker 9

Yes. I was just thinking like the capital markets might not be deep enough yet to be competitive against SOFR Or Bisbee product at least for the first half of this year. So could that give you a little advantage here

Speaker 5

I don't see that having a huge impact on loan growth, but Maybe

Speaker 3

we'll be surprised a

Speaker 5

little bit, but I don't see that happening.

Speaker 9

All right. Because I didn't think the CLO bid was there yet for so far.

Speaker 5

Yes. Like I said, I don't see that happening. I think there are starting to be some CLOs in SOPR, but like I don't see that happen being a big driver.

Speaker 9

Okay. Thanks.

Operator

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

Speaker 10

Hi, good morning. Mike, my first question is for you. Could you give us a sense of what deposit Growth or runoff assumption you have in your 2022 NII simulation? And similarly, what kind of deposit repricing you presume?

Speaker 5

Yes. No, thanks, Erica. Look, as you can guess, like we're in a bit of a different spot than others, right, given our asset cap. And So we're already constrained on deposits and so we're pushing away deposits every week now. And so I don't expect in This year to have much of a runoff in deposits.

Speaker 5

And if we start to see deposit levels going down, we'll stop pushing others off. And Yes, I don't see that going to be a big driver for 2022. As you think about betas or and deposit pricing assumptions, it's Largely similar to what we saw the last rate cycle, but I would say that over the last 3, 4, 5 years, our deposit base has changed quite a bit. If you look at just Based on the segments we are in, as a shorthand, where 57% of our deposits are in our consumer and small business banking business today. If If you go back a number of years, that was probably closer to 43% or 45%.

Speaker 5

And so the remixing of sort of our deposits as a result of some of the actions we've had Take will kind of lower the overall beta for the first number of rate hikes. But I think it will look pretty similar to what we saw. And as you can imagine, since we're constrained on growing deposits, we're not going to be the leader on pricing likely as we go over the next number of quarters.

Speaker 10

And just to clarify, so the betas in the last cycle, If I remember, we're driven by a handful of CIB deposits, right? And clearly, that has Pushed out given assets or some of that hasn't pushed out given asset cap restrictions. So embedded in this NII number is the experience Of the last cycle that included the betas contributed by those deposits, whereas as we actually look out today, You have a much better and less rate sensitive deposit base.

Speaker 5

For sure. And the betas might be similar on the CIB deposits. We just have less of them as a Our overall book, which lowers our overall beta. It's a mix. Yes.

Speaker 5

So but we'll see and a lot of that will be driven by what we In the competitive environment, right? So particularly on those wholesale deposits, but it will have a smaller impact on us than it did in the past just given the mix.

Speaker 10

Understood. And my last question is for Charlie. I think your investors are receiving very warmly. You and Mike have said about You're trying to change how this bank is thinking by constantly identifying cost saves to fund future investments. And as we look out in what looks like a more favorable rate backdrop and revenue backdrop from a growth perspective for banks, Do you see yourself reinvesting more of the identified savings as we enter a more favorable revenue backdrop?

Speaker 3

I don't think I guess The way I put it is, we don't think about it relative to what the rate scenario is or how much we're making in NII. I think again, just think about where we are in the stage of our evolution, which is we're Limiting our investments based upon just what can physically be done, not based upon You know how much we actually want to spend. I mean, there are always a couple of small places around the place where people want to spend and you do have to prioritize. I think a lot of the answer to your question will have to do as we continue to do our work strategically To determine where we want to create additional capabilities across the company, we would expect the investment number to grow for sure. But also, as you know, we're spending a lot of money on infrastructure.

Speaker 3

And I'm not talking about the risk build out. I'm just talking about the basic infrastructure So, I think as we sit here today, we still think That we have an opportunity to both become much more efficient and to continue to grow the level of investments That are going to drive business results inside the company. And that will that's, I would say is focused upon where we think we need to get to relative to how much money we should be spending as a company As opposed to any upside that we have because of just the change in rates at this point.

Speaker 10

Got it. That's clear. Thank you.

Speaker 5

And the only

Speaker 3

reason I would add is I just think for us that just It takes the pressure off of us to think that, if we were to think that way. If we were to say, okay, because of nothing we've done, rates have gone up, We then start spending a lot more money. We're still in this as I said earlier, we're still in this phase of challenging ourselves to become As efficient as we should be, and that having that pressure across the company at this stage for us is still a good thing, Just as we're it is to challenge people to come up with where we should be investing.

Speaker 10

Thanks, Charlie.

Operator

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

Speaker 11

Good morning. So I wanted to ask about the asset cap. And Can you just remind us like where you are in the process from your perspective? Have you implemented everything that you submitted in your proposal? And It's just a matter of consistently executing on those changes or are there still, call it, material changes That you're making to address those issues.

Speaker 3

Matt, again, I understand you're very consistent in Wanting to know the answer, and I certainly appreciate that. We have across all of this regulatory work, still have a substantial amount to do. It's really not right for me to talk about under any Specific consent order where we think we are in the process, because again, what I said ultimately is what's going to matter Is whether our regulators believe it's done to their satisfaction. And it's really unhealthy to get into the game of Do we think we're done? Do we think they're making the right conclusions?

Speaker 3

I think it's on us to continue to do all that's necessary. And when they're comfortable that we satisfy those obligations, they will make that determination. And so I just Again, I'm sorry, I understand why you seek more detail, but it's just a difficult Saying probably not the right thing for us to get to that level of specificity.

Speaker 11

I appreciate that. And I know I asked this line of question Every quarter, but obviously, it's such a key part for the stock. And I know I've also asked this kind of follow-up question. I think you have like a slew of local regulators on-site or at least on-site virtually. But I think there's a perception that it's kind of More of the central regulators that are kind of going to be the ones that make the call.

Speaker 11

And just remind us in general, What is like the frequency of the dialogue with some more of those central regulators? And just any flavor you can add on

Speaker 3

I think it's fair that I think I would speak for most big banks that the level of dialogue with Both local staff and with DC is substantial and meaningful. I mean, I can just tell you even from my last role, It is it's the right thing to do. Again, we certainly have increased, I think, the level of dialogue that we have since the New team has gotten here. And it's hard to put specific how often we do it, but it's very, very regular. And I think it's true that all of the big banks, both the local staff as well as the staff in DC are both extremely important in their monitoring and in the way they draw conclusions about the company.

Speaker 3

And we Worked hard to treat both extremely respectfully. There's a very direct and open communication on their side as far as I can tell. And as I said, we say the same to the local people as we do to the DC staff. But again, they're a very, very important part of the journey that we're on, and we want them to be as knowledgeable About what's going on here, on all of these important issues, and we're always available and willing to have those conversations with them.

Speaker 11

Okay. Thank you.

Operator

The next question comes from Scott Siefers of Piper Sandler. Your line is open.

Speaker 8

Good morning, guys. Thank you for taking the question.

Speaker 5

Mike, I wanted to ask in a

Speaker 8

little bit more detail about rate positioning. I think I can figure this out mostly from your guide and disclosures, but would still be curious to hear your thoughts. Just with your significant asset sensitivity, can you talk a little bit about sort of where you're most sensitive on the curve and sort of when and how You'll benefit like put simply is the first hike the same benefit as the third and so on or where is it more where or when is it more or less powerful?

Speaker 5

Yes. And to state the obvious probably, the short end of the curve is most meaningful, right? So when you look at Just the whole curve shifting up, something like 2 thirds of the benefit ends up being on the short end. And so that's going to be by far the most Meaningful piece of it. I think for the first number of rate rises, it's hard to say exactly how many.

Speaker 5

I think the first 3 or 4 though, it's pretty linear. And you can use our disclosures as a way to sort of model that. You get it earlier in the year. You get it in March, it's worth a quarter or more than if you get it in June And so forth. And so it's pretty it's a pretty good guide at this point to use it that way.

Speaker 8

Okay. Perfect. Thank you. And then just separately, one of the criticisms on the story over the past few years has been that there are a number of Your competitors, a lot of smaller banks out there that sort of suggest that it's still pretty easy to steal talent and Business from Wells Fargo, your emerging loan growth seems to be running kind of contrary to What's been that argument for the last couple of years? Can you just sort of touch on that criticism and sort of where you are in terms of comfort with sort of stability and growth of the workforce?

Speaker 3

Listen, I feel great about the people that we have here. And I've listened to that for quite a while since I've been here. And when I ask people for specifics, very little seems to come back. Listen, it's a very, very competitive Workplace, we lose people to competition. We hire people from competition of all sizes.

Speaker 3

I think, I would say, as I've said before, when you look at the team that we have in place, both at a Senior level all the way down to people that we cover customers. I feel great about it. And I can honestly tell you, we've We I'm trying to remember, Mike, keep me honest here. If we like if we sat around a room and talked about, gee, oh my God, look at all the people that we're losing These smaller competitors and what are we going to do about it, that conversation hasn't happened. And we're very knowledgeable about Attrition that's happening at the company.

Speaker 3

So if a small company hires a banker, it might be a big deal for them. We're lucky enough to have A very broad set of coverage officers, But that's not to say it's not competitive. So maybe they're right, but we feel good about the people that are here and we're going to work hard to keep the people that are here.

Speaker 5

Yes. And I would just add a little color. We've been happy at what we've been able to recruit in places like the Investment Bank. We've hired almost a few Probably 2 to 3 dozen sort of relatively senior investment bankers. We've hired a bunch of paid people in the commercial bank on the front line.

Speaker 5

And so I think as Charlie said, it's definitely competitive and you could always find an anecdotal story of where somebody left to go do a bigger job at a smaller place or so forth. But we feel I think the teams feel good about being able to attract good people into the roles. And so Obviously, we've got to be competitive on pay. We've got to be but I think people are attracted to the franchise and attracted to the sort of direction. And So far, it's been constructive there.

Speaker 5

Yes.

Speaker 2

And I

Speaker 3

just want to say one other thing, which is especially when you get out get down into places like the Commercial Bank and You know our different businesses that cover consumers. As we've talked about having to Prove the talent in some parts of the company. The talent that we have in those areas is really exceptional and it's really deep. And it's a huge strength of the company. It's been a strength of the company for a very long time.

Speaker 3

So again, I think that might Tell you just how we think about the people that we have. And again, we never want to lose good people, but it happens. But it's Not something that we worry about hurting the franchise at this point.

Speaker 8

Good. Okay, Perfect. I very much appreciate those thoughts. So thanks again. Sure.

Operator

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

Speaker 4

open. Good morning. On the low single digit to mid single digit loan growth assumption, can you give us a little more detail How that breaks out among the products either in core C and I versus commercial real estate and consumer? And then separately, are there any areas of the loan book that you're really emphasizing at this point or seeing opportunities to ramp your activity similar to what You've been doing on the credit card side. Thanks.

Speaker 5

Yes. Look, it's a little bit of growth really across the board, John, and I think we're seeing opportunity really everywhere. And I think if you look at on the card side, we are

Speaker 2

expecting to see some growth in the card side.

Speaker 5

Some of that will be like true To see some growth in the card side, some of that will be like true revolve balances, some of that will be some of the intro balances coming off the new products, which will start to really pay off at the end of next year into the year after. We've been really happy with what we've Seen in the auto space, which in this environment are pretty good assets, pretty short lived assets and high quality In terms of what we've seen there, so we see some continued opportunity to grow there. And then on the consumer side, you have to go a little bit on the I'm sorry, on the mortgage side, you have to go a little bit below the covers. And if you look at the non conforming space, We are seeing some growth there, which we think will continue as we go into the year. That's offset By these EPBO loans going away, but nonetheless, we see some growth there.

Speaker 5

So it's really and I gave some color on the commercial banking stuff in my comments and we do expect some more opportunity in the multifamily and apartments and asset classes Like that in commercial real estate. So in places like commercial real estate, we're being really targeted about it. And even where you see a little limited growth in places like office In the quarter, and even in places like that, cash to equity ratios are up, structures are better, spreads are better, given sort of what we've The way we're managing that, so we're being really cautious in that space, but I do think it'll be a little bit of growth across

Speaker 4

And then separately on the buyback front, Buybacks came in a little bit better than we had expected in the Q4. Maybe

Speaker 2

if you

Speaker 4

can just give us your thoughts on the outlook there, on your appetite, Buybacks and also the how you're thinking about the dividend here in terms of deployment? Thanks.

Speaker 5

Yes. Look, I think We've talked about this before, and we're maybe in a different spot than others just given some of the constraints we have on the asset cap. But We still feel like we've got excess capital. You can see that in the numbers yourself. We do expect that we'll continue See some loan growth, so that will drive some RWA and so that we've got to be thoughtful about that.

Speaker 5

And so as we laid out earlier last We said we would do at least $18,000,000,000 of buybacks through the 4 quarter period ending next in the second quarter. That still is achievable and we potentially have the opportunity to go above that if we decide that's the right path Either this quarter or next quarter. So we'll look at sort of how we feel with all the things we got to think about and make that decision. As you sort of think about the dividend, I think Charlie covered this a couple of times last year, is you think about a payout ratio that we hope to get to on a normalized basis, so take out Some of the one time things that you see in the results, it's really kind of a 30% to 40% payout ratio is what we target over time and that just Take some time to get there. And so I think we'll ultimately that's the Board decision in terms of when and how much we increase the dividend, but We're still marching down that path and but it takes some time to get there.

Speaker 4

Got it. All right. Thanks, Mike. Appreciate it.

Operator

The next question comes from David Long of Raymond James. Your line is open.

Speaker 2

Good morning, everyone. You've talked in the past about the operating expense savings being a multi year plan and or initiative. And so with your guidance this year in the $51,500,000,000 range, should we be expecting 2023 operating expenses To still be below that level?

Speaker 5

Yes. Look, at this point, as we think about it, our goal would be to See a net reduction next year. I think we'll obviously give you more guidance on how that's progressing as we get towards the end of the year, and That will be a function of what we think we can invest properly and when inflation looks like and a whole bunch of factors. But we're certainly given what our view on the efficiency side is, targeting that, but we'll give you more guidance on that Seaside is targeting that, but we'll give you more guidance on that later in the year. I don't see anything to add.

Speaker 2

Okay, great. And then as a follow-up, a little bit longer down the road, once the consent orders are mostly in the past, if you replace the costs Today, to improve and upgrade your internal operations with the expected cost to sort of just maintain proper controls and risk management Eckertz, how much savings do you see there?

Speaker 5

Yes. Look, I think there is some savings there, but that's our focus now Getting the work done and getting all the stuff in place and making sure it's operating properly. And so we're focused a little bit we're being thoughtful about how we implement that stuff, but Our focus is a little bit less on making it the most efficient and optimized process. So we will get there when that Stuff is all done and running for a while, but that's a few years off, I think, in terms of really optimizing the risk and compliance.

Speaker 2

Got it. Thanks, Mike. Appreciate it.

Speaker 8

Yes.

Operator

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

Speaker 12

Hi, good morning. So just wanted to squeeze one more question in here just on the fee outlook. A fair amount of noise in the fee line this quarter. I know you didn't give an explicit fee guide for 2022, but as we reflect the impact of business sales, The overdraft change, some weaker mortgage banking and normalization in equity gains, how should we be thinking about the right jumping off point for fee income just Looking ahead to next quarter in 'twenty two just more broadly.

Speaker 5

Well, I think you just outlined it, to be honest. I think you just have to take each of the lines, right? And I know we've talked about this on calls before. Like if you look at one of the biggest fee lines, you take the investment advisory and other asset based fees, That's a function of our client assets and what the equity market is doing primarily. And so that's probably something that you can model.

Speaker 5

And we've got That grew a bit as we went through the year last year. And then I think as you said, we're in the mortgage space. We'll see some the 4th quarter number in the consumer side is probably a good place to start your jumping off point in modeling. And as I think others have spoken about too is we all expect the mortgage market to be down with refinancings really driving that. And how well we do will be a function of how well we're able to sort of penetrate on the purchase side.

Speaker 5

Hopefully, we're down a little less than what the market is, but that will be a function of what we can deliver. And so I think you just got to take each of those lines and sort of model it forward.

Speaker 12

Thanks, Mike. And maybe I'll just squeeze one more in, if I can. Just on the earlier discussion around excess liquidity deployment, It looks like you deployed some of that excess in the quarter and yet if I look relative to pre pandemic levels, You've still seen a doubling of excess reserves and those deposits that you guys have on balance sheet as you noted earlier should be stickier As the Fed initiates QT, just given some of the changes in deposit mix, I was hoping you could just size the amount of excess liquidity Available for deployment today. And if the long end continues to grind higher, is there any appetite or willingness to deploy more aggressively The net mid single digit growth that's contemplated in the NII walk.

Speaker 5

Yes. I mean, the first thing we'll be looking at is how fast loans are growing, right? So obviously, that's like the You'd see that liquidity get deployed first to support customers. And so that will be a function of what we think is going to happen over a series of quarters. But and I think when you look at the securities portfolio, we have done a lot in the last year, both in increasing Our mortgage exposure, increasing our structured product CLO exposure, the place that you saw the decline was really in the treasury And so given sort of what was happening in the rate environment, and so I think you will see us start deploying more.

Speaker 5

And as I mentioned earlier, we've started In a very small way already given sort of what we've seen over the last couple of weeks. And I think really how much How fast we go or how much we go will be both a function of what we think is going to happen with rates, but also how fast we think loans will grow. And Those two things, I think, will drive sort of the pace. And at this point, embedded in our outlook or considerations there, We do expect a modest increase in the portfolio and so we'll see how but we'll make that determination based on all the factors there that I mentioned.

Speaker 12

Very helpful color, Mike. Thanks so much for taking my questions.

Operator

The final question for today will come from Gerard Cassidy of RBC Capital Markets. Your line is

Speaker 13

open. Thank you. Good morning, guys. Charlie, you talked about joining the Net Zero alliance as with some of your peers. Can you frame out for us as you guys get deeper into that and your peers do as well, how should we Trying to estimate what types of risks you might be coming up against and how do you guys monitor those risks?

Speaker 3

Listen, I think it's a great question. I think it's the question that everyone is asking. And I think the whole point about Joining these alliances is to ensure that we're all benefiting from each other's experiences and those that have experienced this in other parts of the world to understand how to actually think about that. What we're doing is we're going through how we think the impact of climate on a much longer term basis Can impact all of the different businesses from a risk perspective, but also understanding where the opportunities for us are. And so whenever we talk about where we're going on Climate with our goal to get to net I think people too often jump to that means we're going to stop doing things.

Speaker 3

First of all, what we're trying to do is to assure that we're doing everything we can To help all of our clients transition, and that doesn't mean walking away from clients. It means helping them invest in areas, Whether it is and we can do that in lots of different ways across the company with our own balance sheet or the public markets To invest in very, very different ways. And I think what you'll start to see from us and others is a lot more disclosure on what the embedded risks are, but also all the different things that we're doing to play our part in reducing emissions more broadly. So I just think it's a question that I think we should continue Ask as we all continue to provide more significant disclosures than we've all done in the past on the topic.

Speaker 13

I appreciate that. Thank you. Pivoting to the follow-up question on credit, obviously, your guys' credit It's fantastic like the industry considering what we just came through. Can you give us some color on the reserve? I assume as we normalize credit, You and your peers, how should we be looking at the reserve building over the next in 2022 going into 2023, loan loss reserve building that is?

Speaker 3

Well, let me start, Mike, and then you just pick up. I think the one thing I obviously, I think you guys all know this is Not everyone starts at the same position when you look across what people have done with reserving across the industry. I think we feel very good about where we are relative to what we're seeing. We all have to make determinations, remember, on a forward looking basis as What the embedded losses are, and I think everyone's got a different point of view on that what On the way that looks, and I think we're at the we're doing the right thing, but I still think it's our assumptions are appropriate and conservative. And beyond that, remember, the idea of looking forward in terms of what's going to change, In addition to just loan growth and making sure that we provide for growth in the balance sheet, it's going to depend The ultimate outcome of the performance of the economy.

Speaker 3

And so as we sit here today, we feel very, very good about it, But it can take lots of different turns and hopefully we're still insulated from some level of Downturn from where we sit today given the assumptions that we've made because of the uncertainty that exists in the environment. So I'm not worried about where we are in 2022 personally, but I think as we look beyond that, It's a living, breathing calculation. Great. Thank you. Listen, thank you very much everyone for the time and we appreciate it and we will talk to you over the next quarter.

Speaker 3

Take care. Bye bye.

Operator

Thanks everyone for your participation on today's conference call. At this time, all parties may disconnect.

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Earnings Conference Call
Wells Fargo & Company Q4 2021
00:00 / 00:00