Wells Fargo & Company (NYSE:WFC) Q3 2023 Earnings Call Transcript

Wells Fargo & Company (NYSE:WFC) Q3 2023 Earnings Call Transcript October 13, 2023

Wells Fargo & Company beats earnings expectations. Reported EPS is $1.39, expectations were $1.25.

Operator: Welcome and thank you for joining the Wells Fargo Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

John Campbell: Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third 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.

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Information about any non-GAAP financials 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.

Charles Scharf: Thanks very much, John. I’ll make some brief comments about our third quarter results and update you on our priorities. I’ll then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start with some third quarter highlights. Our results reflected the progress we’re making to improve our financial performance. Revenue, pretax provision profit, net income, diluted earnings per common share and ROTCE were all higher than a year ago. Our revenue reflected strong net interest income growth as well as higher noninterest income as we benefited from higher rates and the investments we’re making in our businesses. Our expenses declined from a year ago due to lower operating losses.

As expected, net charge-offs have continued to increase from historical low levels, and we increased our allowance for credit losses primarily driven by our office portfolio as well as growth in our credit card portfolio. Average commercial and consumer loans were both down from the second quarter as higher rates and a slowing economy have weakened loan demand, and we’ve continued to take some credit tightening actions. Average deposits also declined from the second quarter and a year ago driven by consumer spending as well as customers migrating to higher-yielding alternatives. Consumer spending remains strong with third quarter year-over-year growth rates for both credit and debit card spending increasing from the second quarter. Now let me update you on the progress we’re making on our strategic priorities, starting with risk and control work, which remains our top priority.

As time goes on, we continue to make the progress necessary to complete our work. I’ve said that we have detailed project plans which track interim deliverables, not just the date the work is to be finalized and turned over to the regulators for validation. The work is not finalized all at once. It’s not as if there’s a big bang conversion at the conclusion of a big body of work. It’s just the opposite. Building our risk and control framework is a continuous ongoing effort. We are implementing changes throughout the life of the project, and we track effectiveness along the way. The numerous internal metrics we track show that the work is clearly improving our control environment, but we will not be satisfied until all of our work is complete.

We remain focused on the work ahead even as we are making progress. But I will repeat what I’ve said in the past: regulatory pressure on banks with long-standing issues such as ours continues to grow. And until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions. Additionally, until our work is complete, we could find new issues that need to be remediated, and these may result in additional regulatory actions. We also continued to take steps to advance our business strategy, which includes focusing on our core business and customers. We sold approximately $2 billion of private equity investments in certain Norwest Equity Partners and Norwest Mezzanine Partners funds. We are also making a number of investments to better serve our customers.

As a leader in U.S. middle-market and asset-based lending, we’re focused on finding ways to support our clients with the recently announced strategic relationship with Centerbridge Partners. Our middle-market clients will have greater access to alternative sources of capital that can be used to pursue a broader set of growth and value-creation initiatives across a variety of market conditions. Branches continue to play an important role in the way we serve our customers, and we continue to optimize our network, but we also look at targeted expansions in markets where we see opportunities for our franchise. Last week, we announced we are expanding our branch network in Chicago, where we only have 7 branches today. We also continue to make enhancements to our mobile app.

And in the third quarter, we launched Stock Fractions, giving Wells trade clients the ability to buy fractions of company’s stocks to help build a diversified portfolio regardless of stock price. Just yesterday, we announced the expanded availability of LifeSync to all consumer customers. Available on the mobile app, LifeSync is our personalized digital approach to aligning customers’ goals with their money and was launched to all Wealth and Investment Management clients earlier this year. Customers’ goals entered in LifeSync will be visible to bankers to enhance need-based conversations. We also expanded the capabilities of Fargo, our AI-powered virtual assistant and recently added the ability for customers to communicate with Fargo in Spanish.

These enhanced capabilities are just the latest of our ongoing investments to deliver seamless and consistent experiences across all our channels. We are seeing more mobile adoption momentum, adding over 520,000 mobile active users in the third quarter, our best quarterly growth since first quarter of 2021. We’ve also continued to make important hires who bring expertise to Wells Fargo and businesses we’re looking to grow. Before I highlight some of our new leaders, I’d like to take this opportunity to thank Bill Daley, Vice Chairman of Public Affairs, who’s retiring at the end of this year for all he has accomplished since he joined the company in 2019. Bill has been an invaluable asset to the company, and we benefited from his long experience in both the public and private sectors.

During this time at Wells Fargo, he helped strengthen our relationships with communities we serve, established new programs in housing and small business, and worked to rebuild our reputation both locally and nationally. I’m pleased to have announced that Tom Nides joined Wells Fargo as Vice Chairman earlier this month. Tom will be a close adviser to the senior management team on a range of issues, and we will work alongside our business leaders as we continue to expand our relationships with clients. The breadth of Tom’s experience across the public and private sectors will be an important asset to us as we continue to move the company ahead. We continue to invest in our Corporate Investment Banking business with new co-heads of equity capital markets.

These new hires complement the other important hires we’ve been making over the past year. We also hired a new Head of Trust Services and Chief Fiduciary Officer in our Wealth and Investment Management segment and a new Head of Affluent and Premier Banking in consumer, small and business banking. We also continue to focus on better serving our communities. During the third quarter, we published 3 reports that provided overview of the work we are doing to build a sustainable, inclusive future in communities we serve; outline our strategic approach to managing the risks associated with climate change in deploying capital to support the transition to a low-carbon economy; and describe our methodology for aligning our financial portfolios with pathways to net-zero greenhouse gas emissions by 2050 and presenting interim emissions-based targets to track that alignment.

We continue to make progress on our special-purpose credit program initiative we announced last year to help drive economic growth, sustainable homeownership and neighborhood stability in minority communities. We recently expanded our special-purpose refinance offers to prequalified Hispanic customers with Wells Fargo mortgages to refinance at a lower than market rate. The program launched last year for Black or African American customers has seen strong results, and the Hispanic offer has shown similar levels of customer engagement. We also announced that we’re offering a $10,000 homebuyer access grant that will be applied towards down payment for eligible homebuyers who currently live and work purchasing homes in certain underserved communities in 8 metropolitan areas.

And we now have 14 HOPE Inside centers of Wells Fargo branches, including the first focusing on serving the Navajo community. The centers help engage and empower communities to achieve their financial goals through financial education workshops and free one-on-one coaching. Looking ahead, the U.S. economy has continued to be resilient with key support from the labor and strength — from the labor market and strength in consumer spending. Delinquencies have continued to deteriorate at a relatively slow consistent rate without signs of acceleration across our portfolios. Our base case remains a continued slowing of the economy, but we remain prepared for a wide range of scenarios given there is still significant uncertainty ahead. Regarding capital, the Basel III Endgame proposal included higher capital requirements as we expected.

It’s a complicated set of rules. But at this point, if nothing changed and we didn’t take actions, we estimate that our RWA would increase by approximately 20%. There are some items that increased our capital requirements that we are hopeful will be adjusted, and we will be participating and sharing our perspectives on the proposed rules during the 120-day comment period. Additionally, we are evaluating changes we may make based on the proposed rules. Fortunately, we come into this from a strong position as our current capital levels are above the estimated regulatory minimum plus buffers. However, we still need to decide how much of an additional buffer we want to maintain and what mitigating actions we may want to take to reduce the impact of the new rules.

At this point, we still see a path to concurrently increasing our level of CET1 as appropriate, increasing our dividend and repurchasing common stock. Levels of each will be influenced by CCAR, the finalization of the proposed rules and economic conditions. I’ll now turn the call over to Mike.

Michael Santomassimo: Thank you, Charlie, and good morning, everyone. Net income for the third quarter was $5.8 billion or $1.48 per diluted common share, both up from the second quarter and a year ago. Our third quarter results included $349 million or $0.09 per share of discrete tax benefits related to the resolution of prior period tax matters. Turning to capital and liquidity on Slide 3. Our CET1 ratio increased to 11% in the third quarter, 2.1 percentage points above our new regulatory minimum plus buffers effective on October 1. This was up from 10.7% in the second quarter as higher earnings, the approximately 14 basis point benefit from the sale of certain private equity investments and lower risk-weighted assets were only partially offset by share repurchases and dividends.

During the third quarter, we repurchased $1.5 billion in common stock. Our strong capital levels position us well for the anticipated increases related to the Basel III Endgame proposal released in the third quarter. Based on where we ended the quarter, we estimate that our CET1 ratio would be 50 basis points above the fully phased-in required minimum if the proposed rules were implemented as written after factoring the growth in RWAs and the resulting decline in our stress capital buffer as well as the impact of the new G-SIB buffer calculation changes. Importantly, this is an early estimate, subject to change and is before any actions we may take to mitigate the impact of the new rules. Looking forward, we expect to continue to have capacity to increase our CET1 ratio, while we plan to continue to repurchase shares as we wait for the capital rules to be finalized.

Turning to credit quality on Slide 5. As we expected, net loan charge-offs continue to increase, up 4 basis points from the second quarter to 36 basis points of average loans. Commercial net loan charge-offs declined modestly from the second quarter to 13 basis points of average loans as lower losses in our commercial and industrial portfolio were partially offset by $14 million of higher losses in commercial real estate. We had $32.2 billion of office loans, down 3% from the second quarter, which represented 3% of our total loans outstanding. Vacancy rates continue to be high and the office market remains weak. Our CRE teams continue to focus on monitoring and derisking the portfolio, which includes reducing exposures. As we highlighted in the past, each property situation is different and there are many variables that could determine performance, which is why we regularly review this portfolio.

As expected, consumer net loan charge-offs continued to increase and were up $98 million from the second quarter to 67 basis points of average loans. Residential mortgage loans continued to have net recoveries, while our other consumer portfolios all had higher losses with the largest increase in our auto portfolio, which was up from the second quarter seasonal lows. Nonperforming assets increased 17% from the second quarter as growth in commercial real estate nonaccrual loans more than offset the decline in commercial and industrial as well as modest declines across all consumer portfolios. The decline in commercial industrial nonaccrual loans was primarily due to payoffs and paydowns, which is a good reminder that the resolution of nonperforming assets doesn’t always result in charge-offs.

The increase in commercial real estate nonaccrual loans was driven by a $1.3 billion increase in the office nonaccrual loan. Moving to Slide 6. Our allowance for credit losses increased $333 million in the third quarter primarily for commercial real estate office loans as well as for higher credit card loan balances, which was partially offset by a lower allowance for auto loans. Since the composition of our office portfolio is relatively consistent with what we shared with you in the past few quarters, we did not include a separate commercial real estate slide this quarter. However, we did update the table showing the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We’ve not seen significant increases in charge-offs in our commercial real estate office portfolio yet.

However, we do expect higher losses over time, and we continue to increase the coverage ratio in our commercial and — in our CIB commercial real estate office portfolio from 8.8% at the end of the second quarter to 10.8% at the end of the third quarter. On Slide 7, we highlight loans and deposits. Average loans were down modestly from both the second quarter and a year ago. While we continue to have good growth in credit card loans from the second quarter, most other portfolios declined. I’ll highlight specific drivers when discussing our operating segment results. Average loan yields increased 195 basis points from a year ago and 24 basis points from the second quarter due to the higher interest rate environment. Average deposits declined 5% from a year ago predominantly driven by deposit outflows in our consumer and wealth businesses, reflecting continued consumer spending and customers reallocating cash into higher-yielding alternatives.

Average deposits also declined in Commercial Banking, while they stabilized in Corporate and Investment Banking. As expected, our average deposit costs continued to increase, up 23 basis points from the second quarter of 236 basis points with higher deposit costs across all operating segments in response to rising interest rates. However, the pace of the increase has slowed, and our percentage of average noninterest-bearing deposits decreased modestly from the second quarter to 29% but remained above prepandemic levels. Turning to net interest income on Slide 8. Third quarter net interest income was $13.1 billion, up 8% from a year ago, as we continued to benefit from the impact of higher rates. The $58 million decline from the second quarter was due to lower average deposit balances, partially offset by 1 additional day in the quarter and the impact of higher interest rates.

Last quarter, we increased our expectations for full year 2023 net interest income growth to approximately 14% compared with 2022, which was up from our expectation of 10% growth at the beginning of the year. We now expect full year 2023 net interest income growth to grow by approximately 16% compared with 2022 with the fourth quarter 2023 net interest income expected to be approximately $12.7 billion. The expected decline in interest income in the fourth quarter was primarily driven by our assumptions for additional deposit outflows and migration from noninterest-bearing to interest-bearing deposits as well as continued deposit repricing, including continued competitive pricing on commercial deposits. Turning to expenses on Slide 9. Noninterest expense declined from a year ago driven by lower operating losses and increased 1% from the second quarter driven by higher operating losses, severance expense and revenue-related comp.

Last quarter, we updated our expectations for full year 2023 noninterest expense excluding operating losses to approximately $51 billion. We now expect it to be approximately $51.5 billion or approximately $12.6 billion in the fourth quarter. The increase reflects additional severance and other onetime costs, revenue-related compensation and some lags in realizing efficiency saves. We’ve reduced head count every quarter since the third quarter of 2020, and it was down 3% in the second quarter and 5% from a year ago. We believe we still have additional opportunities to reduce head count and attrition has remained low, which will likely result in additional severance expense for actions in 2024. We are working through our efficiency plans now as part of the budget process.

Additionally, if the FDIC deposit special assessment related to the events from earlier in the year was finalized in the fourth quarter, it would increase our expected fourth quarter expenses. And finally, as a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating results. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 10. Consumer, small and business banking revenue increased 7% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. Charlie highlighted the investments we were making in our Chicago branch network, and we’re also making investments in refurbishing branches across our existing network.

Additionally, we are bringing our digital onboarding experience to our branches, creating a fast and easy experience for our customers. At the same time, we’ve reduced our total number of branches by 6% from a year ago. Home lending revenue declined 14% from a year ago due to a decline in mortgage banking income driven by lower originations in servicing income, which included the impact of sales of mortgage servicing rights. We continue to reduce head count in home lending in the third quarter, down 37% from a year ago, and we expect staffing levels will continue to decline. Credit card revenue increased 2% from a year ago due to higher loan balances, partially offset by introductory promotional rates and higher credit card rewards expense.

Payment rates have been relatively stable over the past year and remained above prepandemic levels. New account growth continued to be strong, up 22% from a year ago, reflecting the continued success of our new products and increased marketing. Importantly, the quality of the new accounts continue to be better than what we were booking historically. While the majority of new cards were to existing Wells Fargo customers, we’re increasingly attracting more customers that are new to Wells Fargo. Auto revenue declined 15% from a year ago driven by continued loan spread compression and lower loan balances. Personal lending revenue is up 14% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 70% from a year ago and 18% in the second quarter.

We continue to make progress on the strategic plans we announced earlier this year, including focusing on serving Wells Fargo Bank customers as well as borrowers in minority communities. We did not originate or fund any correspondent mortgages in the third quarter. The size of our auto portfolio has declined for 6 consecutive quarters, and balances were down 9% at the end of the third quarter compared to a year ago. Origination volumes declined 24% from a year ago, reflecting credit tightening actions as well as continued price competition. Our origination mix continue to shift towards higher FICO scores, reflecting the credit tightening actions we’ve taken over the past year. Debit card spend increased 2% from a year ago with growth in most categories offsetting declines in fuel, home improvement and travel.

Credit card spending continued to be strong and was up 15% from a year ago. All categories grew from a year ago, including fuel, which rebounded after declining in the second quarter. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue increased 23% from a year ago due to the impact of higher interest rates and higher loan balances. Asset-based lending and leasing revenue increased 3% year-over-year due to higher loan balances as well as higher revenue from renewable energy investments. Loan balances were up 7% in the third quarter compared to a year ago driven by growth in Asset-Based Lending and Leasing. Average loans were down 1% in the second quarter due to declines in Middle Market Banking. After increasing the first half of the year, revolver utilization rates declined in the third quarter to levels similar to a year ago.

Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 20% from a year ago driven by higher lending revenue, stronger treasury management results reflecting the impact of higher interest rates, and higher investment banking revenue reflecting increased activity across all products. As Charlie highlighted, we’ve continued to hire experienced bankers, helping us deliver for our clients and positioning us well when markets improve. Commercial real estate revenue grew 14% from a year ago, reflecting the impact of higher interest rates and higher revenue in our low-income housing business, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago driven by higher revenue in structured products, equities, credit products and foreign exchange.

We’ve had strong trading results for 3 consecutive quarters as we benefited from market volatility and the investments we’ve made in technology and talent to grow this business. Average loans were down 5% from a year ago driven by banking, reflecting a combination of slower demand payoffs and modestly lower line utilization. Average loan balances were stable with the second quarter. On Slide 14, Wealth and Investment Management revenue increased 1% compared to a year ago driven by higher asset-based fees due to the increased market valuations. Net interest income declined from a year ago driven by lower deposit balances as customers continue to reallocate cash into higher-yielding alternatives as well as lower loan balances. While average deposits were down compared to both the second quarter and a year ago, the pace of the decline slowed in the third quarter.

As a reminder, the majority of WIM, Wealth and Investment Management advisory assets were priced at the beginning of the quarter, so third quarter results reflected market valuations as of July 1, which were higher from a year ago. Asset-based fees in the fourth quarter will reflect market valuations as of October 1, which were also higher from a year ago but were lower from the third quarter pricing date. Average loans were down 4% from a year ago primarily due to a decline in securities-based lending. Slide 15 highlights our corporate results. This segment includes venture capital and private equity investments, including the investments and funds that we sold in the third quarter. The sale had a nominal impact on third quarter net income.

Revenue declined $345 million from a year ago, reflecting assumption changes related to the valuation of our Visa B common stock exposure as well as lower venture capital revenue. In summary, our results in the third quarter reflect a continued improvement in our financial performance. During the first 9 months of this year, we had strong growth in revenue, pretax provision profit and diluted earnings per share compared to a year ago. As expected, our net charge-offs have continued to slowly increase from historical lows, and we increased our allowance for credit losses by over $1.9 billion this year primarily for CRE office loans and higher credit card loan balances. We are closely monitoring our portfolios and taking credit tightening actions where we believe appropriate.

Our capital levels have increased, and we expect to continue to return excess capital to shareholders. We will now take your questions.

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Q&A Session

Operator: [Operator Instructions]. And we will take our first question from John McDonald of Autonomous Research.

John McDonald: I wanted to ask about the expenses, Mike. Obviously, improving efficiency has been a big goal of yours. You made progress even while investing in regulatory. What are the additional opportunities to improve efficiency from here as you head into 2024? I know you’re probably not ready to give guidance for ’24 yet, but are you going into the budget planning with a mindset that they should be roughly flattish? Any comments you can give on that would be helpful.

Michael Santomassimo: Yes. Sure. Thanks, John. First off, let’s just make sure we keep it all in context, right? We set out a program almost 3 years ago now to cut roughly $10 billion. And I think that’s all still on track. We’ve brought head count down 40,000 from — or closer to 50,000 from the peak back in . So sort of very good progress to date. And I think as Charlie and I have both said over the last couple of quarters, we still have more to do to make it more efficient. And I would say there are very few parts of the company that we would say are optimized at this point. Now some have more opportunity than others, some require investment in terms of automation and technology, some don’t. But I do think that we go into the budget process and even just how we operate every quarter with a very disciplined approach to every single area of the company saying, what are we going to do to continue to drive more efficiency there while we make investments as well.

And we highlighted some of those that we’ve been making on in the prepared remarks. But I think it’s the same mindset we’ve been bringing to it now for the last few years, and I think we’re going to continue to do that. Where that ultimately ends up, we’ll share for next year. We’ll share with you in January, like we always do.

John McDonald: Okay. Fair enough. And then on the net interest income outlook for the fourth quarter, are you building in assumptions — you mentioned deposit outflows and mix shift assumptions? Are they assuming that things accelerate from here or similar to what you’ve seen this quarter? It seems like a pretty big sequential decline. Just kind of wondering what some of the assumptions are there.

Michael Santomassimo: Yes. No, look, I think as you can — as we’ve talked about over the last — it feels like forever, but certainly last 4, 5, 6 quarters now, there’s still a lot of uncertainty out there in terms of how the path of both the deposits and pricing will shape up. Whether it’s all the quantitative tightening, all of the — any competitive reactions we may see from others. And so I think we continue to think that we’re going to see these trends appear at some point. Now we’ve been pleasantly surprised this — to date this year that hasn’t progressed as fast as we thought it would, but at some point, it will. And so hopefully, we’ll find ourselves in a position where it doesn’t move as maybe fast as we’ve modeled in terms of pricing.

But we still — all those trends are going to happen and are happening as you look at shifts between noninterest-bearing and interest-bearing, you’re seeing deposit costs continue to increase. And on the consumer side, you see people spending their money. And so exactly at what pace those things are all going to keep going as we certainly modeled it, but we try to give you a base case forecast that we can hit under a bunch of different scenarios, and this is the same.

Operator: The next question will come from Steven Chubak of Wolfe Research.

Steven Chubak: So wanted to start, Charlie, because you had made some comments about capital targets and those potentially evolving. The inflation RWA from Basel III Endgame that you guided to does bring your CET1 minimum to 8.5%. You alluded subtly, mind you, to the possibility of managing to a lower target. Since 150 bps management cushion does feel excessive, what are some of the factors that would compel you to maintain a larger cushion than peers and maybe continue to run at or above 10%?

Charles Scharf: Well, let me just — I’ll start and then I’ll hand it over to Mike. We were not trying to — or I was not trying to give any direction about where we thought the appropriate buffer would be. We’re just trying to be very factual about where we are. And once everything is finalized, we’ll determine what the right buffers are and we’ll communicate those. So please don’t try and read any more into what I said other than just that.

Michael Santomassimo: Yes. And I think, Steve, I know your estimate might be 150 basis points. But I think what we’ve talked about over time is that at least at this point, we’ve been saying our buffer is probably closer to 100% — 100 basis points over wherever the right minimum might be. And that may evolve, as Charlie said. I think as you look at Basel III, the increase in RWA is driven by the things that are probably pretty obvious, whether it’s operational risk plus the — some of the other factors. But operational risk is certainly going to be one of the bigger pieces of it. And so I really do think that we have to see how the final rule shakes out next year. We’re hopeful that there’ll be some changes to areas that we think just makes sense from aligning sort of the capital requirements to the risk while also maybe moderating some of the operational risk increases as well.

And so we’re going to engage as we go there. But one of the factors that we’ve talked about now for a while in terms of how big our buffer should be is that we needed the rules to be finalized and so could that lead you to having a slightly smaller buffer than what we would have had in the past? Potentially. But I think we have to get there and get these finalized, and then we’ll also take actions once we have good clarity on what’s going to change or not change as we go over the next year. So I mean, we’re probably 9 months to 12 months away from getting a final rule, and so we still have a little bit of time for this to play out.

Steven Chubak: And for a follow-up, just on the trading business. It continues to surprise positively versus expectations. You cited some of the investments that you’ve made, the benefits of volatility. But with revenues running multiples above what we’ve seen in prior years and that $1 billion-plus bogey being reached for 3 consecutive quarters, I was hoping you could just speak to whether we should be underwriting $1 billion-plus as a new normal or if there were any cyclical benefits or anomalous benefits that maybe we shouldn’t be underwriting go forward. Just trying to think about what the normalized level of trading revenue should be given some of the investments you’ve made scaling of that business.

Michael Santomassimo: Yes, I’ll take that. Look, I think we’ve — as you said, we’ve just been methodically investing in the capabilities with a focus on supporting our core clients more than — more — with more capabilities versus like trying to expand the scope of what we do in a way that just doesn’t fit who we are. And so I think that’s what you’ve seen us try to do there in those businesses. So businesses like FX and rates and just — it’s sort of methodically sort of adding people in a couple of slots or improving technology. And we’ve certainly been the benefit of some volatility in the market this year. So as you know, that could change pretty quickly one way or the other. But I think as we look at some of these businesses, what we’re focused on is just adding more clients, more flows, more incrementally each month and each quarter.

And so whether it ends up being $1 billion plus or minus a quarter — per quarter, I think we’ll see as we go, but we’re pretty pleased with what we’ve seen so far. And there isn’t a big onetime event that happened in the quarter that drove the results. And so that’s good to see as well. And you’re also not seeing big growth in market risk RWA as we do this as well. And so that’s part of what we’ve been trying to do as well is kind of sweat the balance sheet more and make sure that we’re getting paid for the exposure and the risk we’ve got there. And so we’re happy to see that, it’s starting to come together. And we’re under no illusions, though, that 3 quarters is like success, right? We’ve got to do this over a long period of time and continue to add capabilities and clients.

Operator: The next question will come from Scott Siefers of Piper Sandler.

Robert Siefers: Was hoping maybe, Mike, you could spend another moment sort of discussing RWA mitigation in light of the Fed capital proposals. I guess, specifically, I was hoping for maybe a little more color. I know you touched on it in some of the earlier remarks, but the sale of the $2 billion in private equity. And then maybe if you could also discuss the new agreement with Centerbridge for direct lending, just sort of how all these factor into your thinking here.

Michael Santomassimo: Sure. When you look at mitigation — I’ll just give you some examples of the types of things we’re thinking about. So when you look at securities finance transactions, you have haircut — collateral haircut floors that get implemented. And I don’t want to get too technical on it because — but there’s some technical requirements there that just don’t seem to make sense to us. And so — but if they do get implemented as written, we’ll adapt and we’ll change the way we — what collateral we require from clients to do trades or we’ll reprice them. And so there’ll be a number of things that we can do like on transactions like that, but it gets very, very technical for each of the underlying deals. There will be — I know others have talked about this, too.

We’ll have to decide how much tax equity investing we do in renewables. If the risk weights hold there, it’s just — the math just doesn’t make sense from a return perspective. And so we’ll probably have to do less — we’ll probably do less of those. And so there’s a number of things like that as you go through each of the underlying portfolios just don’t make sense. And we’re going to — we’ll make the adjustments as we need to. Now we’re also in a position where we’ve got plenty of flexibility as we talked about in the prepared remarks, right? Our capital levels today are there with a buffer already. And so we have the flexibility to handle it however we think makes sense to — for each of the underlying businesses. And what we want to make sure we do is like we’re building real businesses and client relationships over a long period of time.

So it’s not about necessarily walking away from clients. It’s about finding ways to serve them in ways that both makes sense for them and from a return perspective for us. But it’s going to be a very, very granular conversation. Some of it will be repricing. You got 364-day revolvers that will need to be repriced. You’ve got — there’s a whole bunch of very technical things like that, that will get done over time once the rule is finalized. Switching to the partnership we have with Centerbridge. Look, it’s a — we have been getting demand from clients for a while now in the middle-market kind of mid-corporate space for solutions to help them in financing that they need where it likely wouldn’t make sense for us to put on our balance sheet anyway.

And so instead of having telling clients we can’t help them or having them go direct to somebody else, we built a partnership with Centerbridge that allows us to remain an adviser to a client and help them solve a problem they may have. And so that’s the way we’re thinking about it. And we’re excited to work with Centerbridge and that team, and they’re a very high-quality team, they have done a lot over time. And I think this gives us another arrow in the quiver to help us provide solutions for clients. And so it’s early, and it will grow over time, hopefully. And hopefully, clients will see it in the same way.

Robert Siefers: Okay. Perfect. And then maybe as a follow-up, might want to revisit — or I was hoping to revisit the NII discussion for a bit. I certainly appreciate all the comments on continuing mix shift and deposit pricing pressure. But I guess, as we get to this level at the end of the year, is the thought that there would still be on balance downward pressure on NII beyond that? Or is — as you see it, is there enough kind of asset repricing opportunity that would ultimately allow things to settle out maybe sooner as opposed to later?

Michael Santomassimo: Yes. I mean we’ll see. I think we do need to wait until we get towards the end of the year and into January for us to give you a real view on 2024. I mean, I think what the last number of quarters have — just show over and over and over that there’s a lot still to play out here. And to get too far ahead of ourselves on it for next year, I think, would be a mistake at this point. So — but look, the same — it’s the same drivers we’ve been talking about for a while, right? It’s like what’s going to happen with deposits, the mix, the pricing. And then to a lesser degree, right now, it’s loan growth, but it still matters over a long period of time as well.

Operator: The next question comes from Matt O’Connor of Deutsche Bank.

Matthew O’Connor: Can you just elaborate on the comment of tightening the credit box a bit? And then, I guess, specifically in credit card, thoughts there? I know you’ve been leaning into it and have had real good growth. And I think it’s still only about 5% of your loan book, but wondering your thoughts of, is this really the right time to be leaning into credit card maybe as we’re kind of later cycle.

Michael Santomassimo: Yes. I’ll start with credit card and come back to the broader point. So we started on a journey to transform that — the card business back in the fourth quarter of ’19, so right after really Charlie started. And what we’ve done since then is really refreshed — almost completely refreshed the product line. We still have a little bit more to do there. And so part of what you’re seeing come through in the results is actually putting out good products that people want to buy. And you’re seeing really — we have really good new account growth in the quarter, probably our best quarter in quite some time. And so it starts with just having a good product and good service behind it, and that’s the key driver, I think, of what you’re seeing here.

On the credit side on the new originations, the new accounts we’re adding are really good relative to the back book. And when you look at both — and even when you dig a little bit deeper there, there’s — the majority of them are still Wells Fargo Bank customers, but we’re seeing more and more traction with non-Wells Fargo customers, so first-time customers. And when you look at those first time to Wells customers, those — the credit profile is really good. And so we feel comfortable with like the risks that’s being added there. And we’re going to continue to look for pockets of risk. And if we see them, we’ll tighten it down. But in terms of what we’re seeing in originations, we feel good about what we’re seeing so far. Just more broadly on credit, we’ve said now for probably the last 4 or 5 quarters, we’ve been kind of incrementally tightening the credit box on the consumer side for a while.

Whether it’s really across the board in home lending, auto, card, personal loans, really every single one of them had some credit tightening. And it’s been a bit incremental over the last 4 or 5 quarters. And so I would still sort of think of that as like taking that last 1% or 2% or 3% of origination out that doesn’t make sense in what could be a more difficult economic environment. It’s not wholesale shifts in sort of the approach or the underlying box that we’re operating in. It’s really sort of modest and incremental. And then on the…

Charles Scharf: Just on — and just to be clear, I mean it’s — and it’s the very basic stuff. It’s just upping the lower FICO boundaries, it’s layered risks. And so it’s just as you continue to make these changes, you just — we’re just continuing to do the same types of things without just wholesale exits or anything like that. It’s just kind of a smart tightening.

Michael Santomassimo: Yes. And then outside the consumer space — outside of consumer, really the only place that we’ve meaningfully tightened credit over the last couple of years or a few years is commercial real estate. And other than that, I think there’s probably some minor tinkering, but we haven’t really changed the appetite much outside of commercial real estate.

Matthew O’Connor: Okay. That’s helpful. And then just a clarification on the severance costs. Can you give us what the absolute amount was this quarter? I think you gave us the change versus a year ago and linked quarter. But what was the absolute level this quarter?

Michael Santomassimo: Yes, there wasn’t a lot a year ago, so it’s not far off of the total. So a small difference, but it’s — there wasn’t a lot.

Matthew O’Connor: Okay. So about $200 million?

Michael Santomassimo: Yes. And again, that will sort of evolve as we go. I mentioned that in my script as we look at next year and the attrition rates that we’re seeing.

Operator: The next question will come from John Pancari of Evercore ISI.

John Pancari: On the commercial real estate front, I know you cited the increase in the office loan loss reserve from — in the CIB from 8.8% to 10.8%. Could you just comment there in terms of what were some of the anecdotal drivers for the loan loss reserve increase? Do you think you could have incremental increases here? And maybe cite some of the office revaluations you’ve seen as you have seen with the underlying collateral change hands or reappraisals, if you can give us some color there as well.

Michael Santomassimo: Yes, sure. When you — the hard part of office right now is that there aren’t a lot of trades happening yet, right? There’s a few in certain cities, and they’re all a little bit different in their complexion. So you still have somewhat limited information in price discovery in a lot of places. And so we’re doing — we do a lot of our own work to try to evaluate each of the underlying properties and what they could be worth in a bunch of different scenarios. And then it’s feeling like the appraisal market is starting to kind of catch up, where they’re — we’re seeing appraisals that are more realistic and more updated. So that’s certainly bringing in different data points as we look at it. And as we looked at the quarter, we sort of look at all those data points and the underlying loans and try to do our best to come up what we think the different range of loss could look like here, and that’s what’s embedded in the results.

Hopefully, we end up being conservative. But nonetheless, it’s possible that this plays out this way. And so we haven’t really seen any losses of significant yet — significance yet, but we will. And it just takes some time for it to play out for each of these underlying situations, probably longer than any of us would hope to — you’d hope that you could bring some of this stuff to resolution maybe faster than it really takes in real life. But it’s really looking at all the data points, the limited sales, the new appraisals that are coming through and then our own analysis for each of the underlying properties.

John Pancari: Got it. All right. And then separately, also within commercial real estate, we’re getting more and more questions around multifamily exposures and just how well they really are holding up given some supply issues in certain markets. Can you just comment there? Are you seeing any noteworthy stress or any changes to underlying reserve for that book?

Michael Santomassimo: Yes. Not a lot. I mean you certainly see certain markets that might appear to have some oversupply in condos in certain places. But it feels like that will work itself out over a period of time. We’re not seeing real systematic stress in the portfolio at this point.

John Pancari: Got it. If I can ask just one last one. On the head count cuts, you mentioned you look at every business pretty much. Are any head count cuts occurring yet in the risk area or anything? Or any changes with the contracts with consultants in the risk overhaul area at all?

Michael Santomassimo: Yes. No. Look, the only thing I’d say on the risk and reg work is that we’re going to spend whatever we need to spend and put the resources we need against it to get it done. And we’re going to continue to do that towards…

Charles Scharf: Just to be clear, like we’re not cutting head count related to that. In fact, it’s probably the opposite when you look over the past bunch of quarters. The only thing which goes up and down is depending on where we are with work with outside consultants, that number will go up or down in a given quarter. But we’ve also said, if we can use outside resources to help get the work done sooner, we’re going to. So as we think about — just as we think about our efficiencies, that is just not in scope at this point or for the foreseeable future.

Operator: The next question comes from Erika Najarian of UBS.

Erika Najarian: My first question is on the revenue side. As a follow-up to Chubak’s line of questioning, I think not only the trading numbers come better this year but also investment banking. And so I hear you loud and clear about the cyclicality of the trading business. But I guess, help us get a sense of if the industry wallet, for example, return to 2019 levels, do you think that you’re going to have generally a higher share of revenues in capital markets versus 2019? And sort of the sub-question to that is, as we think about the investments you have already made, what are the other businesses that could potentially surprise us to the upside, where it’s not quite optimized yet in terms of its revenue production? And obviously, everybody is thinking about — you mentioned card, and also everybody is also thinking about wealth management and investment advisory revenues.

Charles Scharf: Yes. Well, let me take a shot at that. I think — listen, I think the answer is, to your question on share, without getting overly specific, yes. We think when you look at where we stand on our growth in our Corporate Investment Banking share, whether it’s on the trading side or whether it’s on the fee-related side, our shares have grown. And certainly, on the — within the fee-based side of the business, we do hope they continue to grow. That’s driven by the investments that we’re making, and investments meaning people in terms of growing our capabilities. And we’ve got clear goals and targets by person that we bring on in terms of what we expect, and we’re going to be tracking to that. And just a reminder, certainly, when we brought some of the people on, they bring some — a lot of clients with them, some new transactions in the short term.

And we’ve been beneficiaries of that over the last couple of quarters just as we brought some people on. But these are relationship-based businesses, and transactions don’t occur every single quarter. So we would expect our share to continue to grow. And I just — as a reminder, without taking any additional risk overall because we’re taking the risk today relative to the exposures that we have. When we look at where we can see growth coming overall across the entire company, we just go business by business. Absolutely, in our consumer small business — small and business banking segment because — we’ve basically been treading water there as we stabilized that business going back to the issues that we had there, which was an incredibly difficult thing to do, and we did.

And we’ve not been our — we’ve not been on our front foot in that business. We’re going to do it in a very different way than this company did it historically, but there are opportunities to be on the front foot and actually grow share on an organic basis. And so incredibly excited about that opportunity. Not excited, as I said, about growing share in mortgage. That’s not where we’re after, and it’s — we’ve talked about where we’re going there. Auto, it’s about returns, not growth. So don’t look for a lot of growth there unless the dynamics change in the business. Mike spoke about card. We’re incredibly energized by the evidence that shows with our brand and our relationships. When you put a great product out there, we get positive selection and real growth.

And by the way, look at our spend numbers. I mean, if you want to see like the impact of what it means, just look at the spend that we’re seeing, which is much higher than the industry levels. Our wealth business, as you pointed out, no question, also treaded water for a long period of time. We’re attracting people and teams. We’re rolling out new products. So we feel really good about the opportunities that are there. And in the middle market segment, where it’s a little bit more business as usual because it is such a strong franchise for us. Even there we look back at our asset-based lending businesses and the things that we acquired from GE. They ran as stand-alone businesses here for a long period of time, and we didn’t bring the entire product set of Wells Fargo to those customer bases.

Under Kyle Hranicky, Kristin Lesher and MK DuBose or Mary Katherine DuBose are diligently working through that and bringing the Investment Banking product to that entire Commercial Banking product. So I could go on. I just — it should be broad-based. Most of it, by the way, I’ll point out, in terms of when we see opportunities, it is fee-based growth, not because we’ve dictated that but just because we focused a lot on NII as a company historically. And we just have a lot of opportunities that we get excited about that will play out over a period of time.

Erika Najarian: Got it. And I think that excitement is clear, Charlie. And my second question is, given all of that and taking a step back, I totally think it’s too early, I agree with you, to give anything on ’24 expenses. But more broadly discussing, do you feel like the company is in a little bit of an inflection point? Because on one hand, Mike was saying that very few parts of the bank are optimized. On the other, I think you guys mentioned that the head count is not going the other way, and perhaps it’s really some of the outside consulting fees that could go up and down. But I’m wondering if you get asked about expenses in a framework of flat, but then all of this momentum on the revenue side seems to be on the comp. And I’m wondering how you think about as you budget for the company and as you think about just getting to that 15% ROTCE.

Let’s just put Basel III Endgame aside in terms of the denominator, how do you balance some of the shareholders and the analysts that are asking you about expenses in the context of flat versus the revenue momentum that obviously would need expenses to keep sustaining versus that revenue momentum that you seem to be so excited about?

Charles Scharf: Let me start. And Mike, you either come in at the end or just make your comments along the way as well. So I think, first of all, we think about it as 2 separate exercises that we go through. And we’re — and it’s very timely because we’re in the middle of going through the exercise for next year as most other companies are, which is this company is not efficient, like period, end of story. And I’ve described this, even with all of the reductions that we’ve made, it’s not surprising because as you peel the onion back, other things present themselves. And so you go in order of things that are more obvious and things like that. But when we sit around as a management team, we feel great about the progress. And there’s no clearer way to see that than in the head count numbers, which ultimately drive the expense of the company.

And if I — if we stood here and told you we were going to drive the head count down that much in this period of time, I’m not sure you’d have believed us. And so when we say we’re going to do something, we really do mean it. And so when we sit around as a team, there are many more efficiencies to get, and we’re diligently working through those. And then separately from that, it’s when we talk about making investments in the place, are we getting the payoff for it. And so whether it’s the marketing in the card business, where we’re spending more money on marketing than we had in the past, and we feel great about, as Mike pointed out, not just the volumes that we’re getting but the underlying quality relative to how we had modeled that. And so we’ll do that with each and everything.

And ultimately, we need to make a decision as we finalize the process of the budget on just much more of a tactical basis of how those things net out. We’re well aware of what shareholders are looking for. We’re well aware of that the expense side of this company is an important equation in what investors look at us in terms of where — unlocking value, and we hear it and we see it. And whatever — wherever we come out when we talk to you about our guidance for next year, we will explain why we got to where we are. It’s going to include efficiencies. It’s going to include investments. Whether it — where that turns out, we’ll explain it. And I think so far, we’ve been as clear and as transparent as we can be. And if it makes sense, you’ll like it.

And if it doesn’t, you won’t, you’ll tell us. But so far, we’ve been able to have alignment there. But overall, I would just — it’s a long way of saying it’s not lost on us that we have opportunities both to reduce expenses and to invest. But making sure that the overall expense level stays in check at this place is incredibly important to us, and we have to prove that there is revenue growth there supporting investments that we make.

Operator: The next question will come from Ebrahim Poonawala of Bank of America.

Ebrahim Poonawala: Just Mike, for you, a follow-up on credit on the C&I side, nonaccrual charge-offs staying relatively flat, I guess, as we look through. Just talk to us in terms of when you look at that C&I book, is the impact of the Fed rate hikes felt by your customers? And how are you seeing that evolve? Is your expectation right now — you talked about the economy being resilient. Are you seeing any soft spots on the C&I book where you’re seeing bankruptcies rise within a vertical or a certain segment?

Michael Santomassimo: Yes. No. Look, I think, first, you’re seeing it come through in utilization of revolvers, right, which are pretty much in check. They aren’t moving much and down in some cases. So people are building less inventory given where rates are. They may be making decisions on like how fast they want to invest in their businesses. And so you’re seeing that come through in loan growth, which is sensible for — from their perspective. I think when you look across the portfolio, there are certainly pockets where you may be seeing margin compression still or different idiosyncratic issues. But across the portfolio, the credit quality is still good.

Ebrahim Poonawala: Got it. And do you think your customers have felt the hit from higher rates already? Or is that on the comp?

Michael Santomassimo: Well, I think they certainly felt it so far, right? I mean most of them have variable rate loan that they service, right? And obviously, the longer rates stay high, they’ll maybe feel it more. But certainly, I think they’ve been impacted.

Ebrahim Poonawala: Got it. And just one separate quick question on the outlook for buybacks. Clearly, big reset lower. When you — like your excess capital, you probably have visibility on the worst case on Basel Endgame. It’s very rare that banks have excess capital when the stocks are actually near lower. You’re creating a tangible book. How do you think about outside of CCAR and SCB in terms of near-term pace of buybacks over the next few quarters relative to what we did this quarter?

Michael Santomassimo: Yes. I mean we’re not going to get into like trying to give you a view on pacing. We’re going to go — we have a process we go through every quarter to look at all of what’s happening. First, it’s like how are we going to support clients, what’s demand we’re seeing, what kind of risks are out there. In the fourth quarter, we have the FDIC special assessment potentially coming. And so there’s a whole — each quarter, there’s going to be a whole range of things that we’re going to go through, and then we’ll decide on pacing.

Operator: [Operator Instructions]. Our next question comes from Gerard Cassidy of RBC.

Gerard Cassidy: Mike, can you share with us — you and your peers as well as investors, we’ve all been surprised with how this deposit trend of moving money into higher-yielding deposits is going slower than expected. Is there any categories within your deposit base, whether it’s just your regular consumer deposits or high net worth deposits or the nonoperational commercial deposits that are moving more slowly? And I know you said you expect it to happen, but is there something that says that it could pick up real quickly in the next 6 months? Or is it just a gradual increase?

Michael Santomassimo: Yes. Gerard, I think you really have to pick it apart by the different businesses. I think in the wealth business, it moved quite quickly, right, in terms of seeing deposits decline from where they were and that is now moderated. So it’s good to see that, that shifting has sort of slowed down quite substantially in the quarter relative to the last couple of quarters. On the consumer side, the majority of the deposits that we’ve got sit in accounts with less than $250,000. And so to some degree, these are — to a large degree, these are operational accounts for folks. And so there’s some portion of those funds that are never going to move into other places because people need it in the accounts to live and operate every day.

And so I think what’s — so I think we’ll see, right? And I think we’re all in a bit of uncharted territory at this point with rates being where they are and the pace at which they got there, quantitative tightening happening. And so I think we need to be prepared for it to change. Exactly at what pace and over what period of time, we’ll see. But we certainly haven’t seen deposit pricing move the way we modeled it a year ago, for sure.

Gerard Cassidy: Very good. And then as a follow-up, since you and Charlie have come on board, Wells has really done a very good job in returning that excess capital. I understand everything that’s going on today, and you guys described it in your comments. Can you share with us, is there a buffer — whenever the final numbers come out, are you guys planning to keep a 100 basis point buffer above that? Or any color there?

Michael Santomassimo: Yes. We haven’t decided exactly what it’ll — what the buffer will look like after Basel III is implemented. But so far, what we’ve said a number of times is that 100 basis points is about where we’ve been targeting. Obviously, we’ve been running above that for a while. But we’ll — as we get a better view of where these rules are going to shake out, we’ll probably talk about that more. But I would think that 100 basis points, at least for now is sort of the bottom end of the range.

Operator: And that was our final question for today. I will now turn it over to your speakers for closing remarks.

Charles Scharf: All righty. Everyone, thank you very much. We look forward to talking to you again next quarter. Take care now.

Operator: Thank you for your participation on today’s conference call. At this time, all parties may disconnect.