Wells Fargo & Co

NYSE:WFC

Earnings Call Transcript 2023-Q1

[Operator]

Welcome, and thank you for joining the Wells Fargo First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that today's call is being recorded.

I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

[John Campbell, Director, IR]

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first quarter results and answer your questions. This call is being recorded.

Before we get started, I would like to remind you that our first quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

[Charlie Scharf, CEO]

Thanks, John. I'll make some brief comments about our first quarter results and update you on our priorities. I'll then turn the call over to Mike to review first quarter results in more detail before we take your questions. Let me start with some first quarter highlights. Our results in the quarter were strong and reflected the continued progress we're making to improve returns.

We grew revenue from both the fourth quarter and a year ago. We continue to make progress on our efficiency initiatives and expenses declined from both the fourth quarter and the year ago, driven by lower operating losses, but we continue to be focused on controlling other expenses as well. The consumer and majority of our businesses remain strong. Delinquencies and net charge-offs have continued to slowly increase as expected. We're looking for signs of accelerated deterioration in asset classes or segments of our customers. And broadly speaking, we saw a little change in the trends from the prior quarter.

However, weakness continues to develop in commercial real estate office, and Mike will discuss this in more detail. Given what we're seeing, we're taking incremental actions to tighten credit on higher risk segments but continue to lend broadly. We increased our allowance for credit losses for the fourth consecutive quarter. Our economic expectations used to support the allowance have not changed meaningfully but we do continue to look at specific asset classes, such as commercial real estate to appropriately assess the adequacy of the allowance.

We will continue to monitor the trends in each of our loan portfolios to determine the future action is warranted. Both commercial and consumer average loans were up from a year ago, but were relatively stable from the fourth quarter. Consumer spending remained strong with growth in both debit and credit card spend, but spending began to soften late in the quarter.

The decline in average deposits that started a year ago continued in the first quarter primarily driven by customers seeking higher-yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press but those inflows have abated.

Our CET1 ratio, which was already strong, increased to 10.8% even as we resumed common stock repurchases in the first quarter buying back $4 billion in common stock. Let me share some thoughts on the recent market events impacting the banking industry.

We're glad that the work we have completed over the last several years has put us in a position to help support the U.S. financial system. Along with 10 other large banks, we utilized our strength and liquidity, and we made a $5 billion uninsured deposit into First Republic Bank, reflecting our confidence in the country's banking system and to help provide First Republic with liquidity to continue serving its customers.

I'm proud of everything our employees have done during this historic period to be there for our customers. We believe banks of all sizes are an important part of our financial system as each is uniquely positioned to serve their customers and communities. It's important to recognize that banks have different operating models and that the banks that fail in the first quarter were quite different from what people think of when they think about the typical regional bank.

These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with a broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear.

Our diversified business model provides opportunities to serve our customers broadly, which reduces concentration risk across the different elements of risk. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies.

We also have strong capital and liquidity positions, which include a mix of deposits and access to multiple funding sources and our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles.

Now let me update you on the progress we've made on our strategic priorities. Our top priority remains building out our risk and control framework appropriate for our company. I spent time in my recent annual letter highlighting why we remain confident in our ability to complete this work, including having much more effective reporting and processes in place to provide appropriate oversight adding close to 10,000 people across numerous risk and control-related groups as part of our commitment to make the investments needed to complete door and building the management discipline and culture to govern and execute the work, which includes the operating committee reviewing risk and regulatory progress and escalations on a weekly basis.

I also summarize the actions we've taken to simplify the way we operate. This work continued in the first quarter as we largely completed the exit of the correspondent home lending business as part of our plans to simplify that business. We're also narrowing our retail mortgage business to focus on predominantly bank customers and underserved communities.

Our strategy includes broadening our existing investment from the special purpose credit program to include purchase loans, investing an additional $100 million to advance racial equity in homeownership and deploying additional home mortgage consultants in local minority communities. We continue to transform the way we serve our customers by offering innovative products and solutions.

We announced a multiyear agreement with Choice Hotels to launch a new co-branded credit card this month creating a best-in-class credit card program designed to enhance our customers' experience and bring them more value. We rolled out early pay day late last year, which makes eligible direct deposits available up to two days early.

In the first quarter, this enhancement provided customers early access to over $200 billion in direct deposits. We launched Flex Loan in the fourth quarter, a digital-only small dollar loan that provides eligible customers, convenient and affordable access to funds. Customer response continues to exceed our expectations, we've originated over 100,000 loans since November.

Digital adoption and usage among our consumer customers continued to increase. We added over 500,000 mobile active customers in the first quarter and digital logins increased 6% from a year ago. Since rolling out Vantage, our new enhanced digital experience for our commercial and corporate clients late last year, we've received overwhelmingly positive feedback on the new user experience.

Vantage uses AI and machine learning to provide a tailored and intuitive platform based on our clients' specific needs. We also continued to make progress on our environmental, social, and governance work. We announced a $50 million grant to the NAACP to support efforts to advance racial equity in America.

This is the single largest donation at the NAACP has ever received from the corporation and builds on our long-standing relationship with the NAACP that spans more than 20 years. The Wells Fargo Foundation expanded its commitment to housing affordability through another $20 million housing affordability breakthrough challenge to advance ideas to help meet the need for more affordable homes across the country.

We also announced a $20 million commitment to advance economic opportunities in Native American communities including addressing housing, small business, financial health and sustainability. Before concluding, I wanted to highlight the management changes we announced yesterday.

Mary Mack, the CEO of Consumer and Small Business banking is retiring this summer. She spent her entire career at Wells Fargo and has led consumer and small business banking for the past seven years through a significant amount of change, including defining a new path forward to the business. I can think a few Wells Fargo colleagues who have done as much for our company and have been as visible in the communities that we serve over such a long period of time.

We also announced that Saul Van Beurden, Head of Technology at Wells Fargo will succeed Mary. Sal is a strong leader a technologist and he knows how to run a business. This makes him the ideal person to lead consumer and small business banking into the future.

Our branch network will continue to be the key business -- to the business. But our customers expect us to provide them with increasingly digitized and seamless banking experiences across all channels. Saul understands this deeply and has consistently proven his ability to convert new products and services across Wells Fargo.

Finally, Tracy Karen, currently Head of Consumer Technology will become head of technology for the company reporting to me. Tracy has worked with the technology and finance industry for more than 20 years and has led a series of business critical initiatives to modernize our technology platforms across our consumer businesses.

She is a strong results-driven leader. It's always great when we can tap our own leaders for roles within the company, and I want to thank Mary for everything she's done during her tenure at Wells Fargo. It's truly been a pleasure working with her.

As we look forward, we're carefully watching customer behavior for clues on how the economic environment is changing. Customer activity is still relatively strong and delinquencies remain low, though they are increasing. There are pockets of risks such as commercial office real estate, which will likely impact institutions differently, and we're proactively managing our own exposures.

We continue to expect economic growth to slow, and we are preparing for a range of scenarios. We will continue to monitor both the markets and our customers and will react accordingly. Our diversified business model should enable us to support our customers throughout economic cycles. I will now turn the call over to Mike.

[Mike Santomassimo, CFO]

Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $5 billion or $1.23 per diluted common share. While there was a lot going on in the banking industry around us, we continue to focus on our priorities and our results reflected the progress we are making, which I'll highlight throughout the call.

Starting with capital and liquidity on Slide 3. Our CET1 ratio was 10.8%, up approximately 20 basis points from the fourth quarter, reflecting our earnings in the quarter and lower risk-weighted assets. After pausing share repurchases for the prior three quarters, we repurchased $4 million of common stock in the first quarter.

Our CET1 ratio remained well above our required regulatory minimum plus buffers, and we expect to continue to prudently return excess capital to shareholders in the coming quarters. In the first quarter, our liquidity coverage ratio was approximately 22 percentage points above the regulatory minimum. We continue to benefit from a diversified deposit base with over 60% of our deposits in our Consumer Banking and Lending segment as of the first quarter, which is a higher percentage than before the pandemic.

Turning to credit quality on Slide 5. Net loan charge-offs continue to slowly increase to 26 basis points in the first quarter but were still below pre-pandemic levels. Commercial net loan charge-offs decreased $16 million from the fourth quarter to 5 basis points. However, while losses improved, we continue to see some gradual weakening in underlying credit performance, including higher nonperforming assets.

We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase.

Total consumer net loan charge-offs increased $60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago, and we've continued to take credit taking actions to position the portfolio for a slowing economy.

Nonperforming assets increased 7% from the fourth quarter, driven by higher commercial real estate nonaccrual loans over down 12% from a year ago due to lower residential mortgage nonaccrual loans. Of note, 87% of the nonaccrual loans in our commercial real estate portfolio were current on interest and 75% recurring on both principal and interest as of the end of the first quarter. Our allowance for credit losses increased $643 million in the first quarter, reflecting an increase for commercial real estate loans, primarily office loans as well as an increase for credit card model loans.

Given the increased focus on commercial real estate loans, especially office, we provided more details on our portfolio on Slide 6. We have $154.7 billion of commercial real estate loans outstanding at the end of the first quarter with 35.7% of office loans, which represented 4% of our total loans outstanding.

The office market continues to show signs of weakness due to lower demand, higher financing costs and challenging capital market conditions. While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time.

As you would expect, we have been derisking the office portfolio, which resulted in commitments declining 5% from a year ago, and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted.

As you can see in the slide, we've provided some additional data on the office portfolio, including approximately 12% is owner occupied. Therefore, the loan performance is mostly tied to the cash flow of the owner's operating business rather than rents paid by tenants. Nearly one third had recourse to a guarantor typically through a repayment guarantee.

The portfolio is geographically diverse, and as you'd expect, the largest concentrations are in California and New York. Over two third of our office loans are in the corporate investment banking business, and the vast majority of this portfolio is institutional quality real estate with high-caliber sponsors.

While approximately 80% of its cost, keep in mind that this is a single measure that is hard to evaluate in isolation. For example, newer or refurbished properties may perform better regardless of whether they are at A or B. We are providing this data to give you more insight into the portfolio, but as is usually the case in commercial real estate, each property situation is different and a myriad of other variables, such as leasing rates, loan-to-value and debt yields can determine performance, which is why we regularly review the portfolio on a loan-by-loan basis.

As a result of market conditions and the recent increases in criticized assets and nonaccrual loans, we've increased our allowance for credit losses for office loans for the past four quarters. The allowance for credit losses coverage ratio at the end of the first quarter for the office portfolio in the corporate investment bank was 5.7%. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period of time as we actively work with borrowers to help it solve issues they may be facing.

On Slide 7, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the fourth quarter, while period-end loans declined 1% from the fourth quarter with lower balances across our consumer and commercial portfolios.

I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 244 basis points from a year ago and 56 basis points from the fourth quarter, reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% for the fourth quarter due to the consumer deposit outflows as customers continue to reallocate cash into higher-yielding alternatives and continued spending.

During the market stress last month, we experienced a brief increase in deposit inflows that has since abated and while our period-end deposit balances were slightly higher than we expected at the beginning of the quarter, they're still down 2% from the fourth quarter.

As expected, our average deposit cost increased 37 basis points from the fourth quarter to 83 basis points with higher deposit costs across all operating segments in response to rising interest rates. Our mix of noninterest-bearing deposits declined from 35% in the fourth quarter to 32% in the first quarter but remained above pre-pandemic levels.

Turning to net interest income on Slide 8. First quarter net interest income was $13.3 billion, which was 45% higher than a year ago as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days.

Our full year net interest income guidance has not changed from last quarter as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. And Ultimately, the amount of net interest income we earned this year will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix and repricing and loan demand.

Turning to expenses on Slide 9. Noninterest expense declined 1% from a year ago, driven by lower operating losses and the impact of visions. The increase in personnel expense from the fourth quarter was driven by approximately $650 million seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement eligible employees and 401(k) matching contributions.

Our full year 2023 noninterest expense, excluding operating losses, is still expected to be approximately $5.2 billion, unchanged from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses.

Turning to our operating segments, starting with Consumer Banking and lending on Slide 10. Consumer and Small Business Banking revenue increased 28% 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.

We are continuing to make investments in this business. We're beginning to increase marketing spend. We're accelerating the efforts to renovate and refurbish our branches, for our bankers, we're investing in new tools and capabilities to provide better and more personalized advice to customers. We're continuing to enhance our mobile app and mobile active users were up 4% year-over-year and we're also seeing increased activity and positive initial indicators after our rollout of Wells Fargo premium last year.

It's early on for all of these initiatives, but we're starting to see some green shoots. At the same time, we continue to execute on our efficiency initiatives. Teller transactions continue to decline with reduced head count. We reduced headcount by 9% and total branches were down 4% from a year ago.

In home lending, mortgage rates remained elevated and the mortgage market continued to decline. Our home lending revenue declined 42% from a year ago, driven by lower mortgage originations and including a significant decline from the correspondent channel and lower revenue from the resecuritization of loans purchased from securitization pools.

We continue to reduce headcount in the first quarter, and we expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the correspondent channel as announced in January and begin to reduce the complexity and the size of the servicing book.

During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances driven by higher point-of-sale volume.

Auto revenue declined 12% from a year ago, driven by lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due to rising interest rates. Personal lending revenue was up 9% from a year ago due to higher loan balances.

Turning to some key business drivers on Slide 11. Mortgage originations declined 83% from a year ago and 55% from the fourth quarter with declines in both correspondent and retail originations. As I mentioned, we stopped accepting correspondent applications in January. So, going forward, our originations will be focused on serving Wells Fargo customers and underserved communities.

The size of our auto portfolio has declined for four consecutive quarters and the balances were down 80% at the end of the first quarter compared to a year ago. Origination volume declined 32% from a year ago, reflecting credit tightening actions and continued price competition. Debit card spending increased 2% in the first quarter compared to a year ago, an increase from the 1% year-over-year growth in the fourth quarter.

Discretionary spending drove the growth with nondiscretionary spending stable from the fourth quarter levels. Credit card spending increased 16% from a year ago, in line with the year-over-year growth in the fourth quarter with sustained growth in both discretionary and nondiscretionary spending. Spending growth slowed throughout the quarter but was still at double-digit levels in March. We continue to see some slight moderation in payment rates in the first quarter, but they were still well above pre-pandemic levels.

Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances while deposit-related fees were lower, reflecting higher earnings credit rate on noninterest-bearing deposits. Asset-based lending and leasing revenue increased 7% year-over-year, driven by loan growth which was partially offset by lower net gains from equity securities.

Average loan balances were up 15% in the first quarter compared to a year ago, driven by new customer growth and higher line utilization. After being stable in second half of last year, volume utilization increased slightly in the first quarter. Average loan balances have grown for seven consecutive quarters and were up 2% from the fourth quarter with the growth in asset-based lending and leasing driven by continued growth in client inventory.

Growth in middle market banking was once again driven by larger clients, including both new and existing relationships, which more than offset declines from our smaller clients.

Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 37% from a year ago driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment management investment banking fees declined from a year ago, reflecting lower market activity with clients across all major products in nearly all industries. While commercial real estate market transactions are down across the industry, our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates and higher loan balances.

Markets revenue increased 53% from a year ago driven by higher trading results across all asset classes. Average loans grew 4% from a year ago, but were down from the fourth quarter. Lower balances in banking reflected a combination of slow demand increased payoffs and relatively stable line utilization. The decline in commercial real estate balances were driven by the higher rate environment and lower commercial real estate sales volumes.

On Slide 14, Wealth and Investment Management revenue was down 2% compared to a year ago, driven by lower asset-based fees due to lower market valuations. Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives.

At the end of the first quarter, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Expenses decreased 4% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Average loans were down 1% from a year ago, primarily due to a decline in securities-based lending.

Slide 15 highlights our corporate results. Revenue declined $103 million or 83% from a year ago as higher net interest income was more than offset by lower results in our affiliated venture capital and private equity businesses. Results in the first quarter included $342 million of net losses on equity securities or $223 million pretax and net of noncontrolling interests.

In summary, our results in the first quarter reflected an improvement in our earnings capacity. We grew revenue and reduced expenses and had strong growth in pretax free provision profits. As expected, our net charge-offs have continued to slightly increase from historical lows, and we are closely monitoring our portfolios and taking credit tightening actions where appropriate.

Our capital levels grew even as we resume stock common stock repurchases, and we expect repurchases to continue. In the guidance we provided last quarter for full year 2023, net interest income and expenses, excluding operating losses, has not changed. We will now take your questions.

[Operator]

[Operator Instructions] Our first question for today will come from Scott Siefers of Piper Sandler. Your line is open.

[Scott Siefers, Piper Sandler]

Thank you, for taking my question. Mike, I was hoping to just start out on the deposit side. So, when you talk about the influx of deposits from some of the sort of special situations having abated. Does that money actually leave the bank? Or is it just sort of the inflows that have stopped?

[Mike Santomassimo, CFO]

Yes, the -- Scott, thanks for the question. Look, the inflows stopped, right? And they came in, in a pretty short period of time and those inflows stop. And I think what you're seeing since then is just normal spending in the consumer side and normal activity across the other businesses.

[Scott Siefers, Piper Sandler]

Okay. Perfect. And then I guess maybe to switch gears just a bit. I think in your prepared remarks, you had discussed plans to sort of prudently return excess capital in coming quarters. I was very glad to see the resumption in repurchase in the first quarter. But just given all the kind of cross currents that we've got, whether it's uncertainty on the regulatory environment or uncertainty on the economy kind of countered against your very strong capital levels. Just curious for maybe a little more color on how you would be thinking about share repurchase in -- through the remainder of the year.

[Charlie Scharf, CEO]

Yes. This is Charlie. Let me take a stab. I would say, listen, I think the way we feel about it is our capital levels grew quarter-over-quarter even after we purchased the $4 billion of stock. So, it just shows our ability to generate capital, if necessary, because of the environment or regulatory changes or things like that. So, because of that, we do feel like we have the ability to continue to return capital to shareholders while we still have plenty of flexibility to deal with anything which could come our way. And so, our excess above the regulatory bids plus buffers is extremely high beyond what we feel that it needs to be -- so we think we can continue to address that and still be very prudent with how we manage capital.

[Scott Siefers, Piper Sandler]

Wonderful. Okay. I have a bunch more questions, but I have a feeling they'll be asked going forward as well. So, Charlie, Mike, thank you guys very much. Really appreciate it.

[Operator]

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

[Steven Chubak, Wolfe Research]

Hi, good morning. So, I wanted to get a little bit more granular on some of the expense trends that we're seeing. We've gone through the exercise of benchmarking your segment efficiency ratios versus peers. Clearly, you've made significant strides improving profitability across virtually every segment, commercial CIB and wealth, the PPNR margins are running really in line with the peer group. It's still the consumer efficiency ratio in the mid-60s, which is running well above peers.

And I was hoping you could just speak to the opportunity on the expense side within consumer. How much of a benefit should you see from the retrenchment in mortgage? And maybe what do you see as a normalized efficiency target for the segment just given your current mix of business?

[Mike Santomassimo, CFO]

Steve, it's Mike. I'll start and Charlie can chime in if he wants. The -- I think when you think about consumer, I think we still have a lot more work to do there. And it's both in the consumer lending space or the mortgage space as we simplify the servicing side of that business, and that just takes a little bit of time to work its way through needs to be thoughtful and in some cases, requires a little bit of investment in technology and the like.

And then on the consumer banking side, we've continued to rationalize the branch footprint and branch set up. We've we continue to see teller transactions and other things decline. And so, I think you'll see us focus there. And hopefully, what you've seen in that segment is a consistent quarter-on-quarter decline in headcount and other factors, and that will sort of continue to hopefully be the case. And then when you think about just where the end state is, we shouldn't look any different than our peers, our best-in-class peers for each of our segments, including that one. So, over a period of time, that's the goal.

[Charlie Scharf, CEO]

And I would just add, when you look at our -- that segment, we obviously mix versus other people is an issue. Our home lending business is today extremely inefficient, which is part of the reason why we made the decision that we made. So, we've got a lot of wood to chop there, which will play out over a period of time to make that business more efficient. And as we've talked about on the consumer banking side, we've done, I think, for many, many years after Mary got her job in the consumer banking operation, our focus was dealing with the cleanup, which they've done an exceptional job in the consumer and small business bank about and then turned our attention to becoming more efficient, which she has worked really hard on.

And that's a combination of looking at our branch footprint, staffing within the branches, migrating people to digital, and we're behind on that. But there has been a lot of progress made over the last 1.5 years to two years. And so there's still a tremendous amount of opportunity there, but it's in flight.

[Steven Chubak, Wolfe Research]

Really helpful color. Just for my follow-up, I wanted to unpack some of the NII trends that we're seeing within the wealth side specifically. And there's a big focus right now on yield-seeking behavior if the higher for longer rate environment persists. You and your peers have seen contraction in NII sequentially and continued deposit outflows.

I was hoping you could speak to whether you're seeing any abatement in just the pace of cash sorting or yield-seeking behavior as of yet or if it's continued at a pretty healthy clip.

[Mike Santomassimo, CFO]

Yes, I'll take that. And when you look at the sequential change in NII, it's really the two fewer days in the quarter that drove it. Otherwise, it's pretty flat to the fourth quarter as we thought it would be when we talked in January. When you think about wealth, it's been pretty stable, the trend. It's not accelerating. It's not decelerating at any significant clip at this point. And what we see there is we're capturing that cash that -- those cash alternatives that people are buying in the wealth business. And so, I think that trend will continue for a while. And the good news is we're capturing that in other ways, but the trend has been pretty stable, and that's probably going to be the case for a little longer.

[Operator]

The next question will come from John McDonald of Autonomous Research.

[John McDonald, Autonomous Research]

Mike, I was wondering what your outlook is for the second quarter NII. If you could talk a little bit about the puts and takes to that and what you're thinking for second quarter. Thanks.

[Mike Santomassimo, CFO]

Yes. John, you look at -- as things are trending, you can see where deposits are on a period end on an average basis. So that's probably input number one. And then you can see that deposit yields have increased, right? So, those two things are going to be the biggest driver. So, you should expect a little bit of a step down from Q1 into Q2. And we'll see exactly sort of what that looks like as we get a little bit into the quarter. But I think the variables are there to kind of come up with a range of outcomes.

[John McDonald, Autonomous Research]

Yes. Okay. And the outlook for the full year obviously embeds a pretty big step down from the first quarter starting point. Can you give us any more color about the types of assumptions you have embedded into the full year outlook on deposit flows, mix shift and reprice data?

[Mike Santomassimo, CFO]

Yes, sure. And as we've talked over the last few quarters, there's still a ton of uncertainty out there with regards to really all the inputs that go into that, right? And whether it's the mix of deposits, the absolute level or where pricing will be. And so, our guide assumes that it's still going to be a pretty competitive space for deposits on the pricing side that we will still see some mix shift happening and that we'll see some moderate declines as people continue to spend and the trends happen. So, as we talked about even last quarter, I think we'll get -- as time goes by, we get more and more information. And so, we're hopeful that there's upside, but -- to the forecast, but we'll see that in the second half of the year, and it will be a function of how all those factors play out, but we're hopeful that we'll see that and there'll be some upside there.

[Operator]

The next question comes from Ken Usdin of Jefferies.

[Ken Usdin, Jefferies]

I just want to ask a follow-up on the cost side. So, I think we're all pretty clear on your view of continuing to hold the core flat from here. But I think an ongoing question is just as we look further out, and I know there's no crystal ball here. Like, what would you give the line of sight when that next wave of gross saves related to all the duplicative and extra buildup in the infrastructure related to risk compliance, et cetera? When you get the line of sight on when you can start to sunset that? Because I know you talked about that as a big point of how you get the ROE up over the medium term.

[Mike Santomassimo, CFO]

Yes. Ken, let me try to clarify a little bit of that. So, I think when you look at what we've we talked about last quarter in terms of getting to a 15% ROTCE in the medium term, that didn't assume that we would have to take out a significant amount of the cost related to the risk and regulatory build-outs that we're doing. And that efficiency on those expenses will be out a little while. It could be years in terms of -- before we really get at some of that. So -- but I think our focus is to get the return to a sustainable 15% in the medium term by not having to rely on that. It really goes back to what we talked about really making sure capital gets optimized, not just in terms of shareholder return, but also across the balance sheet requires us to continue to execute on the efficiency initiatives outside of the risk and regulatory work, and then we'll start to get the benefit of some of the investments that we've been making now for the last couple of years.

[Charlie Scharf, CEO]

And I'll just add to that, just to be clear, when we think about the opportunities to continue to drive efficiency in the Company, we're not -- we don't even think about all the expenses related to the risk and regulatory framework work that we're doing. That work is -- and those expenses are -- they're necessary, and those are not excuse for us not to be efficient in everything else that we do. And so, as we talked about in the consumer businesses a second ago, we look across all the things that we do, and there's still significant opportunity to just become more efficient and either reduce the expense base or provide more capacity to invest going forward. And at some point, can we become more efficient in how we run the risk infrastructure of the Company, probably. But that's not on the radar screen and not necessary for us to achieve our efficiency goals.

[Ken Usdin, Jefferies]

Yes. And thanks for those clarifications. One, just a question on the fee side. I know watching your trading results are a lot different than watching some of the bigger peers. But just looking at that $1.3 billion on the face of the income statement this quarter, in the context of the environment, can you help us put that into context? Was that just an exceptional result this quarter? Did it have anything we should be mindful of as we think forward and just your general outlook there? Thank you.

[Mike Santomassimo, CFO]

Yes, sure. We certainly benefited from the volatility that we saw, particularly in the rate market and other -- some of the other asset classes in the quarter. And you can see that in the results. But when you look at some of the core platforms in FX and other areas, we've been just consistently investing in some of those platforms. So hopefully, over time, you'll see good results there. But the quarter definitely was influenced by the volatility that we saw across the market.

[Operator]

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

[Ebrahim Poonawala, Bank of America]

I just wanted to follow up on the capital comments. I guess, Charlie, you talked about this. Is it fair for us to assume, clearly, we have the SCB coming out of the stress test, that will be 1 data point and then the Basel reforms. Should we assume that the CET1 likely drift higher, maybe 11%, maybe higher in the near term, while you still buy back stock? Is that the right assumption? And secondly, I think, Mike, you mentioned about optimizing for capital and RWA. Just maybe if you can call out a few things that you can do to optimize RWA relative to where the balance sheet is today?

[Mike Santomassimo, CFO]

Yes, sure. Thanks. I think the simple answer to your first question is no. We don't expect that to continue to keep drifting up. Certainly, we'll find out the results of CCAR with everybody else in June. And then, we've got Basel IV, which is a little bit longer time line than that. And -- but we're 160 basis points above the regulatory minimum buffers. We've got plenty of capital to deal with whatever comes out of that. And as we said, over time, we'll get closer to 100 basis points or so above those -- above the 9.2%. And so, I think there's plenty of capacity to deal with whatever comes and continue to return share -- money back to shareholders, as Charlie said. The…

[Charlie Scharf, CEO]

I think the second part just to -- and again, all I was trying to say is we have a lot of flexibility to deal with things that come our way. And so, we're not anticipating significant additional capital needs. We're not anticipating that any potential downturn could create additional capital need inside of the business. All we're saying is that if anything of those things were to happen, we have the flexibility to deal with that, both because of the amount of earnings that we have as well as the existing excess capital that we have. So you'll add those -- you take that, you say -- we bought -- all those things happened while we bought $4 billion of stock back this quarter. So, we feel we'll be able to continue to return capital and still maintain a very conservative position.

[Mike Santomassimo, CFO]

Yes. And then just to give you a couple like examples to help illustrate the capital optimization. The mortgage business is one of them. If we want mortgage exposure, we can buy securities. You don't have to always hold the mortgage. If you're buying securities, you don't have to buy UMBS, you could buy Ginnies. And so there's plenty -- and then you can look at each of the underlying portfolios and make sure we're getting the return from a relationship point of view that we think, whether that's in the commercial bank or the corporate investment bank. And so, I think there's plenty of areas that we can either reallocate capital to clients that we think will get better returns for or optimize some of the underlying portfolios.

[Ebrahim Poonawala, Bank of America]

Got it. And just one separate question. You made tremendous progress, Charlie, since taking over on the compliance risk management front. There was a news article last night talking about some OCC MRAs. I don't expect you to comment on that. But, just give us a sense from a shareholder perspective, your level of confidence around the risk of another shoe dropping on -- major setback to all the efforts and actions that you've taken to address the regulatory orders, to the extent you can, just to give comfort that the progress that's been made is getting us closer to the finish line as opposed to another big setback that could push us back again.

[Charlie Scharf, CEO]

Yes. Listen, I would refer you back to my shareholder letter where I wrote about it extensively. And I think we still continue to feel exactly the way we felt when we wrote that letter. It wasn't that long ago, which is we have continued work to do. We feel very confident in our ability to get the work done and that we're making progress. And so, we live in an environment where things can come up. That's always the case. So, we don't want to pretend like there are no risks of other things out there. But if there was anything specific, we would do our best to let you know. And we feel good about the progress that we're making and are extremely focused on making sure that we've got all the attention decked against it. But we're confident that the things that we're doing will close the gaps that existed at the Company when we got here.

[Operator]

The next question comes from John Pancari of Evercore ISI.

[John Pancari, Evercore ISI]

On the -- back to the NII drivers, can you maybe give us an updated expectation on how you're thinking about loan growth here as you look through 2023. I know you cited some of the pressures on the consumer side, but some of the favorable trends still in commercial. And then separately, on the deposit side, do you have an updated expectation regarding your total deposit beta as you see pricing pressure continue?

[Mike Santomassimo, CFO]

Yes, thanks. So, on the loan side, I think we're definitely seeing pockets of growth in places like the commercial bank, and that's been pretty consistent now for a couple of quarters. It's not -- but the overall growth rate across total loans has moderated for the last three quarters, and -- which is exactly what we thought might happen when we were talking last summer. And so, I think it will still be pretty moderate. I wouldn't expect huge growth in loans over the rest of the year. And embedded in our guidance is some low-single-digit growth rate in terms of loans for the year. And so, I think that's what we're assuming there. What was the second part again, John? Sorry.

[John Pancari, Evercore ISI]

Yes, it was around the update…

[Mike Santomassimo, CFO]

Deposit beta, sorry.

[John Pancari, Evercore ISI]

Yes.

[Mike Santomassimo, CFO]

Yes. No. Look, on the deposit side, to date, betas have played out almost exactly what we thought -- how we thought they would. And I think from here, the path of rates will matter. Competition will matter. And so, as I mentioned earlier in the call, we're still assuming it's going to be pretty competitive when we give you the guidance that we gave you. And I think we may find that hopefully that it gets -- that maybe we're being a little conservative there, but we do think at this point, it will still be competitive. And I think the betas will be pretty reasonable, though on the consumer side, when you look back after the rates rise stop.

[John Pancari, Evercore ISI]

Got it. Okay. Thanks, Mike. And then separately on the commercial real estate front, maybe if you could just elaborate a little bit on the stress that you're seeing. I know you discussed office. Maybe can you talk about your LTVs in office maybe on a refreshed basis, if you happen to have that and maybe in other portfolios as well because clearly the change between origination LTVs versus where we're seeing refreshed levels come in are clearly what is motivating some of the impact around reserve behavior. So, if you can give us a little color there, that would be helpful.

[Mike Santomassimo, CFO]

Yes, sure. Look, in the office space right now, as many others have said, too, like this is going to play out over an extended period of time. We're not seeing a lot of near-term stress in terms of what -- whether clients are current or seeing very big issues on a property-by-property basis at this point, but we do expect some of that to come. And I think it will be for all of the reasons that everyone is reporting on, right? And in particular, it will be in cities that you see weakness in places like San Francisco and L.A., a little bit in Seattle. And so, it's all the places where either lease rates are already lower than the national average or the secular changes around back to office are changing a little bit more a bigger way. And -- but it's going to take time. And we just haven't seen it translate into lost content here, and we're going very granular property by property. And so, giving you LTV numbers from a portfolio -- at a portfolio basis really isn't that helpful at this point because it really is going to be a matter of like what each of these underlying properties look like and what the issues are there. And we haven't seen a lot of trades happening either recently. And so, that also will impact how you think about the valuations. And what we're doing is really just making sure we stress it in a whole bunch of different ways on a property level basis to make sure we understand where the potential issues might come from.

[Operator]

The next question comes from Betsy Graseck of Morgan Stanley.

[Betsy Graseck, Morgan Stanley]

A couple of questions, a little bit of a follow-up. But one on the credit side, I wanted to just understand a little bit about the recoveries in commercial. I know in the deck you mentioned that commercial NCLs were down, in part due to higher recoveries. And I just wanted to understand how long you see those recoveries persisting. And is there any driver for them actually increasing from here?

[Mike Santomassimo, CFO]

Yes. There really isn't any story there, Betsy. I mean we get recoveries every quarter, and there really isn't a significant trend change one way or the other. And again, it's going to come back down to individual underlying issues or situations that drive it quarter-to-quarter. But I wouldn't read too much into the trend.

[Betsy Graseck, Morgan Stanley]

Okay. And then separately on wealth deposits. I know earlier in the call, you addressed this that you would expect to see the wealth outflows continue at current pace or so for at least a little bit of time. I'm wondering, is there any anchor that you can give us with regard to wealth deposits as a percentage of client assets that existed pre-COVID that maybe we should anchor back on in modeling that line item?

[Mike Santomassimo, CFO]

Yes. I mean, what we gave you in my commentary was just cash as a percentage of assets. And it's quite a bit higher than it was before, about 12% now versus 4%. And obviously, deposits is going to be a subcomponent of that. And there are other drivers, right, of how much cash people are going to hold as a percentage of assets. And right now, you're seeing a lot of what is going into cash alts, it's coming out of other asset classes. So it's not -- so it's a little harder to give you a specific number of like deposits as a percentage of assets because you're seeing people sell equities and other asset classes and drive up those cash balances.

[Betsy Graseck, Morgan Stanley]

Right. And cash for you is it's including things like MMF and treasury bills, things like that?

[Mike Santomassimo, CFO]

Absolutely, yes. And so, I would just take the current balance that you see in the wealth space and the deposit side and assume it continues to come down at a pretty -- at a stable pace for a little bit.

[Betsy Graseck, Morgan Stanley]

And then just last question here on deposit betas. I know you indicated that it should be okay. I guess, I'm wondering how you think about deposit betas this cycle versus last cycle. Similar? Higher? Lower? Any sense as to -- versus prior cycle in magnitude would be great. Thanks.

[Mike Santomassimo, CFO]

Yes. Look, I mean it will be different, obviously. And part of what's going to drive that is how long rates stay higher. And I think that will -- we'll find that out over a period of time. But as you can tell, where betas have performed so far, they've performed pretty well when you look at it relative to the last cycle, particularly given how far rates have moved up in excess of what happened last time. And so -- and they're behaving exactly as you might think, right? And if you go portfolio by portfolio, the betas are pretty high on the large corporate side. That's been the case now for a couple of quarters. They're a little bit lower in the commercial bank given the nature of that client base. And in the consumer side, they're relatively low given the amount of rate rises that we've seen so far. And so, I think on the large corporate side, you'll see those be pretty consistent from here and the consumer side will be a function of all the things we talked about earlier.

[Operator]

The next question comes from Matt O'Connor of Deutsche Bank.

[Matt O’Connor]

I was hoping you guys could elaborate on the slowing consumer spending towards the end of the month? Any more color there and any thoughts on what's driving that?

[Mike Santomassimo, CFO]

Yes. It was pretty small when you look at that change. So I wouldn't read too much into it. I think people are still -- there's still a lot of activity out there and consumers are still out spending both on the debit side and the credit side. So, I wouldn't read into a couple of weeks.

[Matt O’Connor]

Okay. And then separately, I know I always kind of harp on some of these reg issues. And I appreciate the New York Post article yesterday, you can't comment specifically on. But it did allude to some concerns in your trading business? And obviously, it performed extremely well. You've been growing it, although I don't think you're growing it super aggressively. But there's been some political comments, maybe it was, I don't know, six months ago or so, that you shouldn't be growing your capital markets business, while you're investing in these other areas. So I guess maybe you could just address the trading businesses overall in terms of how you're growing them in a responsible way and how you're making sure the oversight of risk management is fine. I mean because, again, externally, it seems like everything is going really well, but there is -- it's hard to tell. Thank you.

[Charlie Scharf, CEO]

We have no concerns over what we're doing in the business. We're not increasing risk in any meaningful way. We've had strong oversight in that business, and we think it continues. And we benefited from business activity, which is focused on customer flow. We have strong financial risk management in the Company and have had that for a long period of time. We have strong risk management over our trading businesses and controls. And I would just be really careful to take the source that you're taking and using that to expand into anything beyond from whence it came. If it was anything meaningful to report, we report it. And as I said, we feel really good about the progress that we're making, and we feel good about the performance of the company. And I think it's that -- that stands on its own.

[Operator]

The next question comes from Gerard Cassidy of RBC Capital Markets.

[Gerard Cassidy, RBC Capital Markets]

Mike, you talked about some of the reasons why your commercial loan growth was quite strong on a year-over-year basis. Can you share with us, are you guys seeing any reintermediation where the DCM market was very weak in the quarter for the industry? It was weak last year. Are you guys seeing benefits from that where people are -- corporate and commercial customers are coming to you using your balance sheet more so than possibly 1.5-year ago?

[Mike Santomassimo, CFO]

Not in any meaningful way. There's always an anecdotal story, I'm sure, out there, but I wouldn't say it's meaningful.

[Gerard Cassidy, RBC Capital Markets]

Very good. And then, as a follow-up, I know you gave us some details about the net interest income growth this year. They're still being [Technical Difficulty] annualize the first quarter results...

[Mike Santomassimo, CFO]

Hey Gerard, we lost you there for a second. Can you just repeat the whole second part?

[Gerard Cassidy, RBC Capital Markets]

Sure. You gave us some details on the outlook for net interest income growth, up 10%. And if you annualize your first quarter number, of course, that's -- that would be greater than the 10% growth for the full year. And you gave us the reasons why there's a lot of uncertainty. The one specific question though is, has your thinking on the yield curve -- and I know this is very hard. Nobody can predict where it's going to be. But are you thinking that the yield curve and maybe a rate cut could be coming sooner and the yield curve comes down when you look at your outlook, or has your outlook for the interest rates changed, I guess, is the question.

[Mike Santomassimo, CFO]

Well, I think certainly, the market expectations are implying that there will be a decrease in the late part of the year. And so, I think that's certainly being priced in at the moment. But I do think that you need to be prepared that that's not going to happen. And I think it's possible it doesn't. So, I think as we get a little closer, you'll -- we'll all know. And what we try to do in our guidance is use what the market is telling us, right? So, if that doesn't happen, there's -- and rates are higher than what the market is implying, then there will be a little upside there.

[Charlie Scharf, CEO]

Yes. And the only thing I'd add is, listen, in all of this, there's -- I tried to say this in our remarks, which is we've said constantly, we don't know what the future holds. We see what the market is saying. Who knows where the market is right or wrong. You have the Fed share who's talking about expect rates higher for longer. And so, we're prepared for a range of scenarios. When we think about giving guidance, we just try and choose a benchmark, which is the market, which is it's a scenario and pick your own scenario based upon what you all think and you can make your own determination what it will be, but we're just trying to give you both like a benchmark and what supports that benchmark, but also be clear that there are a range of alternatives out there, which could make the result differ, just trying to be as apparent as we can.

[Gerard Cassidy, RBC Capital Markets]

No, I appreciate the further insights. That's very helpful. Thank you.

[Charlie Scharf, CEO]

Sure.

[Operator]

The next question comes from David Long of Raymond James.

[David Long, Raymond James]

I appreciate all the color on some of the deposit flows. But let me just ask it in a little different way. From a noninterest-bearing deposits figure, the number, the percentage has come down, how do you expect that concentration to change over the course of the next several quarters?

[Mike Santomassimo, CFO]

Well, I wouldn't try to predict it exactly over the next couple of quarters. But I think if you look at -- we're about 32% in the quarter. And if you go back a number of years, pre-pandemic, that was in the mid-20s. And so -- so it could -- and we've said this in other forums that you could see it start to trend towards there. Will it get down there? Unknown, but I think you'll see it trend down a little bit more.

[David Long, Raymond James]

Sure. If you look back over, call it, the last 15 years since the great financial crisis, rates have been pretty close to zero outside of a brief periods, just before the pandemic. Do you see noninterest-bearing deposits going back to pre great financial crisis levels for Wells Fargo or the industry, but we had numbers there in the mid to high teens?

[Mike Santomassimo, CFO]

I think that's almost impossible to predict.

[Operator]

The last question for today will come from Chris Kotowski of Oppenheimer.

[Chris Kotowski, Oppenheimer]

I guess, I wonder, how do you anticipate managing the duration of your investment securities portfolio from here? I mean, obviously, it must have extended out quite a bit last year. And we saw the mark-to-mark on it increase across the industry. But I noted kind of the HTM portfolio is down about 7% during the quarter. And I mean, do you anticipate running that down? And if so, how quickly does it run down if you do nothing?

[Mike Santomassimo, CFO]

Well, I think, obviously, that's going to be a little bit dependent on rates and where rates go, given there's some mortgages - mortgage securities in the portfolio in terms of the burn down. And I think we're going to continue to be thoughtful as we have in the past around thinking about the size of the portfolio in total, including the AFS. And that's really a function of a bunch of things, including how much loan growth we expect to see over a period of time. And then, we look at all of the other constraints that we've got to worry about around liquidity and everything else, and we decide on how much goes into HTM and what the makeup of it is. But at this point, we feel comfortable with the quantum and both in terms of the size of the portfolio and the duration of portfolio.

[Chris Kotowski, Oppenheimer]

Okay. So, you anticipate keeping it roughly the size, all things being equal, or does it run down?

[Mike Santomassimo, CFO]

I think we'll make that decision over time. I don't anticipate the portfolio getting much bigger from here over the next few quarters, but I think we'll make that decision over time. And then, the burn now will be what it is based on where rates and natural maturities of the portfolio go.

[Charlie Scharf, CEO]

Alrighty. Everyone, thanks so much. We appreciate it. And we'll talk to you soon. Take care.

[Operator]

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