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Wells Fargo & Co
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Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [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.
Thank you, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss second quarter results and answer your questions. This call is being recorded.
Before we get started, I would like to remind you that our second 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.
Thanks, John. Good morning. I will make some brief comments about our second quarter results, the operating environment and update you on our priorities. I will then turn the call over to Mike to review second quarter results in more detail.
Let me start with the second quarter. We are in $6 billion or $1.38 per common share in the second quarter. These results included $1.6 billion decrease in the allowance for credit losses as credit quality continued to outperform our expectations. Charge-offs continued to decline as the economy continues to improve and our customers continue to have high levels of liquidity. Revenue increased compared with the first quarter. While net interest income was stable, we had sizable gains from equity securities and card and deposit-related fees increased, reflecting increased spending. Expenses declined, reflecting a decline in personnel expense, which is typically highest in the first quarter and progress on our efficiency initiatives.
If you look through the reserve release and outsized gains from equity securities, we are pleased that our results continued to show progress, even though high levels of liquidity, weakness in supply chains and low interest rates remained as headwinds. Economic growth was robust in the second quarter with real GDP estimated to have increased at an 8% annual rate with especially strong gains in consumer spending. We continued to see supply chain shortages impacting both supply and prices across many sectors.
Home prices are estimated to have increased at a 24% annual rate as scarcity of properties for sale persisted and half of unit sales exceeded asking price. Used car prices continued to increase due to ongoing supply constraints with the second quarter Manheim Index increasing 17% from first quarter 2021 and 45% from a year-ago. However, prices may have peaked in May after four consecutive months of record highs with June’s Manheim Index finishing 1.3% lower than May.
For Wells Fargo consumer customers, nearly $50 billion of federal stimulus payments from rounds two and three have been deposited into our customers’ accounts and we estimate roughly 25% remained in their accounts as of July 2. For our customers who received stimulus payments, their median deposit balance was up 56% compared to April 2020, which is prior to the first round of federal stimulus payments. And for all of our customers, including customers who did not receive stimulus payments, median balances were up 49% over that same time period.
Weekly debit card spend was up every week compared to 2019 during the second quarter and areas hardest hit by the pandemic have recovered, including travel, up 11%; entertainment, up 38%; and restaurant spending up 28% during the week ending June 25 compared with 2019. Consumer credit card spending activity continued to increase, up 13% in the second quarter compared to 2019.
As of the weekend to June 25, travel-related spending, which was hardest hit during the pandemic was up significantly from 2020, but was the only category that has not fully rebounded to 2019 levels. Our commercial banking clients have also continued to have high levels of cash on hand and accommodative capital markets and supply chain disruptions continued – to a continued decline in commercial banking loans outstanding albeit at a slower pace than the last few quarters.
Now that we are halfway through the year, let me update you on progress we’ve made in the areas I highlighted at the beginning of the year. I’ve spoken at every call about our most important initiative, making progress on risk and control. Wells Fargo’s top priority continues to be building the right foundation for a company of our size and complexity. When done, this should meet our regulatory requirements and we remain committed to devoting the resources necessary to operate with strong business practices and controls, maintain the highest levels of integrity and have appropriate control – an appropriate culture in place.
The amount of customer remediation and control-related issues that existed when I arrived was many multiples of what exist at our company. I’ve spoken of what we put in place to address these issues and by most metrics, we are making significant progress. Regarding our work on consent orders and other regulatory requirements, the work remaining is significant and as such, this remains a multi-year journey for us. While what’s required for each is clear, there are numerous complexities with managing this amount of work concurrently, and it will take time to consistently accomplish all at the level we and our regulators expect. As such, we may have setbacks and progress will not be a straight line. However, I remain confident in our ability to complete the work.
Building a strong management team was another key priority. When I first joined Wells, our objective was to ensure we have the talent necessary to close our risk and control gaps. During the first half of my tenure around 60% of senior level hires were in these functions and many more across the company directed their efforts towards these activities. This remains our most important priority today. We will continue to add resources here, but we are also adding significant resources to improve our competitiveness and provide the foundation for higher levels of performance.
During the second half of my tenure, while we’ve continued to hire senior leaders in risk and control areas, we have been increasing our hiring in areas that will grow our business with over 70% of our senior level hires focused on this objective. This includes significant hires in the data platform and analytics, strategy, digital and our technology groups. We are focused on the cloud, payments, FinTech competition, tech companies and our own data and digital capabilities.
Hires include a Digital Platform leader for all of our consumer businesses, a Head of Digital for Commercial Banking and the CIB, Head of Strategy and Innovation for Consumer and Small Business Banking, Head of our Commercial Auto Group, Head of Consumer Banking National Business Development and a new Head of Payment Strategies for the entire company. We are also adding bankers in the CIB and commercial bank where we see growth opportunities.
We also just announced last week that we’ve hired Bei Ling as the new Head of Human Resources. She will be joining us in October. And providing clear business focus and strategic direction has been important as well as we allocate our resources. We will not do anything to jeopardize our control-related work, but we have also begun to execute on plans to build what’s necessary to compete effectively in today’s dynamic business environment. Our playbook was dated and was time to provide direction and be more aggressive about building leading products, capabilities and innovating.
We’ve been focused on targeting our resources to what’s most meaningful today for our customers by selling or closing businesses and we are leveraging our breadth and scale to compete with banks and non-banks alike by working to build new capabilities and work across the company to deliver all of Wells Fargo to our customer base. We are rebuilding core capabilities, but are beginning to instill a mobile-first mindset as part of our broader technology and data guided efforts. One example is our credit card business where we’ve been working on it since I arrived to build a foundation to compete more effectively.
Being competitive here is both an opportunity to grow, but more importantly is a strategic comparative as credit and payments are critical to maintain and build customer relationships, and we will do this with both traditional card products and other ways over time.
Our playbook is simple. Build an experienced management team, update and relaunch product customers who’ll make top of wallet, improve customer service and leverage both our branches and strong digital capabilities to serve our customers. In the second quarter, we announced the first new product of several to come, an industry-leading cashback card, which is now just rolling out.
We are also enhancing our deposit products. Our no-overdraft product, Clear Access Banking continued to perform well with over 825,000 accounts opened since the launch in the third quarter of last year. We also simplified and improved the benefits of our portfolio by Wells Fargo checking customers in the second quarter this year. These are just a few examples of how we are moving forward, but we have initiatives across all businesses, which we will cover over time.
And lastly, we continue to take meaningful actions and are progressing towards better returns. As we highlighted at the beginning of the year, we see a path to get to double-digit ROTCE excluding credit loss reserve releases and then moving towards approximately 15%.
We said that the path to double-digit ROTCE is dependent on capital optimization and executing on our efficiency initiatives. With CCAR complete and a return to the SCB framework, we are now in a position to return significant capital to shareholders. We expect to increase our third quarter common stock dividend to $0.20 per share subject to final Board approval.
Increasing our dividend is a priority and our plan contemplates continued increases as we grow earnings capacity. Additionally, our capital plan included approximately $18 billion of gross common share repurchases starting in the third quarter and concluding in the second quarter of next year. This may change depending on a variety of factors including our earnings and economic outlook. Mike will provide more context here.
Importantly, we remain on target to accomplish the expense reductions contemplating and achieving the double-digit ROTCE level. Assuming no material changes in the economic environment or interest rates, we expect to achieve a sustainable 10% ROTCE excluding reserve releases and other special items both positive and negative on a run rate basis during 2022.
Beyond this, we continue to believe we can further improve our returns through a combination of factors. Moderate balance sheet growth once the asset cap is lifted, a modest increase in interest rates or further steepening of the curve, ongoing progress on incremental efficiency initiatives, a small impact from returns on growth-related investments in our businesses and continued execution on our risk regulatory and control framework.
The combination of these factors we believe would take our ROTCE to approximately 15% over time. And while we are focused on improving our execution of results, we know that supporting our customers and communities will continue to be an important part of our mission. The work we did through the pandemic was meaningful and necessary to help those most in need especially consumers and small businesses, but there remains much more to do.
We offered payment deferrals, waived fees, supported smaller and diverse small businesses through the Paycheck Protection Program. We committed to donate all gross processing fees from PPP loans funded in 2020 totaling approximately $420 million to help small businesses recovery efforts and have completed funding of $234 million of our commitment. We expect to fund the rest by the end of the year.
We are also voluntarily extending our foreclosure moratorium on mortgage loans we own through the end of this year and we are pleased that the industry is contemplating similar foreclosure extensions. We issued our first Sustainability Bond, which will fund projects and programs that support housing affordability, socioeconomic opportunity and renewable energy. We partnered with diverse firms in the offering of our $1 billion Sustainability Bond with approximately 75% of the economics going into these firms, underscoring our commitment to supporting historically marginalized communities.
We fulfilled the pledge that we made last year to commit $50 million to black-owned banks and communities across the country with investments in two additional African-American Minority Deposit Institutions during the second quarter. And we announced the Banking Inclusion Initiative, a 10-year commitment to help unbanked individual gain access to affordable transaction accounts. This is a complex and longstanding issue that will require gathering the best minds, ideas, products and educational resources from across our communities to bring about change and help remove barriers to financial inclusion.
In summary, let me say that the outlook for the economy for the rest of the year is promising, assuming continued success against COVID. The restocking of inventories is expected to be substantial and the excess personal savings should provide a cushion for consumer spending. However, risks remain, interest rates have been volatile and the recent rally in rates is putting pressure on net interest income. We’ve made meaningful progress in our important priorities during the first half of the year, but this is just the start of a multi-year process to transform Wells Fargo. I want to thank everyone at Wells for their hard work and focus on supporting our customers.
I’ll now turn the call over to Mike.
Thanks, Charlie, and good morning, everyone. Charlie highlighted many of the ways we are actively helping our customers and communities on Slide 2, so I’m going to start with our second quarter financial results on Slide 3.
Net income for the quarter was $6 billion or $1.38 per common share. As Charlie highlighted, our second quarter results included $1.6 billion decrease in the allowance for credit losses. Pre-tax, pre-provision profit grew from both a year-ago and from the first quarter as we grew revenue and reduced expenses.
We had $2.7 billion or approximately $2 billion after non-controlling interests of pre-tax equity gains predominantly coming from our affiliated venture capital and private equity businesses, approximately $2 billion was due to unrealized gains from follow-on financing rounds reflecting significantly higher valuations in a number of portfolio companies. The remaining approximately $700 million was realized gains.
Given the nature of these businesses, these gains tend to be episodic however, since 2017 these businesses have generated annual gains in excess of $1 billion in every year except 2020, which was impacted by the pandemic. We completed the sale of student loans in the second quarter, which resulted in a $140 million gain and a $79 million write-down related goodwill.
Our effective income tax rate in the second quarter was 19.3%, which reflected accounting policy changes for certain tax-advantaged investments. We elected to make these changes to better align the financial statement presentation of the economic impact of these investments with the related tax credits.
Prior period financial statement line items have been revised, which had a nominal impact in net income on an annual basis. The changes did improve our efficiency ratio and increased our effective income tax rate from what was previously reported. We provide details regarding these changes on Slide 16 in the appendix of this deck and on Page 30 of the quarterly supplement. Reflecting these changes, we expect our effective income tax rate for the full-year to be approximately 20%.
Our CET1 ratio increased to 12.1% in the second quarter. This year CCAR stress test confirmed the significant strength of our capital position. Based on the results, we expect our stress capital buffer to increase 60 basis points effective in the fourth quarter of this year. And as a reminder, our G-SIB capital surcharge will decrease by 50 basis points effective in the first quarter of next year, which will bring our CET1 regulatory minimum to 9.1% in the first quarter of 2022.
As Charlie highlighted, we plan to return a significant amount of capital to our shareholders starting in the third quarter and expect to move closer to our internal target of 100 basis points above the regulatory minimum over time. We also currently expect to maintain an incremental buffer of 25 basis points to 50 basis points above our target to account for potential uncertainties and maintain flexibility.
Under the SCB framework, we will have flexibility to increase capital distributions and if possible, we will be able to repurchase more than the $18 billion included in our capital plan over the four-quarter period depending on market conditions and other risk factors, including COVID-related risks.
Turning to credit quality on Slide 5. Our net charge-off ratio in the second quarter declined 18 basis points. The improving economic environment with the reopening of the economy, government stimulus and ample liquidity as well as customer accommodations have resulted in our credit losses continuing to trend significantly better than our expectations.
Commercial credit performance continued to improve and loan charge-offs declined $69 million from the first quarter to 7 basis points, our lowest loss rates since the second quarter of 2018. The improvement was broad-based with declines in all commercial asset types, including net recoveries and commercial real estate.
While the overall outlook for commercial real estate continued to improve, we remain focused on the areas most impacted by the pandemic. The reopening of the economy has continued to have a positive impact on retail and hotel as cash flow has improved. While losses and problem loans and office have been very low, we continue to monitor this sector as longer-term demand trends maybe influenced by changes in hybrid work-from-home models. It’s also important to note that even with the reserve release in the second quarter our coverage ratio for commercial real estate loans was still higher than it was a year-ago.
Consumer net loan charge-offs declined from both the first quarter and a year-ago to 32 basis points in the second quarter. Non-performing assets declined $695 million or 8% from the first quarter driven by lower commercial non-accruals. Declines in C&I non-accruals were driven by improvements across a number of COVID impacted sectors, including entertainment and recreation, energy, transportation services and retail. Declines in commercial real estate were driven by improvements in office.
A year-ago, $37.2 billion of our consumer loan portfolio, excluding government insured or guaranteed loans was in COVID-related payment deferral. Deferrals have declined 79% from a year-ago to $7.8 billion at the end of the second quarter. We stopped offering non-real estate related COVID deferrals in the fourth quarter of 2020, but continue to offer certain COVID-related deferrals in home lending for a maximum of 18 months.
It’s important to note that loans have already exited COVID – that have already exited COVID-related deferrals have continued to perform better than we anticipated with approximately 94% of the balances current as of the end of the second quarter.
We started to tighten our credit policies in March 2020 in response to the pandemic and we have now essentially returned back to pre-COVID levels or policies. However, we continue to be thoughtful of the much higher asset prices in areas like residential real estate and auto.
Due to the reserve release in the quarter, our allowance coverage ratio declined from both the first quarter and a year-ago. Similar to the first quarter, while observed credit performance was strong, there were still significant uncertainty reflected in our allowance level at the end of the second quarter, and we will continue to assess the level of our coverage. If current economic trends continue, we would expect to have additional reserve releases.
On Slide 6, we highlight loans and deposits. Although average loans declined in the quarter, the rate of declines slowed with balances down $18.7 billion or 2% from the first quarter. The decline from the first quarter was almost entirely driven by lower residential real estate loans, primarily due to continued high prepayments and the re-securitization of loans we purchased out of mortgage-backed securities last year.
The total period end loans were down 1% from the first quarter. And while it’s hard to predict exactly what will happen during the second half of the year and while line utilization rates remain low, we are seeing signs of green shoots with modest growth in period end balances compared to the first quarter in auto, other consumer, credit card and commercial real estate.
Average deposits increased $49.1 billion or 4% from a year-ago and 3% from the first quarter with growth in our Consumer businesses and Commercial Banking partially offset by continued declines in Corporate Investment Banking and Corporate Treasury reflecting targeted actions to manage under the asset cap.
Now turning to net interest income on Slide 7. Net interest income was stable from the first quarter, unfavorable hedge ineffectiveness accounting results, higher income due to additional forgiveness of Paycheck Protection Program or PPP loans and one additional day in the quarter was offset by lower loan balances and the impact of lower interest rates.
As we think about net interest income for the remainder of the year, the rate volatility observed over the last few weeks have shown how difficult it can be to forecast even for the next couple of quarters. The key drivers continue to be demand for loans and balance sheet yields, which are impacted by the level of rates, the shape of the curve and credit spreads.
While the recent rally in rates and continued softness in loan demand have put downward pressure on net interest income, we still expect NII for the full-year to remain in the range of flat to down 4% from the originally reported and annualized fourth quarter of 2020 level of $36.8 billion.
Where in the range we end up will be dependent on the factors I mentioned. If rates follow the current forward curve and overall loan balances remained flat from the period end balance at the end of the second quarter for the remainder of the year, which would require modest growth in commercial loans, we would expect net interest income to be in the lower end of the range. If we see rates back up from here and start to see more loan growth, we will move up in the range. We continue to closely monitor the evolving trends across each of the major drivers of net interest income and we will provide updates to our outlook as the year progresses.
Turning to expenses on Slide 8. Non-interest expense declined 8% from a year-ago, primarily driven by lower operating losses and also reflected the progress we’ve made on our efficiency initiatives. Let me highlight a few examples. Our customers are increasingly leveraging our digital capabilities with mobile active customers up 6% from a year-ago and the number of checks deposited using mobile growing 9% from a year ago. These changes and others have enabled us to adjust branch staffing and you can see this coming through with lower headcount and expenses in the Consumer Banking and Lending segment.
Importantly, to date, we’ve been able to make these adjustments, while improving client satisfaction. We reduced the number of our locations, including branches and offices by 5% since the start of the year, a reduction of over 2 million square feet. We also recently agreed to sell our tower in downtown Phoenix, which includes over 500,000 square feet. We continue to evaluate owned locations and locations with upcoming lease expirations for closure and consolidation opportunities.
We reduced professional and outside services expense by 14% during the first half of this year compared to a year-ago. This reduction was driven by lower spend on consultants and contractors on various projects across the company. In Commercial Banking, we’ve made progress on changing how we serve our customers, optimizing our operations and other back-office teams and reducing the number of Commercial Banking and Lending platforms. These efforts were reflected in lower headcount expenses in this segment.
We are on track in executing our efficiency plans included in our expense outlook of approximately $53 billion. Our outlook excluded restructuring charges and the cost of business exits, which totaled $192 million during the first half of this year and included a $1 billion of operating losses, which totaled just over $500 million during the first half of the year.
Keep in mind, operating losses can be lumpy and unpredictable and especially as we continue to address the significant work left to do to satisfy our regulatory requirements. We also assumed approximately $500 million of incremental revenue-related expenses and these have been higher than expected so far this year due to strong equity markets, which is a good thing, as the associated revenue more than offsets any increase in expenses.
If current market levels hold, we would expect incremental revenue-related compensation to be approximately $1 billion, which could put us over $53 billion. We’ll continue to update you as the year progresses.
Turning to our business segments starting with Consumer Banking and Lending on Slide 9. Consumer and small business banking revenue increased 7% from a year-ago, primarily due to higher debit card transaction volume and higher deposit-related fees, which were lower in 2020 due to fee waivers provided at the onset of the pandemic. Home lending revenue increased 40% from a year-ago, driven by higher servicing income as last year we had a significant negative valuation adjustment to our mortgage servicing rights asset.
We also had higher origination and sales revenue in the second quarter due to higher gains from the re-securitization of loans we purchased from mortgage-backed securities last year and an increase in retail originations. The 7% decline in revenue from the first quarter was primarily due to lower retail held-for-sale originations and gain-on-sale margins. Gain-on-sale margins are expected to continue to decline in the second half of the year.
Credit card revenue increased 14% from a year-ago, driven by increased spending. Additionally, in response to the pandemic, second quarter 2020 included higher customer accommodations and fee waivers. Auto revenue increased 7% from a year-ago in higher loan balances.
Now turning to some key business drivers on Slide 10. While we believe mortgage originations in the industry declined from the first quarter, our mortgage originations increased 3%. A decline in correspondent originations was more than offset by growth in retail, with an increase in retail held for investment volume, partially offset by lower held-for-sale line.
Our second quarter retail mortgage origination volume increased 10% from first quarter and was the highest since 2015. We currently expect third quarter originations to decline modestly although refinancing volumes to be stronger than currently forecasted with the recent rate rally if lower rates persist. We also expect our retail originations to decline less than the industry as we’ve improved capability to serve our customers’ mortgage financing needs.
Consumer demand for auto loans continue to be very strong despite higher prices and limited inventory. Auto originations increased 19% from the first quarter and 48% from a year-ago with June setting a new monthly record for originations exceeding our previous highs in June of 2016.
Turning to debit card. Purchase volume increased 12% from the first quarter and 31% from a year-ago, reflecting higher consumer spending due to stimulus payments and improving economic conditions. Credit card point-of-sale purchase volume was up 21% from the first quarter as the economy continued to open and in May, we had our highest monthly spending volume in recent history. The increased activity has not yet translated into significantly higher balances as payment rates remain high.
On Slide 11, the Commercial Banking results are highlighted. It excludes the Corporate Trust business, which is now reported in Corporate and prior periods have been revised. Middle Market Banking revenue declined 9% from a year-ago, primarily due to the impact of lower loan balances and lower interest rates, which were partially offset by higher deposit balances and deposit-related fees.
Asset-based lending and leasing revenue declined 12% from a year-ago driven by the impact of lower loan balances, which was partially offset by improved loan spreads, higher net gains on equity securities in our strategic capital business and higher revenue from our renewable energy investments.
Non-interest expense declined 9% from a year-ago, primarily driven by lower salaries and consulting expense. Average loans declined for the fourth consecutive quarter and were down 22% from a year-ago. The demand for loans declined due to low client inventory levels and strong client cash positions. While there are some green shoots in select industries, demand has not yet picked up. Average balances were up 5% from a year-ago, reflecting significant liquidity from stimulus programs.
Turning to Corporate and Investment Banking on Slide 12. In banking, total revenue declined 6% from a year-ago. The decrease was driven by lower debt capital markets revenue, the impact of lower interest rates and lower deposit balances predominantly due to actions taken to manage under the asset cap.
Commercial real estate revenue grew 21% from a year-ago, driven by higher CMBS gain-on-sale margins and volumes. Commercial real estate capital markets transaction volume increased significantly from a year-ago driven by low rates, tighter loan spreads, excess liquidity in the market and stable improving real estate fundamentals. While acquisition activity picked up in the second quarter, loan demand was predominantly driven by refinance activity.
Markets revenue declined 45% from a year-ago from lower trading activity across most asset classes compared to the higher trading activity we experienced in the second quarter of 2020 as the markets recovered due to the monetary and fiscal stimulus in response to the pandemic. Our markets revenue has been negatively impacted by actions we’ve taken to manage under the asset cap as well.
Non-interest expense declined 12% from a year-ago, primarily driven by lower operating losses. Average deposits declined 20% from a year-ago, primarily driven by continued actions we’ve taken to manage under the asset cap.
On Slide 13, we have Wealth and Investment Management, which grew revenue by 10% in the second quarter compared with a year-ago. Non-interest income was up 18% from a year-ago, primarily driven by higher asset-based fees on higher market valuations, which was partially offset by lower net interest income driven by lower interest rates. Revenue-related compensation drove the increase in non-interest expense compared with a year-ago.
We ended the second quarter with record client assets of $2.1 trillion, up 20% from a year-ago, reflecting strong market performance. Average deposits were up 6% from a year-ago and average loans increased 5% from a year-ago due to customer demand for securities-based lending offerings.
Slide 14 highlights our Corporate results, revenue growth from a year-ago and from the first quarter was driven by the equity gains from our affiliated venture capital and private equity businesses that I highlighted earlier in the call, second quarter results also benefited from the gain on the sale of student loans and a modest gain on the sale of our Canadian equipment finance business.
We will now take your questions.
[Operator Instructions] Our first question will come from the line of Betsy Graseck with Morgan Stanley.
Hey. Good morning.
Good morning.
Can you hear me okay?
Yes.
All right. Thanks. Hey, so I did just want to understand a little bit about the commentary that you’re making earlier around the 10% ROTCE that you're expecting you will be able to do that in 2022 without reserve release which is – seemingly a pretty bold statement given what consensus is looking for. If I X out the reserve release, it feels like there's a percentage point or so differential there. Can you help us understand what the drivers are going to be to do that? And if it's in the expenses, can you give us some sense to which parts of your business is going to be feeding that 10% most? Thanks.
Yes. So let me start out and then Mike can chime in. I guess, the way we thought about it is to just – let's first start and think about the earnings of this quarter and do our best to look through all of those things, which we know aren't really recurring. And so if you think about the sale of the student loan business, the change in allowance, and even – obviously, we've got those outsized gains in NEP, NVP. But at the same time, we don't assume they go to zero over the course of the following year.
And then you could even normalize for charge-offs, getting them to somewhat of a higher level. But if you do that, what we've said is that with our expense reductions that we've contemplated with the ability to return capital, you can get to that level. And so we've obviously had the ability now to return to significant amount of excess capital that we have. That's an extremely meaningful driver of the improvement in ROTCE, and it's a – I think about it is like a somewhat modest improvement and the rest of the performance to get there from – in terms of the company from where we sit today.
So we don't want to talk in any level of specificity at this point about the specifics about expenses. But we're working extremely hard not just to get the efficiencies that were important to meet our expectations for this year, but to position us properly next year to reduce expenses on a net basis while we have the ability to invest significantly inside the company.
Yes. And I would just point out, Betsy. It's not a full-year 2022. What he said was it’s the run rate in 2022 at some point, right.
Yes.
Right. So it could be your 4Q exit run rate?
It could be.
Okay. And then just separately, could you speak to the flexibility on the buybacks? I know you indicated that $18 billion or $18.5 billion under the SCB framework. Should we be taking that as a minimum buyback level? Because I think that reflects your ask in the – or at least what you – not in ask, but what you put into the test, and you've got earnings that you're generating and the environments improving. So could you imagine that buybacks could be higher than that over the course of the next four quarters?
Yes. I think the signal is that it could be higher or lower depending on exactly how our results turn out and what we think the outlook for the economy is and potentially where the stock price is even though that's really not a factor in our thinking today given our view of the valuation. We obviously would hope that it would be more, not less and we have the flexibility under the SCB framework to do that. So I think you all can do your calculations on what you think we'll learn next year. We've given you the guidelines for how we're thinking about where we're targeting our capital ratios to be, and we'd like to – we don't see any needs to have excess capital sitting around the company at this point especially given the fact that we have the asset cap.
Okay. Charlie, Mike, thanks so much. Appreciate it.
Sure.
Your next question will come from the line of Steven Chubak with Wolfe Research.
Hey. Good afternoon. So I wanted to start-off with a question just on the headcount trajectory. You started to make some real progress, driving some of the headcount reductions that you've spoken to. It sounds about 6% year-on-year, but if I look – comp you against the peer group, BoA probably being the closest comp. You still have 50,000 more employees despite a similar business mix and scale. I recognized that certainly some of that's going to be tied to the consent order. But I was hoping Charlie you can maybe just give us some context or perspective on. As you start to execute on the plan of optimizing that headcount, what's the right level to support your strategic vision for the franchise?
Yes. I think it's a great question. I think your numbers are accurate for sure. Just a couple of things I'd say. I think, first of all, you can imagine we try and do all those numbers ourselves. And between other places that we've all worked at the senior management team, it is very hard to get apples-to-apples because different people in-source different functions. And so – but directionally, your point is still right. So I'm not sure the magnitude is exactly right versus just Bank of America. But directionally, I think it's a fair statement.
And I think that is a simple driver that gets everyone's attention here as well as, frankly, just as we look around the company and we see our processes and we see the things that we haven't done nearly as well. And so that's why when we think about the future that we have, we still continue to believe that there are significant efficiencies on a gross basis that we'll be able to continue to drive out the company.
Over time, we would love to do as much of it through natural attrition as possible given the size of the company, we have significant attrition. And people self-select because of how we're going about doing things. But I think – we think about where we're going and our ability to reinvest in the company. We think that there's a lot there. And I think, again, as we get towards the end of the year, we'll talk about next year with some more specificity and at some point give you a little more clarity. I think we're still in the stage of peeling the onion back, and every time you peel a layer of the onion back, you see the next layer even more clearly. And I think we're still in that stage. But it does give us a pretty good feeling about our ability to continue to drive this forward.
Thanks for that perspective, Charlie. And just for my follow-up on the NII outlook. Mike, I was hoping you could just unpack the NII guidance a bit further. Specifically, what is the contemplate in terms of premium am and excess liquidity deployment? And is there any noise relating to some of the loan sales that could drive some volatility in the back half as we think about the trajectory?
Yes. There is no noise from loan sale per se. But let me break out aspects of it and kind of talk through what was included there. So obviously the curve is going to be an important element of it. And what we said in the remarks, right, at this point, we're assuming it's about where it is, right. It's been bouncing around the last few days, but sort of think about it as about where it is right now.
And then as you sort of look forward on loans and you assume that overall loan stay sort of flattish where we exited the quarter, that does require a little bit of growth – modest growth on the commercial side. And so that's sort of embedded in the assumption. I think on premium amor, you saw it come down a bit in the quarter versus the first quarter, we're still expecting that to come down. I think it could bounce around slightly versus what the assumptions are given where rates are, but we think the direction is still the right direction.
And then you may have a little bit of noise between Q3 and Q4 given some of the PPP related forgiveness that may happen. But that's sort of what we're assuming overall to get to and that gets you towards the bottom of the range that we've given. Hopefully, we're surprised by loan growth or a backup in rates again. But that's we're assuming at this point.
That's great color. Thanks for taking my questions.
Your next question will come from the line of Ken Usdin with Jefferies.
Thanks. Hey, Mike, on the mortgage business, I wanted to ask you, you said that you had the loans that were in the loan book that you moved into and resecuritized. Can you help us understand how much of a benefit that might've been in mortgage banking this quarter and just your general outlook for origination trends and what's happening in the gain-on-sale market? Thank you.
Yes. Good questions, Ken. So I'll try and pick it. If I miss something, let me know. But as you sort of think about gain-on-sale, the gain-on-sale continues to come down each quarter and we would expect that to continue. And at this point, what that's driven by is just the capacity that's been built up in the industry and as people get a little more competitive on price, that's going to drive gain-on-sale down. Now, I think what you've also seen us do there is really focused on the retail channel. And to some degree deemphasize the correspondent channel or use it to kind of fill in the capacity that we've got. And so that should be helpful as we sort of think about gain-on-sale, but the direction is certainly going down.
And I think, as I said at this point, I think it's really capacity-driven more than anything else from here forward. As you look at the – and I also said in the remarks that we think origination volumes were going to be down a bit in Q3 versus Q2. Now there is lots of different prognostications on the market. We think based on what we're seeing, we think we'll be down less than the market. But nonetheless, will be a little bit down. Now, if we could see a little bit of a gap of refi activity that could change that a little bit. But right now, we think it's probably down just a little.
As you look at the impact of the [ETDO] gains, it was about $150 million increase on a linked quarter basis. We do expect to continue to have some gains in the third and fourth quarter. It probably comes down a bit from where it was in the second quarter as we sort of look quarter-by-quarter, but maybe a little bit less than what it increased versus the first quarter, but we do expect those to continue. And you'll see, we've still got about a little under $20 billion of those loans on the balance sheet. And you'll see the exact number when we put out the Q.
All right. Great. Thanks. And just one follow-up on consumer-related fees. Good to see the deposit-related side and card rebounding. Can you just talk about the type of momentum that you're seeing there and just – or should we expect ongoing improvements from here in those areas? Thanks.
Yes. Look, it’s just activity levels picking up and you can see that in the card volume metrics that we put out there. And so I think, assuming, we continue to see the recovery take hold and activity levels pick up and there should be – those are highly correlated there, so…
And this is Charlie, I would just add. I would say slightly different dynamics on debit and credit, right. Debit, if you look at the remarks that I made, consumers still have a substantial amount of cash you see it in overall deposit levels and the willingness to spend as things open up, it’s certainly what you're saying. And so that should continue to drive debit spend upward. And then credit is having similar benefits from reopening that the whole industry is seeing.
Understood. Thanks guys.
Your next question comes from the line of John Pancari with Evercore ISI.
Good morning. I want to see if you can give a little bit more color just around the loan growth outlook. Maybe if you can talk about commercial versus consumer on the commercial side? Are you starting to see utilization trends turn and as CapEx beginning to contribute to some increased willingness to draw down? And then on the consumer side, just curious what you're seeing in terms of payment rates specifically in the card businesses? Or are we starting to see the payment rates inflect? And do you think that's sustainable? Thanks.
Yes. Hey, John, it's Michael. I'll take that and Charlie can jump in if he wants. I'll try to pick it apart piece by piece. In the commercial bank loans are still down and utilization rates are pretty low on a historic basis. And I think overall that has not inflected yet. And there's lots of reasons, high liquidity, supply chain issues, demand for product in certain industries. Lots of things that sort of underpin that, but we haven't really seen that influx yet. There's a little bit of maybe differences by size of clients or by sector, but overall it's still not quite there yet. Now there is lots of good conversations, so I think people are really thinking about investments and really are thinking about building inventory levels over the coming quarters. But I think that'll take some time before it starts to translate into loan growth in the commercial bank.
In the corporate investment bank, we do see loans there are up a little bit. So you're seeing some activity in subscription, finance, real estate and a few places. But again, relatively small so far, but you are seeing a little bit of activity there and we'll see how that progresses. On the consumer side, I know, a lot of others are talking about this too. If you look at through the end of period balances, you're seeing a little bit of growth in auto. We had a really good quarter from an origination point of view in the auto business, but it's a relatively small portfolio in the scheme of the balance sheet.
You're seeing little bit of growth in card. Although the activity has really picked up there, it hasn't quite translated into bigger volumes given the payment rates as you sort of pointed out. Payment rates are still really high. And I think they'll come down and normalize eventually, but they're still pretty high. So I think we'll see how that progresses.
And then we still expect a further decline albeit at a much slower pace in the home lending space as we work out of the EPB – the early buyout loans and see prepayment activity start to stabilize in that business. So we'll see how it all comes together over the next quarter or two.
Okay, Mike. Thanks. That's helpful. And then separately on the consumer front, can you maybe elaborate a little bit on the rationale for exiting the personal credit lines as a product and if there's any other areas like that within your lending products suite that you might be considering similarly to exit? Thanks.
Sure. This is Charlie. That was a product of a pretty exhaustive effort that we went through across the whole company to look at what we thought was core, where we had some kind of strategic advantage or where it really was important for the customer relationships as we look forward. And so out of that exercise came our decisions to sell corporate trust to exit the international wealth business, sell the asset management businesses and a couple of other things that we have announced. The things that we've announced to the things that we're actively working on and so there's really – there's nothing more in progress now.
The way we looked at the business was quite simple. It was very, very small business for us. We have products in our card products as well as we're still in the personal loan business. And so we have the ability to continue to serve customers who either want access to credit or actual being able to draw down and fund it over term. And so again, the idea of just simplifying the company around focusing on products that are most important to the broadest set of customers. That's what led us to the decision.
Got it. All right. Thank you for taking my questions.
Your next question comes from the line of Gerard Cassidy with RBC.
Thank you. Good morning, gentlemen. Mike, can you share with us – I think, I don't think you've addressed this. But your loan loss reserves remain very strong. You guys have very strong credit as evidenced by this quarter in the history of this company. And your reserves are about a 100 basis points I think above where they were at day one in January of 2020 when you guys did the CECL true up? Can you share with us the outlook for reserves? Could they get back down to that level? And if the outlook is even better than it was in January of 2020, could the reserves actually fall below the CECL levels?
Yes. Look, Gerard, I think that's a – first on the reserves, we need to be reserve for a whole bunch of different scenarios on any given time. And so as we sort of look at the path that we're on, there's a lot to be optimistic about, but there are still some risks there that we need to be mindful of and from where we are today. But if things keep progressing, look we should have future releases as we have noted. As you think about where you end up, I think that's a hard thing to call right now in terms of any degree of certainty at a point in time because it will be a function of – as you mentioned, the outlook that you have at that point.
The mix of your balance sheet and other factors that go into sort of the – your view on the future and what could happen. But could we end up a little bit higher, maybe could we end up a little bit lower, maybe – I think it's – they're all possible scenarios depending on what point in time you're talking about. And as you know, there's a lot of things like elements of the office market in commercial real estate, that'll take a while to really play out. And so we'll see how that progresses over time, but I think it will be a function of all those things of exactly where we end up.
Very good. Thank you. And I know this question is putting the cart before the horse and I'm not asking you guys to predict when the asset cap will be lifted. But when the asset cap is lifted, how do you think you'll proceed going forward? There's been some talk in the markets that some of your peer banks are being stretched with their supplementary leverage ratio. In fact, JPMorgan now has told us that this is their binding constraint. And you have to wonder if the wholesale deposit market is going to be disrupted because of this freeing up Wells Fargo without the asset cap may give you guys the opportunity to pick up some wholesale deposits. So again, not asking when the asset cap is going to be lifted, but how does it look after it is lifted? What are you guys thinking?
Well, again, I think it's very hard to answer the question because as you know, we don't know the timing of the asset cap just as if we don't know the timing of any changes, which could potentially happen on SLR or the way other banks will deal with that. So there are a whole series of unknowns that go into the question that I'm not sure that we're in a position to answer this quite frankly.
Yes. And I would just add two things. If you think about the actions and we've been very public about this, a lot of the actions we've taken as a result of the asset cap is to work with clients to manage deposits to other vehicles or other institutions in some cases and we continue to do that. So there's likely to be opportunity there with clients and we've managed areas like our market's business down. And think a lot of that could be financing type trades. And some of that, we think there'll be demand at the right time. And so I think as you sort of look at that, there should be plenty of opportunity for us as we look forward. But as Charlie said exactly, what shape that will take is a little bit of a function of when it happens.
Thank you. Appreciate the color.
Your next question will come from the line of Matt O'Connor with Deutsche Bank.
Hi guys. Some of those has been kind of weaved throughout the call. But I was hoping you could just put together. If we look at the next two or three years and obviously assuming you're well past the asset cap, what are some of the key organic revenue growth drivers for Wells Fargo and how meaningful can they be? You mentioned credit card, you just mentioned some of the markets and wholesale business, the wild card. But maybe kind of list like three or four of them if there are and what might move the needle as we think about the next few years because you're probably one of the few stories where yes, you've got leverage to rising rates, but there's also an organic cost opportunity like you talked about and probably from organic revenue opportunity too. So hoping it's just kind of packaged that together for us? Thanks.
Yes. I appreciate the question. And again, so I'll just put aside the interest rate environment for a second. And I think, listen, the reality is for a – I'm not sure what the right period of time is, but I'll just say for a period of time, we have been laggards across most of our businesses at growing revenues. For many, many years we had very, very strong financial performance. It's been a while since that's been the case.
And when you look at the underlying trends of the businesses, while I personally think we've done remarkably well in terms of our share stats across the franchise given all of this company has been through which says an awful lot about the people on the front lines that do it day in and day out. There's just been very little that we've really done to focus on growing the franchise. And I do want to be fair to everyone here, right, which is that given all the issues that we've had, whether it's sales practices and the consumer bank, as an example, Mary Mack’s job when she was put into that role was to fix that problem, not to focus on growing the business. And we continue to have other issues around the company.
So as we've talked about where our priorities are, as I said in my remarks, we understand that continuing to build the risk and control infrastructure and satisfy the regulatory requirements is a gate to a really successful future of ours that we need to get through. But at the same time, just answering your question, I really do believe the opportunities exist in every one of our core businesses. And when we go through and we think about the consumer segment again, we've been getting a reasonable share of deposit flow, not because we're pricing for it, not because we've done anything really interesting in our coverage model, our products are digital or anything like that. It's because of who we are in the relationships that we have.
We need to alter the course by changing all the things that I just mentioned. And those are the things that we're actively working on the background – in the background, whether it's all of our digital capabilities with this mobile-first attitude, looking at all of our products and services, thinking about how we serve the different segments using the data and information that we have to become more targeted in our offerings, that should drive a different level of growth in the consumer business.
We've talked about the card businesses as one of the pieces of our consumer lending business. You pick the business. In our middle market business, we don't see much revenue growth both because of rates and because of balances there. And we do believe we're the best commercial lender in the country and the best at being in a position to serve those customers far more broadly. And so whether it's through improving our treasury management products or the work that we've talked about utilizing our CIB platform to sell investment bank products to these customers who we bank for decades is just a very meaningful opportunity for us.
The CIB, we're not going to be all things to all people. When you look at our fees relative to the lending commitments that we have out there, just as a measure of opportunity, we're not even close to where a company with risk, our existing risk profile should be. And by the way, it's been – the team has been improving it, but we're not shy to say we want to improve it even more from here, focused by industry, focused by product, utilizing the competitive advantages that we have.
So I really believe and I don't leave anyone out when the exact same thing, we've got online capabilities and [indiscernible] that we've completely underutilized. We have a platform for brokers that want to go independent, that we've completely underutilized and there too – all the things that Barry Sommers is doing to bring our platforms together, to be able to offer all of the best products across all the platforms, do a better job with things like security-based loans and mortgages, where our stats clearly lag the competition. Those are just some sound bites, but we really believe it's everywhere. And so that work is going on the background and hopefully what you'll start to see, like we've seen – like you've seen with credit card is you'll start to see things come to market. But again, nothing is going to jeopardize the risk work we have to do.
So it obviously sounds very broad-based in terms of the opportunity, but any way to size it either if you didn't have the asset cap, your balance would be, say $200 billion bigger now or if loan growth for the industry is 4% over the next several years per year you can do 50% better than that. Just any sound bites on sizing or where you could be now if you didn't have it or [indiscernible] longer-term?
Matt, honestly, like we're not even thinking about what life is like without the asset cap. We quantify for ourselves and what the impact is on having it in this environment because that's the reality of it. But there are plenty of opportunities. I mean, if you go through all the things that I spoke about before, very few of those require balance sheet. Now, it doesn't mean that there's not opportunity costs for having it, but that's not an excuse for us not to do some other things. And when we get to the future, we'll talk about it when we get there.
Understood. Thank you.
Yes. And Matt, I've quantified some of the actions we've taken in the past that in other forums. And so I'd go back to some of that, but it's significant, and it's hundreds of billions of dollars of actions we've taken to help manage through the asset cap. So that should give you a pretty good sense of what the impact has been.
Okay. Thank you.
Your next question will come from the line of Vivek Juneja with JPMorgan.
Hi. Thanks for taking my questions Charlie and Mike. Quick clarification through your onset to this – the last question, as soon as Charlie has said you aren't contemplating life without the asset cap, does that mean that the $18 billion buyback that you're talking about in the CCAR that does not – that assumes the current situation, it does not assume the lift of the asset cap?
Yes. Vivek, that's what I think he meant was, we're not playing a bunch of what ifs, like where we would have been right now if like the asset cap wasn't in place, right. So I think that's – I would take that in that context. And I think as we sort of look for our capital planning, we're assuming that it's in place during the period.
Okay. Second quick one for you, Mike. Hedge ineffectiveness gain you meant – how much was it and could it continue?
Yes. The hedge ineffectiveness absolute impact in the quarter is very small. You do have a bit of a linked quarter variance because we had a negative hedge ineffectiveness result in the first quarter given what happened with rates during the first quarter. But the absolute impact that's embedded in the second quarter is actually really small Vivek.
Okay. So then something else drove down that long-term debt costs by 50 basis points?
Yes. I think if you look at long-term debt, right, part of it is we reduced our long-term debt. If you look at the absolute long-term debt costs, we reduced the rate and we reduced the amount and the rates down.
Okay, great. Thanks, Mike.
Your next question will come from the line of David Long with Raymond James.
Hi, everyone. As it relates to the buybacks, it seems like you guys are pretty optimistic on your capital levels and the economic backdrop. Can you accelerate the pace of buybacks here in the near-term? By that, I mean, is it possible that you could buyback a higher fraction in the third quarter, meaning $5 billion or $6 billion worth of your stock?
Yes. Look, we're always looking at like the pace and we're not going to get into specifics of what we're going to do before. But when you say fast, like we haven't said how much we intend to do by core, yes. And so obviously we're going to be mindful of how with the pacing that we do it and we're going to be prudent about that. And we start with a lot of extra capital. So we feel really confident that we'll be able to get that moving at the right pace soon.
Got it. Thanks for that color. And then my second question relates to the PPP forgiveness, and it's not going to be huge to the bottom line for you guys. Did you disclose what the impact was on forgiveness fees in the quarter specifically to the second quarter?
We did not, but you did see – we did see our PPP balance has come down from roughly about $12 billion to about $8 billion, and we'll see those continue to come down and we'll continue to have some impact from as the remaining loans start to get forgiven over the next few quarters.
And also keep in mind that we had said that we are giving away the fees and so very little if any net bottom line impact from that.
Yes. So we're giving away the fees for – the gross fees for the loans that are originated in 2020. And that's mostly what's been forgiven now.
Got it. Appreciate it. Thank you.
Your next question will come from the line of Ebrahim Poonawala with Bank of America.
Hi. Just had a very quick follow-up. And I know this is a few years out on Charlie, but I think you mentioned, over time you think the bank can achieve a 15% ROTCE. Is that – how much of that is dependent on interest rates moving higher and does that eventually need the asset cap to move higher for Wells to get to that 15% kind of ROTCE?
Yes. It certainly does. Assume that the asset cap has gone and it assumes higher rates and we haven't really been specific about exactly what that means. And what we've said is, listen, we first want to get to double-digits, this is a – we're on a journey and that's kind of where we're headed. And once we get to 10%, then we can talk with some more clarity about what's next.
Got it. And just in terms of clarifying your guidance on expenses. As we think about beyond 2022, is it safe to assume that incremental expense growth would be driven by revenue generation as opposed to further investment, so there maybe some room in terms of cost expense savings beyond this year?
Yes. We haven't talked about our outlook on expenses past this year. I think what we've said, which I think is continuing to be true is that we've got a – we're in the middle of a multi-year efficiency program. And even with some of the investments that we need to make that we should be able to bring expenses down on a net basis for the next couple of years. So I think that still stands.
That's helpful. Thank you.
Your final question will come from the line of John McDonald with Autonomous.
Hey, Mike. I wanted to just do another quick follow-up on the expense comments for this year. Could you just repeat what you said about the revenue-related expenses and where they're trending relative to what you baked in and kind of how that ties to the $53 billion target for this year?
Yes. Sure, John. Thanks. Embedded in our original outlook of about $53 billion, we assume that revenue-related would increase about $500 million. And at this point, we think that's probably more like $1 billion, so an incremental $500 million, and that's really largely driven by the advisory assets and business that we have in our wealth management group that's doing really well, particularly given where the market levels have been. And so that's putting pressure on the $53 billion. So it's possible if that holds that we could be a little over $53 billion, and obviously that excludes restructuring and the cost of business exit. So that's the way to think about it.
Okay. And it also includes the expense benefit of business exits too, right, so that's not factored into that?
Yes. The $53 billion, John, assumes that those businesses were here the full-year except for the student loan business. But for corporate trust and asset management assume they were there the full-year. Once we get to closing, which should happen later this year, we'll update how we think that's going to progress based on how we think the transition service agreements will play out.
Okay. And then just looking at your year-to-date expense numbers, the cadence then implies that you're stepping down in the back half of the year to something that kind of averages closer to $13 billion a quarter. I'm just kind of playing out the math. Is that right way to think about it?
Yes. I think that's what the math would imply.
Okay. Thank you.
Thanks, John.
With that I'll turn the conference back over to management.
Right. Well, listen, thank you all so much for the time. We appreciate it. And if we don't talk to you during the quarter, we'll talk to you next quarter. Take care.
Thank you all for joining today's call. You may now disconnect.