Wells Fargo & Company (WFC) Presents at Barclays Global Financial Services Conference (Transcript)

Q – Jason Goldberg

Maybe just jump right in. Obviously, you have a very broad consumer customer base. On the earnings calls, you guys noted that certain cohorts of customers have seen average balances decline to pre-pandemic levels as kind of stimulus payments came to an end. You also kind of talked about potentially debit card spend off or declining while inflation appears to be impacting certain categories of spending. Maybe just kind of update us in terms of kind of your current lay of the land.

Mike Santomassimo

Yes. No. It’s an important piece, right? And it’s good to see everybody in person again. We’re a couple of conferences in I think in-person. It’s great to be back. As you sort of think about what’s happening overall things are — things look really good still. If you look at averages medians, they all look fine. Increase — they’re higher than they were pre-COVID. They’re — and most customers are performing quite well. And you can see that through a lot of the posit data.

Where the environment is going to really start to matter more is on those lower income levels lower wealth spectrums and that’s where you’re seeing more stress. So, whether it’s higher gas prices rent grocery you name it in terms of the basics of just living every day, those sorts of expenses impact that lower income levels much, much quicker. And you are seeing that happen, right? And you can see that in other people that are more sub-prime focused, you can see that more clearly probably in some other results. But you’re seeing that in terms of lower deposits. You’re seeing that in terms of a small uptick in delinquencies.

Now, for us, that’s a really small piece of the overall portfolio, so it’s not going to be a significant driver. But you’re starting to see that and that’s what you should expect to see given the inflation that we’ve seen. And as it persists, it will impact folks even more over time.

When you look at spending, people are out there spending. You can see that probably in your own daily lives, getting restaurant reservations or other things are just not easy in some places and so people are out there.

When you look at debit spend in July and August, that was on average about up 3% year-on-year. Some of the categories continue to shift around as you would expect. When you — what we saw in the end of the second quarter was much bigger growth in things like fuel and gasoline and entertainment and other categories like that. You’re seeing in July and August some of the fuel moderate because — as gas prices have started to come back down and so you’re seeing more of that shift to different categories. There’s still some categories declining, but nonetheless, you’re seeing decent continued spend there.

On the credit side, it’s up more, up 25%-ish in terms of the growth and it’s really growing in all categories, which is good to see. I think coupled with that which I’m sure we’ll come back to later in terms of credit, you’re still seeing people have very high payment rates on their credit cards, which I think goes back to that liquidity story that we have there.

And so look as rates rise, the economy will slow and that will have an impact on a lot of these consumers. But so far, the majority of people are weathering it pretty well. And the folks that are having the most impact are the ones that you would expect to as inflation has a much bigger effect on their overall spend. But so far so good in terms of those overall spend levels too.

Jason Goldberg

And maybe shift gears to commercial front in just kind of in terms of what you’re hearing seeing from your corporate customer base in terms of credit utilization, cash flow activity, impact of inflation et cetera.

Mike Santomassimo

Yes. It’s a similar story that I think we’ve heard over the last quarter or so. I think customer — the majority of business customers or commercial customers are still doing really well as well. If you look in the commercial bank, we are seeing a little bit of an uptick in utilization rates, but just a little not through pre-COVID levels or just about at pre-COVID levels in terms of those utilization rates. And that’s really driven by the impacts of higher wages, inflation, input costs, a little bit of inventory build. There’s — we were looking at our inventory finance business just the other day.

And when you look at a business like that, yes, people are building inventory a little. But if you look at how long it’s sitting on the floor it’s still — if it was 100-plus days pre-COVID it’s still around 60 days now on average. And so you’re still seeing inventory turn much faster even though people are building there as well. So overall the impact of inflation and wages and so forth has been something they’ve been able to pass along to clients through price increases at least so far.

And that’s been generally sort of what we’ve heard from folks and so so far so good again in terms of the overall health that we’re seeing there. But you’ll see idiosyncratic issues with spread compression and impact from wages in certain factors — in certain industries and so we’re keeping a pretty close eye on that but that’s something that looks still looks pretty good.

Jason Goldberg

Got it. Why don’t we go to the first ARS question before I delve further? Just what’s your current position in wallet of shares?

Mike Santomassimo

A lot of anticipation here.

Jason Goldberg

We’re going to rank them at the end and see what we come up with. All right. Interesting. I guess, Mike you obviously talked on the consumer-side, the commercial-side, kind of — maybe kind of tie this into the income statement per se. But the second quarter pretty broad-based loan growth it feels like back half you’re hearing kind of loan growth continuing, but moderating. Just maybe kind of talk about it in terms of what you’re seeing at Wells.

Mike Santomassimo

Yes. And if you just make sure you have the context right in terms of what we’ve seen over the last few quarters, right? So we started to see some loan growth at the end of last year. That continued into the first quarter and started to accelerate as we got out to the end of the first quarter into the second quarter.

And so those outsized growth rates were really more in the second quarter than over the last couple before that. And so year-to-date overall loans are up 5%. And by category it could be plus or minus that a bit. But overall we saw some pretty good growth across most categories not quite everything but a lot of — most categories.

And so as I said in the earnings call we just didn’t think that was going to continue at the same pace that we saw in the second quarter. And I think as you look at the Fed data coming out in the H8 data that is the case so far through the third quarter where growth has moderated.

You’ve seen in — so the H8 data for the top banks at least you’ve seen growth — you still see growth in most categories. Auto is probably down a little bit. But other — but most other categories are still growing. And so that approximates what we’re seeing plus or minus on the overall growth rates that we’re seeing there across each of them, but we’re still seeing growth but it is moderating as we thought it might coming off a pretty stellar and big growth in the – particularly in the second quarter.

Jason Goldberg

Got it. And then, I guess, maybe shifting gears to deposits. Last quarter, you saw some pressure from seasonality tax payments and outflows on the commercial side the wealth side. Just maybe talk to your expectations for 3Q in terms of balances mix. And in – betas, I think was around mid-30s last cycle. How do we think about this cycle?

Mike Santomassimo

Yeah. As you think about the balances, so as you say they were down a little in the quarter in the second quarter. And again, I go back to the industry data. They’re down again, a little in the third quarter, which is to be expected and normal given the environment we’re in as people start to shift – either shift some money around for the wealth clients, as you pointed out, or you see some – the continued spending of some of the liquidity people have as well.

And so I think that’s just normal activity that, we’re seeing so far in terms of the decline. And we’ve seen a little of that decline, as well as we’ve gone through the third quarter. When you think about pricing, I think the – whereas over the last couple of years we’ve had to optimize our deposit mix, as we’ve dealt with the asset cap constraints we’ve had. So we come into this environment feeling as good as we can about the overall deposit base that we’ve got.

Roughly, 60%, 61% of the deposits were in our consumer business at the end of the quarter and in the second quarter, up from low to mid-40s. If you go back a couple of years or a few years in terms of looking at that deposit book. So those deposits are going to be our least rate-sensitive deposits in an environment like this in the stable.

And then on the other side of the spectrum in the corporate investment bank, those were down to roughly 12% or so of the deposit base, which are the most rate sensitive. And so we come in feeling as good as we can about the overall book there. When you look at betas on the consumer side, pricing hasn’t moved a ton yet, which is what we thought is what we expected to see so far across most of the industry as well. That – I think that’s the case. And so that’s what we – the case for us as well and you can see that through the second quarter and you’ll see that in the third quarter numbers as well.

On the other side, on the corporate investment banking side, the cumulative betas that we’ve seen so far are about where we expected them to be. They probably started off a little slower in the beginning of the cycle and caught up towards the end of the cycle, but cumulatively about where we thought they would be. And we feel that where we want to pay for the deposits we’re able to compete well. And that’s really focusing our energy on real core operational deposits across, our corporate franchise primarily in the CIB and I think we can compete well there.

And then, the commercial bank, it’s somewhere in the middle in terms of the overall betas, probably kept pace with the CIB in the beginning probably slowed a little bit or separated a little bit in the last rate rise. But on average, it’s playing out largely as we thought it would play out in terms of pricing so far. I think the – as we go through the rest of the year, we’re going to see higher betas, right? As rates continue to rise that’s just natural as we sort of get past where we were – where we ended the last hiking cycle and you’re going to see betas increase. And eventually, you’ll start to see the consumer side come up a little. And then you’ll see it continue to be somewhat competitive on the corporate investment bank. But I’d say overall, things are playing out as we thought. But we are seeing a decline and we’ll see how that plays out over the rest of the year.

Jason Goldberg

Got you. So in the second quarter so NII jumped 20 — sorry 11% sequentially; NIM was up like 23 basis points. Last, we spoke you were talking about 2022 net interest income up 20%. Is that still how you’re thinking about the back half of the year? And just how do you kind of think about NIM, as we start to think about 2023?

Mike Santomassimo

Yeah. That’s like the magic question, right? And so as you think about what we’re seeing, we still feel really comfortable about the 20% increase on a full year basis. And I think given what we’re seeing in rates and loans and I think it’s more likely there’s a little upside to that than there is downside to that at this point. And so I think we feel really good about that. As you think about going into next year, there’s just a lot to play out between now and then. I think we’ve seen a lot of rate volatility even in this quarter, although the absolute level of rates are maybe a little lower than the — at least the longer end of the curve a little lower than they were at points during the second quarter. We’ve still seen lots of rate volatility. We’ll see where the Fed actually gets to as we get to year-end. And so — and where pricing goes and deposits and loan growth. And so I think I’m sure you can all do some math to figure out what a trajectory might look like. But I do think there’s a lot to play out between now and then to see where — what the actual path will look like into next year.

Jason Goldberg

Got it. Maybe we can kind of maybe just run through some of the key fee income items. Mortgage maybe we talk to kind of maybe your near-term expectations. One bank yesterday guided to down 30%, 35% linked quarter; one bank guided to stability. So just kind of what you see in near term around kind of gain on sale margins. And maybe bigger picture, Wells’ mortgage business has been the news lately. There’s been some headlines I think some maybe — I don’t know maybe kind of give us your take and we’ll tell you what their take was?

Mike Santomassimo

Yeah. Look I think as we — as expected in the mortgage business, it’s a pretty challenging time, right? So we’ve seen I think last week we hit rates — mortgage rates that we haven’t seen in 20-plus years. We saw the largest increase in rates in a short period of time maybe ever, but certainly in a very long time earlier in the year. And that’s having the impact you would expect it to have in terms of refinance volumes being much, much lower than they were. Now in every market there’s always some refinance volume, but — so it’s not zero, but it is much, much lower than it was not very long ago. And you see — you are seeing this impacts the purchase market a little bit as well where we’ve seen lower volumes. And with applications being down to pretty low levels that we haven’t seen in a while.

As you think about the quarter, what we said in the second quarter was we could see a little bit more pressure and a downward pressure on mortgage banking revenue in the consumer side and that’s still possible. Now it’s off a much lower base, right? So even if we had a decent percentage decline, it’s not a lot of — it’s not very material in terms of an earnings impact. But I think there’s still a little more to play out there and there could be a little pressure there. But it’s not going to be significant in terms of an earnings driver relative to where we were last quarter.

More broadly what we’re doing is no different than what we’ve talked about now for probably a quarter or so in different forums where we’re really trying to make sure the business — the mortgage business is focused on our consumer and wealth clients. We’re in that business because this is a really important product for those consumer relationships and wealth relationships. And that’s got to be the focus where we do a really great job for there.

We’re not going to try to be number one in terms of size just to be big in the mortgage business. It’s a very complicated business. It’s changed a lot over the last decade or so or more in terms of what needs to happen inside a big regulated bank like ours. And so we’re going to continue to focus our energies there and make sure we can deliver a really great experience for those consumers that we’ve got a more well-rounded relationship with. And then I think you’ll see the — with that you’ll see the servicing side of it gets smaller over time. This is not something that happens in a day or two or a quarter or two, but it’s something that will happen over a period of time.

Jason Goldberg

Got it. EMEA and the wealth management front, obviously, asset based fees transaction activity under pressure last quarter. Just remind us how to think about that business in the current backdrop and just, kind of, maybe what you’re hearing and seeing from your customers?

Mike Santomassimo

Yeah. And with our — in our wealth business, the majority of the fees are billed in a quarter in advance based on the prior quarter end market value. So the third quarter is based on the end of June or 1st of July, June 30th, 1st of July. And so the fourth quarter will be based on September 30th in terms of where we end up. And so you have to take that into account as you think about that fee line. And what you saw again in the second quarter was a pretty big dip in both the equity and really all of the equity indices. But you also saw a dip in fixed income values. As rates increased that impacted the value of the fixed income assets, which you don’t always normally see together, right, at that — in that same way. And so you see that coming through in the results for the third quarter.

Now at least where we are as of close yesterday, it’s a different environment that we’re seeing this quarter than we saw last quarter, certainly on the equity market side. And so we’ll see where we end up for the quarter. But assuming we see some growth there in the market or can sustain the growth that we’ve seen in the market that will flow into the fourth quarter fee line. So that should help support that fee line as we look forward.

Jason Goldberg

Got it. Let me talk about credit card. I know this is more of an NII business more than fees, but you did rollout a bunch of new cards over the last couple of quarters, new rewards based offerings. It’s, obviously, a very competitive field. Maybe just talk to how new launches have gone how Wells is differentiating themselves?

Mike Santomassimo

Yeah. Look, the credit card business is a really important business, right? Because it’s really at the core, or one of the core products from a payment perspective for our clients. And so it’s really important to have a real credible strong offering there. As I think Charlie said as soon as he got to Wells, we didn’t have a great competitive product set. And we needed to do a much better job in service and a whole bunch of aspects of the credit card business. And so what you’re seeing is we hired a new team in the end of 2019 and you’re seeing them execute the plan they laid out for us internally. We started launching products, new products a year — almost a little over a year ago now with our cash back card Active Cash. And now we just launched our fourth new product just a few weeks ago maybe a month ago. And there’s probably two or three more to come over the next year or so as we sort of round out the overall offering.

And I think what we’re seeing so far is actually really good receptivity to the products, right? So, very simple, clear, value propositions. The cash back card is an example, it’s 2% cash back. There’s no fine print. You know what you’re going to get. And I think we’ve seen really good uptick in new accounts and applications and approvals. We fixed things like line assignment service, and so you’re seeing the benefits of a more sort of holistic offering for customers there.

And we’re really happy with what we’re seeing from a credit perspective as well where both the applications and the approvals that we’re seeing are good from a credit perspective, in most cases better than the back book. And we feel good about that profile. And you’re starting to see that come through in the results. If you look at the second quarter, the industry was up kind of mid-teens. In terms of growth rates we were up kind of mid-20s in growth rates. I said what July and August looked like a little while ago.

And so, I think in part that excess — the incremental growth we’re seeing over the industry is a result of some of the new products. And so, the team is executing really well. We still have a lot more to do in terms of refining the service model and all the things that we want to try to do to make sure the experience is as good as it can be, but we’ve seen a lot of good progress there.

Jason Goldberg

And maybe with respect to CIB, it seems like there’s an increased emphasis there. Is that true? And kind of, what are you hearing and seeing on that front?

Mike Santomassimo

Yes. It’s interesting. On the CIB, it’s been a really important business for Wells Fargo for a long time. It’s just that we started talking about it more recently over the last couple of years. We broke out the financials in the first quarter of 2021, fourth quarter 2020.

I forget which quarter, and so we — to give you more transparency into what’s driving the results there. So it is a really important business and very much fits into who we want to be to be able to support both, our commercial banking clients and our corporate, large corporate and FI clients.

If you break down the pieces of it, we’ve talked a lot about what we think the opportunity looks like in investment banking over a period of time. We hired a new leader there, I think in May or June. Tim O’Hara has come in to run that business.

We think there’s a huge opportunity to better serve our mid-corporate commercial bank clients and go after an opportunity there that fits really into — we already provide the balance sheet. We’ve got the relationships for decades in some cases with founders and CEOs and the rest of the management teams.

And then, we also have the opportunity in the large corporate space in select sectors where we think we can really do a great — do a much better job there. And so I think you’ll see us continue to focus there. Now, I think that in the investment banking, the market is challenging right now, right given what we’re seeing across the industry.

I think we’ve got to see the equity markets open up a little bit more and to generate some more equity capital markets activity. The leveraged finance market is continuing to work through a number of deals that I think will sort of help maybe support opening — that opening a little bit more over time. I think M&A is probably a little more subdued, given the environment we’re in now. So it’s challenging from a fee wallet point of view now. But I think the opportunity is really big over a period of time for us to do better there.

Many of you know the commercial real estate business that we’ve got. We’ve got a really long-standing footprint there. And we feel great about what the team is doing there to continue to build that franchise. And then our markets business is something that has been very much impacted by the asset cap, where we’ve had to shrink our footprint and our balance sheet there as we’ve gone through the last few years. But again, we feel like there’s a great opportunity to complement the other things we do for the corporate franchise and the commercial bank clients, FX rates, all the basics in terms of providing a great product there. We’re not going to try to be everything to everybody there. And so we’re going to be very targeted about how we go after the opportunity but we think there should be some over time as we get through.

Jason Goldberg

And then just maybe last quarter, lastly and last quarter we saw some large impairments of equity securities in the BC businesses sort of write-downs and some unfunded commitments. How are those kind of areas shaping up for this quarter?

Mike Santomassimo

Yes. On the private equity venture side, what you saw as I mentioned earlier was a big disruption in the equity markets last quarter. And that’s really what caused the majority of what you saw there and the impairments. Many of these portfolio companies are actually doing fine. It’s really as the accounting model that requires you to look at what’s happening in the public equity markets that drives some of that for us.

And again, we’re in a very different market than we were during the quarter. And so at this point, it doesn’t appear to be anything significant there that we’re concerned about. And in the leveraged finance market I mentioned a minute ago, I think is – we’re working through some deals that are going to market there but we don’t anticipate anything significant at this point. So again a very – a little bit of a different market in terms of that opening back up a bit from what we saw at the end of the second quarter.

Jason Goldberg

Okay. And then on the expense front, we actually saw a decline last quarter despite inflationary pressures and higher operating losses. You’re still thinking about expenses for the year in the $15.5 billion area?

Mike Santomassimo

$15.5 billion?

Jason Goldberg

I’m sorry. $51.5 billion.

Mike Santomassimo

There’s a lot of people that would love for me to say $15.5 billion.

Jason Goldberg

Just how you think about that number operating losses and just how you’re approaching the 2023 budgeting season?

Mike Santomassimo

Yes. I think when you look at expenses, there’s a big efficiency plan that we laid out in the beginning of 2021 and we feel great about where we are on that. The – we said we would execute another – a little over $3 billion of saves and we’re on track to continue to do that. And part of what we’ve been also focusing on there is really just embedding it in how we operate the place every day. This can’t be a program. It has to be sort of just the – in the DNA of how we manage the businesses and functions and all the support we provide every month and quarter. And so we feel like that’s becoming kind of more of the normal way people think about.

You’ve got to make your investments, you’ve got to drive efficiency, you’ve got to continue to find ways to make the experience better for customers. And so that’s been working quite well. You saw the initial program go from $8 billion to $10 billion last year. And we still think there’s a lot of opportunity to continue to get more efficient. I don’t think you’ll find that many people in the company to say we’re like – we’re at the optimal efficiency level across the place. And so I think that should be quite good.

As you think about operating losses, as you mentioned, they’ve certainly been elevated from what we assumed for the quarter in the second half — in the first half. It’s possible that continues into the second half. Just as a reminder, we continue to work through a lot of these past issues and regulatory issues. And so as we sort of look at some of these operating losses, it also helps us put some of these issues behind us, which can be a positive.

And I think you couple potential for those that remain elevated, and then to a lesser degree, we’ve got some revenue-related expenses as the market comes back. So there could be a little pressure on the $51.5 billion as we go through the end of the year, but we continue to work every day to get there and drive the efficiency program more and more.

Jason Goldberg

And one thing you touched on, maybe prior is ability for expenses to decline again for 2023.

A – Mike Santomassimo

For 2023, yes. The budget process. Sorry. I thought I successfully avoided that. The — look it’s still early days in the budget process. I think the — as I said, as part of the efficiency program, we’ve got a lot of opportunity to continue to drive more there. And that’s what we’re focused on. So we go into the budget process, with a mindset of executing the program we know and adding to it and continue to drive expenses down. But we’re in the early days of that and we’re going to continue to do all the work we do. And we’ll provide very specific — provide more specific guidance on that as we get, towards the end of the year. But we’re encouraged by the opportunities we have.

Jason Goldberg

And then, I guess credit quality I mean charge-offs were 15 bps last quarter NPA is down 13%. In your intro, you kind of talked about the health of the consumer and the corporate client. Just any signs of stress? How should we think about this credit normalization process? How are you thinking about the reserve from here?

A – Mike Santomassimo

Yes. Well, I think I’ve been saying, this since I became CFO. Like the credit performance is still better than what we would have expected, given the environment we’ve been through the last couple of years. I think I’ve had to say that every quarter since I started, which is good I guess. But — and I think that continues, right? And I think we’re not seeing systematic stress really in any of the portfolios at this point.

On the consumer side as I mentioned, good high card payment rates. We’re seeing the home lending markets doing just fine, even though home prices are off some of the peaks in some of the markets. On the auto space, we did see an uptick in losses and so there is some noise there in terms of the auto business. And I think that feels like that goes beyond just Wells Fargo at this point.

And then on the commercial side, there’s always an idiosyncratic story of a customer that’s having some stress. But overall, the commercial bank clients are in really good shape. In the commercial real estate business, many of the sectors that were most impacted by the environment in the last couple of years are doing well. It’s retail hotel entertainment so a lot of those types of industries. Cash flows back. Valuations are back in a lot of cases.

In the office space, that’s an area that we continue to very much focus on. The portfolio is — really hasn’t seen any real loss content at this point, but that’s a story that will take a longer time to play out. We’re still seeing owners very, very constructive in terms of, whether it’s incremental equity that’s needed or other adjustments to those facilities. So we’re encouraged by what we’re seeing. But I’ll come back to where we started, there will be stress, right, as the economy slows. And so that’s going to come in terms of some of these portfolios. It’s just — so far, it’s been weathering it quite well.

Jason Goldberg

And I guess maybe on capital. You didn’t buy back any stock in the second quarter despite like 100 basis points above kind of your updated CET1 requirement. How do we think about share repurchase in the back half of the year and into next?

Mike Santomassimo

Yes. Look, I think, the — as you go back to the second quarter, what we saw was a tremendous amount of rate volatility. So, we — our memories, we end up having real short-term memory sometimes where we forget the first part of the quarter and only focus on where we ended the quarter, right? And so I think we were just being prudent based on sort of a very evolving sort of market that we’re experiencing in the second quarter.

And I think the results of CCAR, I think helps support the fact that we’ve got opportunity to continue to buy back stock over the next number of quarters. And we’re just being prudent about it. Now we haven’t done any in the third quarter, but we do feel very confident we have a capacity to continue to do more. But as we said in the earnings call, we’re just — we’re trying to be prudent and manage the place so that we get to — we think about all the risks that are out there, and we go through our normal process each quarter just to look at what could be out there and we’ll decide on timing. But I think the good news is we have a lot of capacity to do it over the coming quarters.

Jason Goldberg

Got it. Maybe go to the next ARS question. When do you expect Wells’ asset cap to be lifted? And I guess as they answer Mike, Charlie’s got there about three years ago. I think he joined about two years ago. You guys have done a lot of work to build appropriate risk and control infrastructure yet regulators maybe still aren’t satisfied. What else needs to be done? And what would be your answer to this question? We ask this every year and every year, it’s the next year since 2018. But now we’re thinking back half of 2023?

Mike Santomassimo

I liked your first question better. The — look, the build-out of the risk and control infrastructure is still by far our number one priority, right? And it’s going to be until we’re satisfied with what we’ve got to do. And when you think about the portfolio of work that we’ve got to get done across all of the different consent orders and the like, it’s significant and it takes time. It’s still a multiyear journey to get it all complete. Now not all of it needs to get done for the asset cap to get lifted, but it all needs — but we need to ultimately complete it all. And that’s still going to take time to get done.

And I’ll just always remind people like this is — it’s a complicated set of interrelated stuff. And we’re going to have a little bit of setbacks along the way as we’ve completed all. That’s just natural as you go through a process like this, and so progress doesn’t always happen in a straight line as you go through a portfolio like this.

But hopefully, what you’ve seen over the last 15 or so months is some tangible proof as three of the consent orders did get closed or expired. And so I think we continue to make sure, we’re going to dedicate the time and the money we need to get it done and are working through it as quickly as we can.

Jason Goldberg

Got it. And I guess, let’s say, a hypothetical world asset cap goes away, what would you expect for your increased marketing to grow deposits? Do you reengage financial institution deposits? Would the G-SIB surcharge go back up? Basically is there a plan?

Mike Santomassimo

Yes. Yes. I mean, there’s a lot of what-ifs in there right? And so look I think the thing you can sort of look to initially is, we’ve had to manage an awful lot of deposits over the last few years. Not all of those are FI deposits, right? But we’ve had to manage off a lot of deposits. And so that creates capacity to build there.

We haven’t done a ton of marketing on the consumer side. And we certainly haven’t been proactively — very proactive about going after deposits as we sort of manage through the last few years. So that certainly provides an opportunity there.

As I mentioned earlier the markets business has been very much impacted by the asset cap. So there’s, a number of opportunities that I think will be there at that time. And when we get there we’ll sort of outline what that is.

And I would just always caution people the that this is not a moment where you — Friday you’re under the asset cap and Monday you’re off it and then all of a sudden things spike, right? And so this does take some time. This will — when that does happen it will take some time to continue to grow from there.

Jason Goldberg

Got it, maybe go to the next ARS question. When do you expect Wells to reach its long-term ROTCE target of 15%? And I guess, Mike, against that backdrop you’ve talked about the sustainable 10% ROTCE run rate basis for the second half of this year, and it feels like with everything you said you’re on track to do that.

But I think there’s a lot more interest on the path to 15%. And maybe discuss kind of the key levers needed to get there, kind of any thoughts on the timeframe? And earlier we talked about the efficiency ratio kind of being above where it needs to be. How quickly can you drive that lower?

Mike Santomassimo

Yeah. Well, I think when you go back and look at where we started right we were at 8% when we came out of 2020. We said that we’d get to 10% through really just better capital efficiency and the expense efficiency program.

And we’re executing we delivered on what we committed in terms of buybacks last year. We’ve done — and we’re executing the efficiency program. So that stuff’s on track.

When you look at the path from 10% to 15% we had said we needed some we needed the asset cap to go away a little bit of moderate increase in rates moderate impact from some of the investments we’re making and a couple of other factors.

And so what’s changed now is the pace of the rate increase, right? And so — and that certainly helps you get to the 15% through a different path but much potentially sooner than you thought you were going to get there.

Now the other things you have to sort of look at, which we’ll talk about when we get to the — when we feel like we’re there you got to look at normalizing of charge-offs. You’ve got to think about where we are from a fee perspective. So you’ve got to sort of incorporate all the other aspects to it. And so we’ll talk more about it on one of the earnings calls as we get there.

Jason Goldberg

Got it. The audience has you at 2024 is the most likely answer the most used answer. Let’s see.

Mike Santomassimo

And I want to meet the number six people…

Jason Goldberg

We can ask for a show of hands. But I guess with that, any questions from the audience? I guess we’ve got a minute left. I’ll close out with the final one. I guess you talked earlier about credit is definitely going to normalize. You’ve been waiting and waiting for it and it hasn’t happened.

But ultimately, I guess, we all expect it will. As you see I guess what are the — you mentioned kind of office as being kind of an area of concern. I guess what are, other areas and what maybe metrics do you look at to kind of help gauge where you should focus risk office time?

Mike Santomassimo

Yes. No. We — you got to look at every portfolio and figure out, where you think the potential risks are going to be. On the consumer side, you’re looking at changes in payment behavior, looking at different combinations of income to payment to LTV to ability to pay and other — ability-to-pay metrics. And on the commercial side, it’s all the basics of real credit monitoring and underwriting, right, where you’re looking at the cash flow characteristics of it and you’re looking at what’s happening in terms of the inflationary impacts on different sectors. And so, that’s something we spend a lot of time making sure that we’re trying to get ahead of.

End of Q&A

Jason Goldberg

Great. With that, please join me in thanking Mike for his time today.