Wells Fargo & Company (WFC) Q1 2023 Earnings Call Transcript

Wells Fargo & Company (NYSE: WFC) Q1 2023 earnings call dated Apr. 14, 2023

Corporate Participants:

John Campbell — Director of Investor Relations

Charlie Scharf — Chief Executive Officer

Mike Santomassimo — Chief Financial Officer

Analysts:

Scott Siefers — Piper Sandler — Analyst

Steven Chubak — Wolfe Research — Analyst

John McDonald — Autonomous Research — Analyst

Ken Usdin — Jefferies — Analyst

Ebrahim Poonawala — Bank of America — Analyst

John Pancari — Evercore ISI — Analyst

Betsy Graseck — Morgan Stanley — Analyst

Matt O’Connor — Deutsche Bank — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

David Long — Raymond James — Analyst

Chris Kotowski — Oppenheimer — Analyst

Presentation:

Operator

Welcome and thank you for joining the Wells Fargo First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that today’s call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

John Campbell — Director of Investor Relations

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings materials, including the release, financial supplement and presentation deck, are available on our website at wellsfargo.com.

I’d also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website.

I will now turn the call over to Charlie.

Charlie Scharf — Chief Executive Officer

Thanks, John. I’ll make some brief comments about our first quarter results and update you on our priorities. I’ll then turn the call over to Mike to review first quarter results in more detail before we take your questions.

Let me start with some first quarter highlights. Our results in the quarter were strong and reflected the continued progress we’re making to improve returns. We grew revenue from both the fourth quarter and a year ago. We continue to make progress on our efficiency initiatives and expenses declined from both the fourth quarter and a year ago, driven by lower operating losses, but we continue to be focused on controlling other expenses as well.

The consumer, and majority of our businesses remained strong. Delinquencies and net charge-offs have continued to slowly increase as expected. We’re looking for signs of accelerated deterioration in asset classes or segments of our customers. And broadly speaking, we saw little change in the trends from the prior quarter, however, weakness continues to develop in commercial real estate office, and Mike will discuss this in more detail. Given what we’re seeing, we’re taking incremental actions to tighten credit on higher risk segments, but continue to lend broadly. We increased our allowance for credit losses for the fourth consecutive quarter. Our economic expectations used to support the allowance have not changed meaningfully. But we do continue to look at specific asset classes such as commercial real estate to appropriately assess the adequacy of the allowance. We will continue to monitor the trends in each of our loan portfolios to determine the future action is warranted.

Both commercial and consumer average loans were up from a year ago, but were relatively stable from the fourth quarter. Consumer spending remained strong with growth in both debit and credit card spend, but spending began to soften late in the quarter. The decline in average deposits that started a year ago continued in the first quarter, primarily driven by customers seeking higher-yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press, but those inflows have abated. Our CET1 ratio, which was already strong, increased to 10.8%, even as we resumed common stock repurchases in the first quarter, buying back $4 billion in common stock.

Let me share some thoughts on the recent market events impacting the banking industry. We’re glad that the work we have completed over the last several years has put us in a position to help support the U.S. financial system. Along with 10 other large banks, we utilized our strength and liquidity and we made a $5 billion uninsured deposit into First Republic Bank, reflecting our confidence in the country’s banking system and to help provide First Republic with liquidity to continue serving its customers. I’m proud of everything our employees have done during this historic period to be there for our customers. We believe banks of all sizes are important part of our financial system as each is uniquely positioned to serve their customers and communities. It’s important to recognize that banks have different operating models and that the banks that failed in the first quarter were quite different from what people think of when they think about the typical regional bank. These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with the broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear. Our diversified business model provides opportunities to serve our customers broadly, which reduces concentration risks across the different elements of risks. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies. We also have strong capital and liquidity positions, which include a mix of deposits and access to multiple funding sources and our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles.

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

I also summarize the actions we’ve taken to simplify the way we operate. This work continued in the first quarter as we largely completed the exit of the correspondent home lending business as part of our plans to simplify that business. We are also narrowing our retail mortgage business to focus on predominantly bank customers and underserved communities. Our strategy includes broadening our existing investment from the special-purpose credit program to include purchase loans, investing an additional $100 million to advance racial equity in home ownership and deploying additional home mortgage consultants in local minority communities.

We continue to transform the way we serve our customers by offering innovative products and solutions. We announced a multi-year agreement with Choice Hotels to launch new co-branded credit card this month, creating a best-in-class credit card program designed to enhance our customers’ experience and bring them more value. We rolled out early payday late last year, which makes eligible direct deposits available up to two days early. In the first quarter, this enhancement provided customers early access to over $200 billion in direct deposits. We launched Flex Loan in the fourth quarter, a digital-only small dollar loan that provides eligible customers convenient and affordable access to funds. Customer response continues to exceed our expectations. We’ve originated over 100,000 loans since November.

Digital adoption and usage among our consumer customers continued to increase. We added over 500,000 mobile active customers in the first quarter and digital logins increased 6% from a year ago. Since rolling out Vantage, our new enhanced digital experience for our commercial and corporate clients, late last year, we received overwhelmingly positive feedback on the new user experience. Vantage uses AI and machine-learning to provide a tailored and intuitive platform, based on our clients’ specific needs.

We also continue to make progress on our environmental, social and governance work. We announced a $50 million grant to the NAACP to support efforts to advance racial equity in America. This is the single largest donation that the NAACP has ever received from corporation and builds on our longstanding relationship with the NAACP that spans more than 20 years. The Wells Fargo foundation expanded its commitment to housing affordability, there were another $20 million housing affordability breakthrough challenge to advance ideas to help meet the need for more affordable homes across the country. We also announced a $20 million commitment to advance economic opportunities in Native American communities including addressing housing, small business, financial health and sustainability.

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

We also announced that Saul Van Beurden, Head of Technology, Wells Fargo, will succeed Mary. Saul is a strong leader, a technologist, and he knows how to run a business. This makes him the ideal person to lead Consumer and Small Business Banking into the future. Our branch network will continue to be the key to business — to the business, but our customers expect us to provide them with increasingly digitized and seamless banking experiences across all channels. Saul understands this deeply and has consistently proven his ability to convert new products and services across Wells Fargo.

Finally, Tracy Kerrins, currently Head of Consumer Technology, will become Head of Technology for the company reporting to me. Tracy has worked in the technology and finance industry for more than 20 years and has led to a series of business-critical initiatives to modernize our technology platforms across our consumer businesses. She’s a strong results-driven leader. It’s always great when we can tap our own leaders for roles within the company and I want to thank Mary for everything she’s done during her tenure at Wells Fargo. It’s truly been a pleasure working with her.

As we look forward, we’re carefully watching customer behavior for clues on how the economic environment is changing. Customer activity is still relatively strong and delinquencies remain low though they are increasing. There are pockets of risks such as commercial office real estate, which will likely impact institutions differently and we are proactively managing our own exposures. We continue to expect economic growth to slow and we are prepared for a range of scenarios. We will continue to monitor both the markets and our customers and we’ll react accordingly. Our diversified business model should enable us to support our customers throughout economic cycles.

I will now turn the call over to Mike.

Mike Santomassimo — Chief Financial Officer

Thank you, Charlie, and good morning, everyone.

Net income for the first quarter was $5 billion or $1.23 per diluted common share. While there was a lot going on in the banking industry around us, we continue to focus on our priorities and our results reflected the progress we’re making, which I’ll highlight throughout the call. Starting with capital and liquidity on Slide three, our CET1 ratio was 10.8%, up approximately 20 basis points from the fourth quarter, reflecting our earnings in the quarter and lower risk-weighted assets. After pausing share repurchases for the prior three quarters, we repurchased $4 billion of common stock in the first quarter. Our CET1 ratio remained well above our required regulatory minimum plus buffers and we expect to continue to prudently return excess capital to shareholders in the coming quarters. In the first quarter, our liquidity coverage ratio was approximately 22 percentage points above the regulatory minimum. We continue to benefit from a diversified deposit base with over 60% of our deposits in our Consumer Banking and Lending segment as of the first quarter, which is a higher percentage than before the pandemic.

Turning to credit quality on Slide five. Net loan charge-offs continue to slowly increase to 26 basis points in the first quarter, but we’re still below pre-pandemic levels. Commercial net loan charge-offs decreased $16 million from the fourth quarter to five basis points. However, while losses improved, we continue to see some gradual weakening in underlying credit performance, including higher nonperforming assets. We are proactively monitoring our clients’ sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I’ll share some more details on our exposure on the next slide.

As expected, we’ve seen consumer delinquencies and losses gradually increase. Total consumer net loan charge-offs increased $60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remained resilient, we’ve seen some consumer financial health trends gradually weakening from a year ago and we continue to take credit tightening actions position the portfolio for a slowing economy. Nonperforming assets increased 7% from the fourth quarter, driven by higher commercial real estate nonaccrual loans over down 12% from a year ago due to lower residential mortgage nonaccrual loans. Of note, 87% of the nonaccrual loans in our commercial real estate portfolio were current on interest and 75% were current on both principal and interest as of the end of the first quarter.

Our allowance for credit losses increased $643 million in the first quarter reflecting an increase for commercial real estate loans primarily office loans as well as an increase for credit card model loans. Given the increased focus on commercial real estate loans, especially office, we provided more details on our portfolio on Slide six. We had $154.7 billion of commercial real estate loans outstanding at the end of the first-quarter with 35.7 [Phonetic] of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs in challenging capital market conditions. While we haven’t seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been derisking the office portfolio, which resulted in commitments, declining 5% from a year ago and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted.

As you can see on this slide, we provide some additional data on the office portfolio, including approximately 12% owner-occupied, therefore the loan performance is mostly tied to the cash flow of the owner’s operating business rather than rents paid by tenants, nearly one-third have recoursed to the guarantor typically through repayment guarantee. The portfolio is geographically diverse and as you’d expect, the largest concentrations are in California and New York. Over two-thirds of our office loans are in the corporate investment banking business and the vast majority of this portfolio is institutional-quality real estate with high-caliber sponsors. While approximately 80% of it’s Class A, keep in mind that this is a single measure that it’s hard to evaluate in isolation, for example, newer or refurbished properties may perform better regardless of whether they are Class A or B. We are providing this data to give you more insight into the portfolio, but as is usually the case in commercial real estate, each property situation is different in a myriad of other variables such as leasing rates, loan-to-value and debt yields can determine performance, which is why we regularly review the portfolio on a loan-by-loan basis.

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

On Slide seven, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the fourth quarter, while period-end loans declined 1% from the fourth quarter with lower balances across our consumer and commercial portfolios. I’ll highlight the specific drivers when discussing our operating segment results. Average loan yields increased 244 basis points from a year ago and 56 basis points from the fourth quarter, reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% from the fourth quarter due to the consumer deposit outflows as customers continue to reallocate cash into higher-yielding alternatives and continued spending.

During the market stress last month, we experienced a brief increase in deposit inflows that has since abated, and while our period-end deposit balances were slightly higher than we expected at the beginning of the quarter, were still down 2% from the fourth quarter. As expected, our average deposit cost increased 37 basis points from the fourth quarter to 83 basis points with higher deposit costs across all operating segments in response to rising interest rates. Our mix of non-interest bearing deposits declined from 35% in the fourth quarter to 32% in the first quarter, but remain above pre-pandemic levels.

Turning to net interest income on Slide eight. First quarter net interest income was $13.3 billion, which was 45% higher than a year ago as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days. Our full-year net interest income guidance has not changed from last quarter, as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. Ultimately, the amount of net interest income we earn this year will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix and repricing and loan demand.

Turning to expenses on Slide nine. Non-interest expense declined 1% from a year ago, driven by lower operating losses and the impact of the business unit sales. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter including payroll taxes, restricted stock expense for retirement eligible employees and 401k matching contributions. Our full-year 2023 noninterest expense, excluding operating losses, is still expected to be approximately $2.2 billion, unchanged from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses.

Turning to our operating segments, starting with Consumer Banking and Lending on Slide 10. Consumer and Small Business Banking revenue increased 28% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. We are continuing to make investments in this business, we’re beginning to increase marketing spend, we’re accelerating the efforts to renovate and refurbish our branches for our bankers, we’re investing in new tools and capabilities to provide better and more personalized advice to customers, we’re continuing to enhance our mobile app and mobile active users were up 4% year-over-year, and we’re also seeing increased activity and positive initial indicators after our rollout of Wells Fargo Premier last year. It’s early on for all of these initiatives, but we’re starting to see some green shoots. At the same time, we continue to execute on our efficiency initiatives. Teller transactions continue to decline with reduced headcount — we reduced headcount by 9% and total branches were down 4% from a year ago.

In Home Lending, mortgage rates remained elevated and the mortgage market continued to decline. Our Home Lending revenue declined 42% from a year ago, driven by lower mortgage originations including a significant decline in the correspondent channel and lower revenue from the resecuritization of loans purchased from securitization pools. We continue to reduce headcount in the first quarter and we expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the correspondent channel as announced in January and began to reduce the complexity and the size of the servicing book.

During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances, driven by higher point-of-sale volume. Other revenue declined 12% from a year ago, driven by lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due to rising interest rates. Personal Lending revenue was up 9% from a year ago due to higher loan balances.

Turning to some key business drivers on Slide 11. Mortgage originations declined 83% from a year ago and 55% from the fourth quarter with declines in both correspondent and retail originations. As I mentioned, we stopped accepting correspondent applications in January. So going forward, our originations will be focused on serving Wells Fargo customers in underserved communities. The size of our auto portfolios declined for four consecutive quarters and balances were down 8% at the end of the first quarter compared to a year ago. Origination volume declined 32% from a year ago, reflecting credit tightening actions and continued price competition.

Debit card spending increased 2% in the first quarter compared to a year ago, an increase from the 1% year-over-year growth in the fourth quarter, discretionary spending drove the growth with non-discretionary spending stable from the fourth quarter levels. Credit card spending increased 16% from a year ago, in line with the year-over-year growth in the fourth quarter with sustained growth in both discretionary and non-discretionary spending. Spending growth slowed throughout the quarter, but was still at double-digit levels in March. We continue to see some slight moderation in payment rates in the first quarter, but they were still well above pre-pandemic levels.

Turning to Commercial Banking results on Slide 12. Middle-market banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances, while deposit-related fees were lower, reflecting higher earnings credit rates on non-interest bearing deposits. Asset-based lending and leasing revenue increased 7% year-over-year, driven by loan growth which was partially offset by lower net gains from equity securities. Average loan balances were up 15% in the first quarter compared to a year ago, driven by new customer growth and higher line utilization. After being stable in the second half of last year, line utilization increased slightly in the first quarter. Average loan balances have grown for seven consecutive quarters and were up 2% from the fourth quarter with growth in asset-based lending and leasing driven by continued growth in client inventory. Growth in middle-market banking was once again driven by larger clients, including both new and existing relationships, which more than offset declines from our smaller clients.

Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 37% from a year ago, driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment management — investment banking fees declined from a year-ago, reflecting lower market activity with declines across all major products in nearly all industries. While commercial real estate market transactions are down across the industry, our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates and higher loan balances. Markets revenue increased 53% from a year ago, driven by higher trading results across all asset classes. Average loans grew 4% from a year ago, but were down from the fourth quarter, lower balances of banking reflected a combination of slow demand, increased payoffs and relatively stable line utilization. The decline in commercial real estate balances were driven by the higher rate environment and lower commercial real estate sales volumes.

On Slide 14, Wealth and Investment Management revenue was down 2% compared to a year ago, driven by lower asset-based fees due to lower market valuations. Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives. At the end of the first quarter, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Expenses decreased 4% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Average loans were down 1% from a year ago, primarily due to a decline in securities based lending.

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

In summary, our results in the first quarter reflect an improvement in our earnings capacity. We grew revenue and reduced expenses and had strong growth in pre-tax, pre-provision profits. As expected, our net charge-offs have continued to slowly increase from historical lows and we are closely monitoring our portfolios, taking credit tightening actions where appropriate. Our capital levels grew, even as we resumed common stock repurchases and we expect repurchases to continue. And the guidance we provided last quarter for full-year 2023, net interest income and expenses excluding operating losses has not changed.

We will now take your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question for today will come from Scott Siefers of Piper Sandler. Your line is open.

Scott Siefers — Piper Sandler — Analyst

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

Mike Santomassimo — Chief Financial Officer

Yeah the — hey, Scott, thanks for the question. Look, the inflows stopped right and they came in, in a pretty short period of time and those inflows stopped. I think what you’re seeing since then is just normal spending on the consumer side and normal activity across the other businesses.

Scott Siefers — Piper Sandler — Analyst

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

Charlie Scharf — Chief Executive Officer

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

Scott Siefers — Piper Sandler — Analyst

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

Operator

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

Steven Chubak — Wolfe Research — Analyst

Hey, good morning. So wanted to get a little bit more granular on some of the expense trends that we’re seeing, we’ve gone through the exercise of benchmarking your segment efficiency ratios versus peers. Clearly, you’ve made significant strides, improving profitability across virtually every segment, Commercial, CIB and Wealth, the PP&L, our margins are running really in line with the peer group, it’s still the consumer efficiency ratio in the mid 60s, which is running well above peers and I was hoping you could just speak to the opportunity on the expense side within consumer, how much of a benefit should you see from the retrenchment in mortgage and maybe what do you see as a normalized efficiency target for the segment, just given your current mix of business?

Mike Santomassimo — Chief Financial Officer

Hey Steve. It’s Mike, I’ll start and Charlie can chime in if he wants to. I think when you think about consumer. I think we still have a lot more work to do there. And it’s both in the consumer lending space, the mortgage space, as we simplify the servicing side of that business and that just takes a little bit of time to work its way through, needs to be thoughtful and in some cases, requires a little bit of investment in technology and the like. And then on the consumer banking side, we’ve continued to rationalize the branch footprint and branch setup. We continue to see teller transactions and other things decline and so I think you’ll see us focus there and what hopefully what you’ve seen in that segment is a consistent quarter-on-quarter decline in headcount and other factors. And that will sort of continue to hopefully be the case. And then when you think about just where the end state is, we shouldn’t look any different than our peers, our best-in-class peers for each of our segments, including that one. So over a period of time, that’s the goal.

Charlie Scharf — Chief Executive Officer

And I would just add, when you look at our — that segment, we obviously — mix versus other people is an issue. Our Home Lending business is today extremely inefficient, which is part of the reason why we made the decision that we made. So we’ve got a lot of wood to chop there which will play out over a period of time to make that business more efficient. And as we’ve talked about on the consumer banking side, we’ve done I think you know for many, many years after Mary got her job in consumer banking operation, our focus was dealing with the cleanup, which they’ve done an exceptional job in the consumer and small business bank about. And then turned our attention to becoming more efficient, which she has worked really hard on, and that’s a combination of looking at our branch footprint, staffing within the branches, migrating people to digital and we’re behind on that, but there has been a lot of progress made over the last year and a half to two years. And so there’s still a tremendous amount of opportunity there, but it’s in flight.

Steven Chubak — Wolfe Research — Analyst

Really helpful color. Just for my follow-up, wanted to unpack some of the NII trends that we’re seeing within the Wealth side specifically. And there’s a big focus right now on yield-seeking behavior if the higher for longer rate environment persists. You and your peers have seen contraction in NII sequentially, and continued deposit outflows. Was hoping you could speak to whether you’re seeing any abatement in just the pace of cash sorting or yield-seeking behavior as of yet or if it’s continued at a pretty healthy clip?

Mike Santomassimo — Chief Financial Officer

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

Steven Chubak — Wolfe Research — Analyst

Helpful color. Thanks for taking my questions.

Operator

The next question will come from John McDonald of Autonomous Research. Your line is open.

John McDonald — Autonomous Research — Analyst

Hi, good morning. Mike, I was wondering what your outlook is for the second quarter NII, maybe you could talk a little bit about the puts and takes to that and what you’re thinking for second quarter? Thanks.

Mike Santomassimo — Chief Financial Officer

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

John McDonald — Autonomous Research — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

John McDonald — Autonomous Research — Analyst

Okay, thanks.

Operator

The next question comes from Ken Usdin of Jefferies. Your line is open.

Ken Usdin — Jefferies — Analyst

Hey, good morning. I just wanted to ask a follow-up on the cost side, so I think we’re all pretty clear on view of continuing to hold the core flat from here, but. I think an ongoing question is, just as we look further out, and I know there’s no crystal ball here, like at what would you get a line of sight when that next wave of gross saves related to all the duplicative and extras buildup in the infrastructure-related to risk compliance, etc. You see — when you get the line of sight of when you can start to sunset that, I know you talked about that as a big point of how you get the ROE up over long — over the medium-term.

Mike Santomassimo — Chief Financial Officer

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

Charlie Scharf — Chief Executive Officer

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

Ken Usdin — Jefferies — Analyst

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

Charlie Scharf — Chief Executive Officer

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

Ken Usdin — Jefferies — Analyst

Okay, thanks very much.

Operator

The next question will come from Ebrahim Poonawala of Bank of America. Your line is open.

Ebrahim Poonawala — Bank of America — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Charlie Scharf — Chief Executive Officer

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

Mike Santomassimo — Chief Financial Officer

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

Ebrahim Poonawala — Bank of America — Analyst

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

Charlie Scharf — Chief Executive Officer

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

Ebrahim Poonawala — Bank of America — Analyst

Noted. Thank you very much.

Operator

The next question comes from John Pancari of Evercore ISI. Your line is open.

John Pancari — Evercore ISI — Analyst

Good morning. On the — back to the NII drivers, can you maybe give us an updated expectation on how you’re thinking about loan growth here as you look through 2023. I know you cited some of the pressures on the consumer side, but turning the table will turn school in commercial. And then separately on the deposit side, you have an updated expectation regarding your total deposit beta as you see pricing pressure continue?

Mike Santomassimo — Chief Financial Officer

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

John Pancari — Evercore ISI — Analyst

Yeah, it was around updated deposit beta —

Mike Santomassimo — Chief Financial Officer

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

John Pancari — Evercore ISI — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

John Pancari — Evercore ISI — Analyst

Okay, thank you.

Operator

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

Betsy Graseck — Morgan Stanley — Analyst

Hi, good morning.

Mike Santomassimo — Chief Financial Officer

How you’re doing.

Betsy Graseck — Morgan Stanley — Analyst

Couple of questions. Little bit of follow-up, but one on the credit side. Wanted to just understand a little bit about the recoveries in commercial. I know in the deck, you mentioned that commercial loans yields were down in part due to higher recoveries and just wanted to understand how long you see those recoveries persisting and was there — is there any driver for them actually increasing from here? Thanks.

Mike Santomassimo — Chief Financial Officer

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

Betsy Graseck — Morgan Stanley — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Betsy Graseck — Morgan Stanley — Analyst

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

Mike Santomassimo — Chief Financial Officer

Absolutely, yeah.

Betsy Graseck — Morgan Stanley — Analyst

Okay —

Mike Santomassimo — Chief Financial Officer

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

Betsy Graseck — Morgan Stanley — Analyst

And then just last question here on deposit betas. I know you indicated that they should be okay. I guess I’m wondering how you think about deposit betas this cycle versus last cycle, similar, higher or lower, any sense as to versus prior cycle in magnitude would be great. Thanks.

Mike Santomassimo — Chief Financial Officer

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

Betsy Graseck — Morgan Stanley — Analyst

Great, thanks so much.

Operator

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

Matt O’Connor — Deutsche Bank — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Matt O’Connor — Deutsche Bank — Analyst

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

Charlie Scharf — Chief Executive Officer

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

Matt O’Connor — Deutsche Bank — Analyst

Okay. That’s very clear and very helpful. Thank you.

Operator

The next question comes from Gerard Cassidy of RBC Capital Markets. Your line is open.

Gerard Cassidy — RBC Capital Markets — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Gerard Cassidy — RBC Capital Markets — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Gerard Cassidy — RBC Capital Markets — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Charlie Scharf — Chief Executive Officer

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

Gerard Cassidy — RBC Capital Markets — Analyst

No, I appreciate the further insights. This is very helpful. Thank you.

Charlie Scharf — Chief Executive Officer

Sure.

Operator

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

David Long — Raymond James — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

David Long — Raymond James — Analyst

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

Mike Santomassimo — Chief Financial Officer

I think that’s almost impossible to predict.

David Long — Raymond James — Analyst

Got it. Okay. Thank you. Appreciate it.

Operator

The last question for today will come from Chris Kotowski of Oppenheimer. Your line is open.

Chris Kotowski — Oppenheimer — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Chris Kotowski — Oppenheimer — Analyst

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

Mike Santomassimo — Chief Financial Officer

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

Chris Kotowski — Oppenheimer — Analyst

Okay. Thank you. That’s it for me.

Charlie Scharf — Chief Executive Officer

All right. Everyone, thanks so much. We appreciate it. And we’ll talk to you soon. Take care.

Operator

[Operator Closing Remarks]