Wells Fargo & Co. (WFC) Q4 2020 Earnings Call Transcript

Wells Fargo & Co. (NYSE: WFC) Q4 2020 earnings call dated Jan. 15, 2021

Corporate Participants:

John Campbell — Director of Investor Relations

Charles W. Scharf — Chief Executive Officer and President

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Analysts:

John McDonald — Autonomous Research — Analyst

Betsy Graseck — Morgan Stanley — Analyst

Ken Usdin — Jefferies — Analyst

Steven Chubak — Wolfe Research — Analyst

Scott Siefers — Piper Sandler — Analyst

Brian Kleinhanzl — KBW — Analyst

Matt O’Connor — Deutsche Bank — Analyst

John Pancari — Evercore ISI — Analyst

David Long — Raymond James — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

Erika Najarian — Bank of America Merrill Lynch — Analyst

Erika Najarian — Bank of America — Analyst

Vivek Juneja — JPMorgan — Analyst

Presentation:

Operator

Good morning. My name is Katherine, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Wells Fargo Fourth Quarter 2020 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

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

Before we get started, I would like to remind you that our fourth 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 Scharf.

Charles W. Scharf — Chief Executive Officer and President

Thank you, John, and good morning to everyone. I’ll make some brief comments about the operating environment, our fourth quarter results and I’ll discuss our priorities. I’ll then turn the call over to Mike to review fourth quarter results in more detail before we both take your questions. I’m going to start by making some brief comments about the economy based on what we’re seeing. The benefits from both fiscal and monetary stimulus continue to provide important support for many, and the additional $900 billion stimulus is an important step in helping those who are still in need.

Though there was solid economic growth in the fourth quarter, we continued to see an uneven recovery and increases in COVID cases towards the end of the quarter, negatively impacting the path to recovery. Overall, our customers continued to be in much stronger position than we would have anticipated when this crisis began, but unemployment levels remain high, inventory levels remain lower than pre-pandemic levels and confidence to invest is dependent on an effective bridge until broad-based vaccination can be accomplished. Given this, we expect 2021 will get off to a slow start, but there is great potential in the second half of the year for a strong 2021, especially if there is another significant stimulus package.

Before turning to our performance this quarter, let me discuss our new business segments. One of my early observations when I joined the Company was that we were not managing the Company at the level of granularity necessary. As a result, we’ve made significant changes to the management structure, most notably having more of our businesses report directly to me. That change also drove us to completely alter our internal reporting to provide us with more transparency into our performance and underlying business drivers and give us the data necessary for us to create plans to improve our performance. This is how we now manage the Company with reporting and reviews conducted at a business level at which decisions are made, a big change from what had been the practice.

As you can now see, we’ve also made meaningful changes to our external reporting with the goal of giving our investors a clear understanding of our results as well as the ability to compare our businesses on a more like-for-like basis to competitors and track our performance as we do internally. What you see now is what we’ve been reviewing internally. Our strengths and weaknesses should be clear to you than ever, but the potential for improvement should also be clear. The changes go well beyond the addition of business segments. We’ve reevaluated capital allocation, how we do funds transfer pricing as well as our internal expense and revenue allocations.

We have also added more detailed revenue and performance metric disclosures to help you have more transparency into our results. We think these disclosures are an important step forward in showing you the size and scope of our businesses as well as forming the basis for how we talk about them going forward. We hope you find it helpful as you evaluate our results and our potential.

I’m going to let Mike take you through the results of the fourth quarter in detail, but they continue to be affected by the ongoing impact of COVID as well as our actions to improve performance and put our past issues behind us. While rates have begun to move upward, the overall level and shape of the yield curve continued to be a significant drag on our net interest income, and for now, we have limited flexibility to offset these headwinds with balance sheet growth, given our constraints of operating under an asset cap.

In terms of major business trends, corporate loan demand remained soft, driven by continued strong capital market conditions and an improving but still uncertain economic backdrop. Credit continues to perform well as both consumers and companies have benefited from accommodations, ongoing fiscal and monetary stimulus, and an improving economic outlook.

Actual charge-off rates are at multi-year lows, but again, the ultimate timing and magnitude of losses depend on the broader recovery. On consumer spending, we’re seeing a continuation of the trend observed in the second half of the year. Debit spend is up double-digits while credit volumes have largely stabilized at flat to down low-single digits compared to the prior year. Recently, we’ve seen the impact of the new stimulus with roughly half of the dollars that were deposited into accounts being spent.

All in all, our returns remained significantly below where they should be or what this organization is capable of, but we are taking significant actions. Our agenda is clear and we’re making progress, but it will take some time. Our focuses as follows: Number one, building the right management team; number two, making progress on our risk and control buildout and satisfying our regulatory obligations; number three, put our significant historical issues, including legal and customer remediations behind us; number four, reviewing our business, exit activities that are non-core and focus our efforts on building our core scaled businesses and capitalizing on the power of an integrated Wells Fargo; and lastly, identifying and beginning to implement changes to make us a better run and more efficient Company.

I will briefly cover each of these. First on the management team. We’ve transformed the team by value — by elevating strong internal talent, while bringing in people with the experience and skills necessary for our success. Our operating committee, which are the 18 senior most members of the Company responsible for running it, is an entirely new management team. Over two-thirds are new to the Company or their role. Of the 17 members other than myself, I’ve hired nine leaders from outside the Company, four others are in different roles, and four were relatively new to the Company when I joined. Each member has expertise and experience in their area of responsibility and brings a diverse set of skills, backgrounds, tenures and perspectives for discussions and decisions. Our broader group of senior leaders is also a new team, nearly half of our Top 150 leaders are new to their role from the start of 2020, including over 40 who are new to the organization.

Regarding our risk and control buildout, in 2020, we announced an enhanced corporate risk organizational structure to provide greater oversight of all risk-taking activities and a more comprehensive view of risk across the Company. We made a number of important hires throughout the year. In just the fourth quarter, a new Chief Compliance Officer and new Chief Risk Officers in Consumer and Small Business Banking, Commercial Banking and Wealth Management have joined the Company. These and the many other leaders that joined the Company in 2020 who have done similar work at other institutions have been critical to the early progress we are making.

As we announced last week, the OCC terminated a 2015 consent order related to the Company’s Bank Secrecy Act/Anti-Money Laundering compliance program. This is just one accomplishment for us but it’s evidence of the progress we’re making and our ability to build the right risk and control infrastructure and remediate our legacy issues. However, this is a multi-year journey, progress may not be a straight line. We still have significant work to do, but we are diligently doing what’s necessary issue-by-issue. It will continue to be our top priority to dedicate all necessary resources and make meaningful progress on this critical work.

In addition to the continued investment we’re making to buildout the risk and control infrastructure, we’re also moving with urgency much more than had been done before I arrived to put our substantial legacy issues behind us. This includes working through our legal and customer remediation matters, which are almost entirely tied to our historical issues. Doing this work, we’re committed to treating customers fairly. To provide some context, this work is complex, oftentimes involves going back many, many years and looking across multiple platforms and systems. We’ve also had new leaders come in this year, and as a team, we’ve been diligently working through issue-by-issue that requires this level of rigor. We’ve made significant progress over the course of 2020 and it’s absolutely critical that we get this work done so we can do what is right for customers and move our organization forward.

Over the past year, I’ve discussed our businesses with an eye towards assessing strategic fit to the Company, assessing risk return profiles, and creating a roadmap for improved operational and financial performance. Our goal is to be the pre-eminent provider of core financial services in the U.S., and in doing so, seek to reward all stakeholders, including investors, employees, customers, and the communities where we do business. We believe our business model as a fully integrated U.S. bank with significant scale and breadth of capabilities positions us to achieve our goal and that we are only — and that we are one of only a few who have this position, but we do compete with thousands. Our strategy is about becoming even crisper about our target market and taking actions necessary to leverage our strong competitive position.

We are clear on who we are. Our core target market is U.S. consumers and businesses of all sizes. We do have capabilities outside the U.S., but these activities are predominantly to support our core U.S. customers with their global needs or are in domains where we have scale and expertise to compete locally. We provide the same capabilities for both consumers and companies of all sizes, though the words we use to describe what we do is sometimes different. We are a trusted advisor and provide core banking services, including deposits, capital, payments and investments. Capital includes both private and public access to debt and equity. Our scale and sophistication allow us to have differentiated physical presence and technology platform few can compete with. This important — the importance of scale is clear and we’ll continue to increase.

We have the right businesses at Wells Fargo to achieve our goal. Our individual businesses are strong and valuable. We have excellent individual franchises that compare favorably to all competitors, large and small. We have the products and services, people and scale to be a leader in each and each has opportunities to serve customers more broadly and improve its own financial profile. I wouldn’t confuse our recent underperformance with our great franchise value and how our business fits together to put us in a great competitive position.

And there is — then there is the great power of an integrated Wells Fargo. While our businesses are strong individually, they are even more powerful when working together. Though we talk about separate lines of business, we operate as one Company in our communities. Our branches serve our consumers and small businesses as well as commercial banking and corporate clients. Our ability to support our local communities is based on that breadth locally but also by the support and resources of Wells Fargo nationally. At times, our lines of business has served as artificial boundaries for us delivering the very best for our customers and clients. We’re breaking down those barriers to more effectively serve our customers and each should add to our profitability and returns.

We have opportunities across our entire franchise, but just a few examples include serving low to moderate income as well as more affluent consumers consistently across our platform, payments, and investment banking for our commercial clients. We’ve completed the review of our businesses and are taking action for those that aren’t core to our mission. In the past few months, we’ve announced sales or intention to exit the student loan business, international wealth management and direct equipment finance in Canada. We are also in the process of exploring options for asset management, corporate trust, and our rail portfolio.

As I said, we’re focusing all of our efforts on our core scale businesses and these other activities, which may be good businesses are not consistent with the core strategic priorities I just outlined. And we’re taking actions to run a better Company, which is far more efficient. I’ve acknowledged many times that our returns are below where they should be and what this Company can deliver. I pointed out that our efficiency ratio is not competitive. You can now see this by line of business as well and it is an important data point to guide us to drive efficiency and simplicity and how we manage the Company. As we do this, we will reduce complexity in risk and our expenses should decrease even as we continue to reinvest in building our infrastructure and growing the Company.

As we look at financial goals, today, we’re targeting our overall expense level and return on tangible common equity. And just to be clear, we will spend whatever is necessary to complete our risk and regulatory buildout. We have started to take significant actions. Mike will share the details of our initiatives and our expense outlook, but I would like to emphasize that we will continue to be cautious about putting firm time frames around our goals. We’re making dramatic changes to put us in a position to capture our full potential but we do have constraints today that impact our ability in the shorter-term to realize our earnings and return potential or commit to firm timelines.

We remain subject to an asset cap as part of our consent order with the Federal Reserve and we must prioritize balance sheet usage more so than if it was not a limitation, a significant constraint, especially given the current operating environment. Though we believe we’re making meaningful progress, there is substantial work to do.

We’re also temporarily limited in our ability to return capital to shareholders due to special restrictions placed on the largest banks by Federal Reserve due to the uncertainties around COVID. As the path to economic recovery becomes clear, these restrictions should be lifted and we will be able to return excess capital to shareholders through a combination of higher dividends and share buybacks.

And the negative impact to our results from COVID is clear and will likely continue until broad-based vaccinations allow for a clear and even economic recovery. As these headwinds abate, our earnings and returns should benefit materially. We’re taking action for things in our control, but will remain cautious until there’s more clarity around when these constraints will recede.

That said, we’re hopeful that our actions to increase efficiency in the Company and the ability to return excess capital to our shareholders creates a clear path to a return on tangible common equity in excess of 10%. Beyond that, the ability to grow our balance sheet, higher interest rates, and executing on additional efficiency and growth initiatives presents a path to longer-term ROTCE of around 15%. Again, it’s hard to put specific time frames around these goals with any confidence today, but we’re confident that our franchise is capable.

I mentioned we continue to have significant excess capital above our regulatory requirements. Last month, Federal Reserve authorized the nation’s largest banks to pay common stock dividend and make share repurchases in the first quarter that in aggregate do not exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters. Based on these criteria, we have the capacity to return approximately $800 million in the first quarter. Assuming the Board declares the first quarter dividend, consistent with the past two quarters under the Federal Reserve’s criteria, we expect to have common stock repurchase capacity in the first quarter of approximately $600 million, including repurchases for employee compensation. Returning capital to shareholders remains a priority. Our Board of Directors has also approved an increase in our authority to repurchase common stock by an additional 500 million shares, bringing the total authorized amount to 667 million shares.

In summary, we’re taking meaningful actions and believe we have line of sight to a double-digit ROTCE ratio. While returning to low-double digit ROTCE would mean an improvement from where we are operating today, as I’ve said before, I continue to believe there is no structural reason why we shouldn’t be able to generate comparable returns to our peers over the longer term and that continues to be the goal. 2020 was certainly a challenging year for all, but I’m proud of what Wells Fargo and my more than 265,000 partners have done to support our customers, our country and our communities. We’ve begun a multi-year process of transforming Wells Fargo, and I look forward to making more progress in 2021. I want to thank everyone at Wells for what they’ve done through an extremely difficult set of circumstances, and I look forward to a better 2021.

I will now turn the call over to Mike.

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Thank you, Charlie, and good morning, everyone. First, I’d like to thank John Shrewsberry for all his partnership over the last few months and wish him success in the future. I’m going to review our fourth quarter results and then I’ll provide some information on our expectations on a few additional topics. 2020 was a challenging year and I’m proud of the support we provided to our customers, communities, and employees which we highlight on Slide 2.

We summarize our consolidated financial results for the fourth quarter on Slide 3. Net income for the quarter was $3 billion or $0.64 per common share. Our effective income tax rate was 3.5%, which was lower than we expected due to discrete tax benefits related to resolving some legacy tax matters. We expect our effective income tax rate for the full year of 2021 to be in the mid-single digits. Our fourth quarter results also included $781 million in restructuring charges. Similar to the third quarter, these charges include severance expense, but the fourth quarter also included charges for software impairment and costs related to reducing our real estate footprint. We also had a $757 million reserve release due to the announcement that we are selling our student loan portfolio, which is expected to close in the first half of this year. Finally, we had $321 million of customer remediation accruals, primarily for a variety of historical matters, down $640 million from the third quarter.

Our capital and liquidity remained strong. Our CET1 ratio increased to 11.6% under the standardized approach and a 11.9% under the advanced approach. Our liquidity coverage ratio was 133%. We continue to have significant excess capital with $31 billion over the regulatory minimum, and we hope to return more to shareholders this year.

Turning to credit quality on Slide 5. Our net charge-off ratio in the fourth quarter was 26 basis points, the lowest it’s been in a number of years, and certainly better than what we would have predicted earlier in the year. As we’ve previously mentioned, although our customers seem to be in better shape than we would have forecasted, the accommodations we’ve provided since the start of the pandemic are also helping delay the recognition of the charge-offs, which is reflected in our allowance level.

Non-performing assets increased 9% from the third quarter. Commercial non-accrual loans increased $381 million [Phonetic], primarily due to a small number of commercial real estate exposures. While there is still a lot of uncertainty regarding commercial real estate, the performance has been better than expected as our customers are benefiting from low interest rates, which is helping them preserve liquidity. It’s also important to note that approximately 70% of our commercial non-accrual loans were current on interest and principal as of the end of the fourth quarter. Consumer non-accrual loans increased $325 million on higher consumer real estate and auto non-accruals.

Our allowance coverage ratio was unchanged versus the third quarter. Similar to the third quarter, while observed performance was strong, there was still a significant amount of uncertainty reflected in our allowance level at the end of the fourth quarter. Just a reminder that the reserve release in the fourth quarter was almost entirely due to the announcement that we are selling the student loan portfolio.

As we show on Slide 6, the percentage of our consumer loan portfolio that remained in a COVID-related payment deferral as of the end of the fourth quarter decreased to 3% with declines across all the portfolios. We are no longer offering COVID-related deferrals except for home lending and new deferral requests are down significantly. Loans that have already exited deferral are performing better than we anticipated with over 90% of the balance is current as of the end of the year.

On Slide 7, we highlight loans and deposits. Our average loans declined for the second consecutive quarter and were down 6% from a year ago. The decline in commercial loans from the third quarter was driven by lower commercial and industrial loans as demand remained weak and line utilization continue to be very low amid strong capital markets and soft economic background. On the consumer side, residential real estate loans declined as prepayment rates remained elevated. Lower consumer balances also reflected the transfer of student loans to held for sale.

We had strong deposit growth throughout the year with average consumer deposits up 19% from a year ago. However, average deposits in the fourth quarter decreased modestly on a linked quarter basis driven by intentional run-off of certain deposits primarily in corporate treasury and corporate investment banking, reflecting targeted actions to manage under the asset cap.

Turning to net interest income on Slide 8. Net interest income declined 17% from a year ago as lower interest rates drove repricing of the balance sheet. The decline also reflected lower loan balances and investment securities as long as higher mortgage-backed security premium amortization. Net interest income declined modestly from the third quarter, reflecting lower loan balances and the impact of lower interest rates, which drove balance sheet repricing. These declines were partially offset by higher investment securities and trading assets, higher commercial loan fees, higher hedge ineffectiveness accounting results and lower mortgage-backed securities premium amortization. As a result, our net interest margin was flat compared with the third quarter.

Turning to expenses on Slide 9. Non-interest expense was down 5% from a year ago and 3% from the third quarter. The decline from the third quarter was driven by lower operating losses and declines in other non-personnel expense, including lower professional and outside service expense primarily due to efficiency initiatives implemented towards the end of the year. These declines were partially offset by higher personnel expense driven primarily by the timing of incentive compensation expense. Our expenses in the fourth quarter also reflected the restructuring charges that I highlighted earlier on the call. And as a reminder, we typically see seasonally higher personnel expense in the first quarter.

Turning to our business segments. Starting with consumer banking and lending on Slide 10, net income increased versus both third quarter 2020 and fourth quarter 2019 as lower revenue was more than offset by lower expenses and a decline in the provision for credit losses. Home lending revenue of approximately $2 billion declined 21% from the third quarter as servicing income declined, driven by MSR valuation adjustments, reflecting higher prepayments and increased servicing cost. Net interest income was down due to a decline in loan balances and lower interest rates and revenue also declined as lower mortgage originations were only partially offset by higher spreads. Versus the fourth quarter of 2019, home lending revenue was up slightly as higher net gains on mortgage originations were partially offset by lower net interest income due to lower balances, loan balances and interest rates, a decrease in gains on the sale of loan portfolios and lower servicing income.

Credit card revenue increased 2% from the third quarter, driven by lower deferrals and seasonally higher spend. Average balances grew modestly from the third quarter, but were down 9% from a year ago as COVID-related headwinds persisted. Average deposits grew 18% from a year ago, reflecting COVID-related impacts, including government stimulus programs. This deposit growth represents long-term opportunities as we work to build on these important deposit relationships with new and existing customers.

Turning to some key business drivers on Slide 11. Mortgage originations declined 10% from a year ago, while retail originations increased 17%, correspondent originations declined 33% from a year ago, as we maintained margins on a more competitive market and suspended non-conforming correspondent originations earlier in 2020. Auto originations declined 22% from a year ago and were down 2% from the third quarter. Our underwriting policies remained slightly more conservative than pre-COVID levels.

Turning to debit card. Though [Phonetic] both transactions in dollar volume increased linked quarter while purchase volume increased 11% from a year ago, transactions were down 2% as customers made fewer purchases but spent more per transaction. As a reminder, debit card fees are based primarily on transaction volume not dollar volume. Credit card point of sale purchase volume has rebounded from second quarter lows and fourth quarter volume was up 8% from the third quarter and relatively stable from a year ago.

Commercial Banking net income was up from the third quarter, driven by decline in the provision for credit losses but was down versus the fourth quarter 2019 on lower revenue. Middle Market Banking revenue declined 4% from the third quarter, driven by lower net interest income due to lower loan balances and was down 26% from a year ago, primarily driven by the impact of lower interest rates — the lower interest rates had on what we earned on deposits and lower loan balances. Asset-Based Lending and Leasing revenue grew 5% from the third quarter, driven by higher loan syndication fees and valuation gains on equity investments, but was down from a year ago due to lower interest rates in loan balances.

Non-interest expenses declined 4% from the third quarter, partially reflecting efforts to increase efficiency and client coverage and streamline the organization. While overall headcount was down, we’ve hired more bankers in key markets to drive new business growth in our Middle Market business. Average loans declined for the third consecutive quarter with revolving credit line utilization at very low levels. Loan balance has started to stabilize late in the fourth quarter but loan demand remains weak overall, reflecting continued high liquidity levels, strength in the capital markets, and lower inventory levels.

Turning to Corporate and Investment Banking on Slide 13, banking revenue growth in the third quarter was driven by an 18% increase in investment banking revenue on higher advisory fees and equity origination. The investment banking pipeline remained strong at year-end. Commercial real estate revenue grew 15% from the third quarter, driven by higher CMBS volumes and improved gain on sale margins as well as an increase in low income housing tax credit income. The 12% growth in revenue from a year ago was primarily driven by our low income housing business, which in the fourth quarter of 2019, included lower revenue due to the timing of expected tax benefit recognition.

Markets revenue declined 26% from the third quarter on trading volumes — lower trading volumes across fixed income and equities. Overall, 2020 was a good year with strong performance across fixed income and equities, especially during the first half of the year. However, our results were impacted in part due to actions we took to reduce trading-related assets in order to manage under the asset cap.

Non-interest expense declined 10% from the third quarter, primarily reflecting the timing of incentive compensation accruals and average deposits declined 20% with average trading assets were down 19% from a year ago, primarily driven by actions we’ve taken to proactively manage deposits and other liabilities.

Wealth and Investment Management net income increased 16% from the third quarter, driven by revenue growth, primarily reflecting higher asset-based fees. Non-interest expense increased 2% from the third quarter, driven by higher revenue-based compensation. Versus the fourth quarter of 2019, net income increased reflecting the impact of lower interest rates on net interest income, which was more than offset by lower expenses due to one-time charges in 2019. Average loans increased 5% from a year ago with growth in both securities-based lending and non-conforming mortgages. Average deposits grew 22% from a year ago, and we ended the year with a record client assets of $2 trillion, up 6% from a year ago. Wells Fargo asset management — assets under management of $603 billion, increased 18% from a year ago due to net flows into money market funds and higher market valuations.

Corporate on Slide 15 includes corporate treasury and staff functions as well as our investment portfolio and affiliated venture capital and private equity partnerships, and it also includes certain lines of business that we’ve determined are no longer consistent with our long-term strategic goals or have previously divested. In the quarter, this primarily includes our student loan business, institutional retirement trust, rail and our direct equipment finance business in Canada.

Turning now to our expectations for 2021, starting with net interest income on Slide 16. As a starting point, if you were to annualize the fourth quarter’s net interest income, you get approximately $36.8 billion. We currently expect full year 2021 net interest income to be flat to down 4% from this level. It’s important to note that approximately 1% of the potential decline is driven by the announced sale of our student loan portfolio. Our assumptions to get to the top end of this range include interest rates that generally follow the implicit that are those that implicit in the current forward curve. It is worth noting that while the recent increase in rates is helpful, rates remain below levels at which most of our portfolio was originated and that results in some ongoing downward yield pressure as we reinvest cash.

We also assume stable total loan balances from the fourth quarter with a modest reduction in the proportion of consumer loan balances consistent with recent trends. To achieve this, we would need some improvement in loan demand which has been soft across the industry for the past couple of quarters. Additionally, mortgage balances will likely continue to see headwinds in 2021, given the elevated level of prepayments which have exceeded portfolio originations and given the expected sale or re-securitization of loans previously purchased out of agency mortgage securitizations.

Finally, we assume stable to modestly improving credit spreads across major loan and securities categories. Recently, we have seen significant tightening and most credit sensitive assets are now trading through the pre-COVID levels of early 2020. Our net interest income expectations for 2021 also assume the asset cap will remain in place. Regarding the asset cap, we are focused on getting the work done properly and believe we are making progress. However, there remains a significant amount of work to do and a series of steps required by the consent order, requiring both successful execution and implementation by us and ultimately a determination by the Federal Reserve as to when the work has been completed to their satisfaction. Recognizing we are early in the year and uncertainties exist, the range we have provided reflects the potential for pressures on each of these assumptions.

Turning to expenses on Slide 17. We’re focused on building a more efficient company with a streamlined organizational structure and less complexity so we can better serve our customers. Our efficiency initiatives are designed to improve staffing models, reduce bureaucracy and lower reliance on expensive outside resources. Importantly, we are not seeking efficiencies related to the resources needed to complete our regulatory and control work and we’ll continue to add, if necessary. We have rigorous reviews to help ensure that we have the required resources in place to complete this important work. We are executing on a portfolio of over 250 efficiency initiatives which we expect to span over the next three to four years. They amount to over $8 billion of identified potential gross saves that are concentrated in the five categories that we highlight on the slide.

In addition to these initiatives, we have a long list of others that are in the process of being vetted. While we are focused on becoming more efficient, we will continue to invest in our risk and regulatory work as well as to support business growth and improve our products and services. We are not foregoing opportunities with good returns to grow revenue even if they may increase expenses. We are targeting net expense reductions each year and our restructuring charges become clear, we will build our growth plans — and as we build our growth plans each year, we will provide further details.

We provide some selected details on our efficiency initiatives on Slide 18, and as you can see, some of these initiatives are company-wide while others are business specific. As we’ve streamlined our organizational structure, we’ve been able to reduce layers of management across businesses and functions which has increased the average span of control by approximately 10%. Our flatter organizational structure has also given us the opportunity to reduce support function headcount and apply the savings in the growth areas. We’ve also had the opportunity to reduce our non-branch real estate by using our space more efficiently. We currently have approximately 46 million square feet of real estate, which we expect to reduce by 15% to 20% by the end of 2024. Much of this reduction is due to our under-utilization of the space pre-COVID.

Turning to some of the business specific opportunities. As of year-end 2020, we had 5,032 branches which is down from a peak of over 6,600 in 2009, reflecting an acceleration of digital adoption in usage among our customers, we closed 329 branches in 2020 and expect to close approximately 250 more this year. We are also changing our branch staffing model to better reflect the activity that’s occurring within the branches which is less transactional and resulted in an approximately 20% reduction in branch staff in 2020. We will continue to adjust staffing in response to changing customer needs.

We have also identified opportunities in our home lending and auto businesses. In the fourth quarter, 73% of home lending’s retail applications were sourced through our online mortgage application tool and we expect to continue to improve our digital capabilities in the origination process which makes for a better customer experience and is expected to reduce expenses. As the economic environment improves and the processes become more technology driven, we expect significant home lending servicing efficiencies over the next four years.

In our auto business, we’re investing in our loan origination system and credit decision tools, which we expect will increase decision automation to more than 70 — automation to more than 70% by 2022, up from 59% in 2020 enhancing the customer experience while improving controls. We also had significant opportunities within commercial banking including changing how we serve our customers and optimizing operations and other back-office teams which is expected to reduce headcount expenses. This includes working to reduce the number of commercial banking lending platforms by over 50% and standardizing and automating customer on boarding which should reduce cost, but more importantly, improve the customer experience.

Turning to our 2021 expense outlook on Slide 19, we reported $57.6 billion of non-interest expense in 2020, included in that were $2.2 billion of customer remediation accruals and $1.5 billion of restructuring charges. So a good starting point for discussion of 2021 expenses is approximately $54 billion. If market levels remained strong we expect to see an increase in revenue-related compensation of approximately $500 million in 2021 primarily in wealth management. This impact may increase if markets or business performance exceeds our expectations. We expect to realize $3.7 billion of gross expense reductions in 2021. This will be partially offset by incremental spending in a few important areas including personnel and technology, including investments in risk and regulatory work. After factoring in incremental spending, our net reduction for 2021 is expected to be approximately $1.5 billion with reductions accelerating through the year.

Our full-year 2021 expenses, excluding restructuring charges and business exits are expected to be approximately $53 billion with lower annualized expenses towards the end of the year. In prior expense outlooks, we assumed $600 million of annual operating losses, which is still the normal amount of losses we have for theft and fraud related items. However, we also typically have some level of customer remediation accruals and litigation costs which are hard to predict, but we have assumed approximately $1 billion for total operating losses in our 2021 outlook. While we made significant progress on working through our legacy issues, we still have significant outstanding litigation and regulatory issues that can be unpredictable.

The restructuring charge that we took in 2020 reflect what we believe will be needed for 2021 headcount reductions. While we haven’t included any restructuring charges in our 2020 outlook, we may have some smaller amounts primarily real estate related and we will evaluate later this year the need for additional severance and/or restructuring charges for initiatives in 2022 with a focus on ensuring the payback periods continue to be strong. We will call out these charges as appropriate as we move through the year.

We made significant progress in 2020 in identifying efficiency opportunities across our businesses and we started executing on these initiatives, resulting in the restructuring charges during the second half of the year. This is just the beginning of a multiyear process and our ultimate goal is to improve our efficiency while continuing to invest in our businesses.

Now on Slide 20, we’ve finished our business reviews and we’ve updated you on our expense expectations, now let’s turn to what we as a management team are ultimately focused on improving our returns. We believe we have a clear line of sight to increase our return on tangible common equity to approximately 10% in the short term, if we continue to reduce expenses and we’re able to optimize our capital levels closer to our internal target. After that, we believe we can further improve our returns through a combination of factors including moderate balance sheet growth once the asset cap is lifted, a modest increase in interest rates or further steepening of the curve, our ongoing progress on incremental efficiency initiatives, a small impact from returns on growth-related investments in our businesses and continued execution on our risk regulatory and controls work.

The combination of these of these factors we believe would take our return on tangible common equity from approximately 10% to approximately 15% over time. To be clear, this is a multiyear process dependent on the path of the economic recovery and requires successful execution on our part, particularly in controlling expenses, as well as — and improved operating environment. But the takeaway is that we believe our business model is capable of producing these returns.

We will now take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of John McDonald with Autonomous Research.

John McDonald — Autonomous Research — Analyst

Hi. Good morning. Mike, so, if I could ask about the expense slide on Page 19. Is it right way to look at it — you said you’ve identified over $8 billion of gross saving opportunities and you’re realizing — you expect to realize $3.7 billion of that $8 billion or so in ’21?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Hey, John. Thanks for the question. Yeah, at this point, that’s where we are. We’ve got a little — probably a little over $8 billion that we’re sort of working on as we speak and we’ll get $3.7 billion in the year. And as I said in commentary, those savings get bigger as you go throughout the year. And so that implies the exit rates better than the $53 billion.

John McDonald — Autonomous Research — Analyst

Okay. And if you think about the gross to net, you’re realizing $1.5 billion of net saves for like $3.7 billion of gross, maybe 40% of the $3.7 billion your achieving, is that ratio of gross to net — could that improve in the out years based on what your investment spend forecast is?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah. You have to sort of think about it that you don’t get the benefit all day one. These things sort of take — get executed throughout the year. So that ratio of $8 billion to $3.7 billion, you can’t really look at it — or I’m sorry, the ratio of $8 billion to the sort of net that you’re seeing, you sort of have to look at that over a couple year period as you get the full annualized benefits of all the saves coming into the P&L.

Charles W. Scharf — Chief Executive Officer and President

Hey, John, this is Charlie. How you doing? I would also just add to that, in that the $1.6 billion of investments that’s broken out on Slide 19, that does include a significant continued increase in expenses related to the risk and infrastructure build-out that we have. And so, as we continue to move forward, there’s a point at which that the increase certainly slows.

John McDonald — Autonomous Research — Analyst

Got you. Okay. Thank you.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck — Morgan Stanley — Analyst

Hi, good morning.

Charles W. Scharf — Chief Executive Officer and President

Good morning.

Betsy Graseck — Morgan Stanley — Analyst

Couple of questions. One, Charlie, you walked through the businesses that you have sold or in the process of contemplating selling. Is — should we take that to mean that that’s the full extent of what you’re looking to do with the business model at this stage and that there is anything else beyond those areas that are not being contemplated for sale or maybe just give us some color on that? And then how you identified what to keep, like what was the bar for sale versus retain?

Charles W. Scharf — Chief Executive Officer and President

Sure. Yeah, I think the answer is yes. You should look at this as the complete list, with the one aside that all companies should always relook at this on a regular basis to make sure that whatever assumptions you’ve made are accurate. But we have gone through an exhaustive review of everything that we do business-by-business at a level of detail well beyond the level that we report publicly. We’ve come up with these activities. We thought about a whole bunch of other things. And so, this is the list that we’re actively working on and we feel very good about everything else.

As we think about the lens that we used, it starts with — we look at the core customer base that we want to serve and is it part of our capabilities that we have either targeted towards that customer base or are they part of a package that’s logically offered to customers as one. Also, look at risk returns. I would just make the comment on risk returns because I’ve heard a little — people talking about this a little bit, we’re not looking at the risk return of a given quarter, we’re looking at the risk return over a much longer life cycle of these businesses.

And so, you add that together and the businesses that we’re exiting, they’re perfectly good businesses and the things that we’re thinking about, there’s certainly — the question is are they best housed within Wells Fargo? And so, we think the answer is probably best housed someplace else. There are different ways to get there and different arrangements that we can have with folks in terms of what that means. But again, I do feel very good at this point that we’ve looked across the enterprise.

Betsy Graseck — Morgan Stanley — Analyst

And then you’ve outlined where there has been a pullback in loan balances or earning assets because of these exits, but what do you do with that opportunity there? I mean, there is a lot of discussion as you all know about the asset cap and it’s hard to know when you get out of it, but are you creating room for your core businesses to grow into that space or how are you thinking about that?

Charles W. Scharf — Chief Executive Officer and President

Yeah. So I would start with we did not approach this exercise with we have to sell businesses to create room under the asset cap. It was really the view is driven by what do we think actually belongs within Wells Fargo for the long term. To the extent that it helps us with the asset cap, that’s certainly a benefit, but that was not the lens with which we view this. When you look at what we’ve done, the education finance business is roughly $10 billion or so in assets. The things that we’ve announced that is the most significant piece, and so sure, there’s no — that over time creates the ability for us to redeploy that capacity elsewhere.

Betsy Graseck — Morgan Stanley — Analyst

Okay. And then just lastly on the tax rate, I think you mentioned this year it’s going to be single-digits, can you speak to what’s driving that and what your sustainable tax rate is? And also, is there a difference throughout the year like how that tax rate? Is it single-digits throughout or is it just starts super low and then goes up to normalized by 4Q? Help us think through the seasonality there.

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Hey, Betsy, it’s Mike. Yeah, it bumps around a little bit based on earnings and what’s in the quarter. But I think the simple way to think about why it’s lower than kind of the past is we’ve got a significant amount of investments that are multi-year investments in whether it’s low income, housing, other renewable energy that create tax credits. And those tax credits are what’s driving — what’s offsetting sort of the normal statutory tax rates that we’d have. It’s no more complicated than that. And so, as you’ve seen over the last couple of years, those have increased a bit over time, and so as we sort of look for — look at 2021, that’s the big driver.

Betsy Graseck — Morgan Stanley — Analyst

Sustainability — yeah, go ahead, sorry.

Charles W. Scharf — Chief Executive Officer and President

So the dollar impact of those is, it was up a little bit, but it obviously has a much bigger impact on the rate when you’re earning less.

Betsy Graseck — Morgan Stanley — Analyst

Right. So I mean as you weren’t more obviously, your tax rate will bleed higher but for a good reason.

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Correct.

Charles W. Scharf — Chief Executive Officer and President

Correct.

Betsy Graseck — Morgan Stanley — Analyst

Okay. Thanks.

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Thanks.

Operator

Your next question comes from the line of Ken Usdin with Jefferies.

Ken Usdin — Jefferies — Analyst

Hey, thanks. Good morning, guys. Coming back to your Slide 20, just wondering, I know that it’s a pass and it’s hypothetical and that long-term ROE is long ways away, but on that interim stat [Phonetic], the 10%, do you have a way of helping us think about what type of time frame might be possible to even get to that middle stat, that 10%?

Charles W. Scharf — Chief Executive Officer and President

Yeah, I think — hey, Ken, how are you? I think the way we’re trying to describe it is, that is where we have clear line of sight. So when we look at the impact of expenses, these are actions that we are actively taking. But we’re also — in order to get to 10% without any changes to the revenue equation at this point, we also have optimized capital levels, which means that deferred — we have to relax restrictions. And so the reason why we’re not talking about the time frame is because we don’t know when that will happen. But the amount of excess capital that we have as you know is extraordinarily significant and we’re also in the position of not being able to use it because we have the balance sheet limit. And so — so the timing is dependent on that, but yet in our minds, very clear line of sight when that occurs to be able to get there in a relatively short time frame.

And then, on the longer-term fees, which you didn’t ask about, again, there too I think we — there is some words off on the right-hand side, but again, I would not describe this as a — as just something that we’re dreaming about. We — when we look at what is possible with modest balance sheet growth relative — really moderate increases in the rate curve and/or steepening and efficiencies that we believe we can get, we really do believe that that is what we will achieve. It’s just — we’re just not in a position to put timing around it because we don’t control the timing on most of those items. But when those things become clear we should be in a position to be clear with you about timing.

Ken Usdin — Jefferies — Analyst

Yup. And on a follow-up to the capital and then the potential business sales, how do we get a sense of what earnings might potentially go away with those business sales and then if you were to get gains on those business sales, is that capital also kind of contemplate it in these ROE improvements or would that be extra or incremental used to at that point you’re able to do something with the capital generated to offset some of the lost earnings?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah. I think a couple of things. So, it’s Mike, Ken. Thanks for the question. I think we’ll give you more detail as sort of we announce plans for each of the businesses, but think of the revenue impacted by the four things Charlie sort of outlined as very low-single digits, a few percent of revenue and we’ll sort of give you more clarity as sort of they come — the plans come into focus with the timing. And I think you’re right, as we — if we book gains as we sort of divest of items that’s helpful from a capital perspective, that can either get redeployed into business or through buyback capacity.

Charles W. Scharf — Chief Executive Officer and President

And this is Charlie. Let me just add, given what we’ve announced, those are announced transactions, not closed. So it’ll take a period of time for these things to close. So once you factor into certainly what will impact 2021, it’s a smaller amount and we’re working hard at making sure that when we exit businesses, we get the expenses out. It obviously frees up capital that we have invested in those businesses as well as the gains. And so you put those things together and that’s why we don’t think of the impact of these things as being material to either a plus or minus on what it means for our ratios, but it cleans up the Company, it gets us focused on making sure that we’re putting resources towards the right things and we’ve just got the Company set up properly going forward.

Ken Usdin — Jefferies — Analyst

Got it. Thanks very much, guys.

Charles W. Scharf — Chief Executive Officer and President

Sure.

Operator

Your next question comes from the line of Steven Chubak with Wolfe Research.

Steven Chubak — Wolfe Research — Analyst

Hi, good morning. So I wanted to start off with a question on the NII guidance. Where are some of the assumptions in informing the lower and upper bound of the guidance range for ’21 and maybe more specifically where you are reinvesting today versus the back book yield of 196 basis points?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah. Hey, Steven, it’s Mike. Look, I think as you sort of think about the top-end of the range, we’re assuming roughly the implied forward curve, even though that’s bumping around day-by-day, week-by-week here over the last couple of weeks. So assume — we’re not assuming much improvement from where it is relative to the — to get to the top of the range.

We’re assuming loan balances are in total roughly flat. We’ll see some declines we think on the consumer side, particularly in the mortgage book as we go into this year, but we will — and so we’ll need to see a little bit of growth in commercial and corporate side to get there. And then we’re assuming spreads are about where they are relative to the other asset classes that we would invest in. And then a very modest expansion of the securities portfolio, but not very big.

So further steepening of the curve kind of increases overall sort of our positive relative to our assumptions. I think the biggest sort of downside risk is what happens to loans — loan growth, particularly on the commercial and corporate side. But a lot of the activity we’re seeing from stimulus and what the potential could be in terms of the recovery, particularly in the latter part of the year should be constructive for that. So I think it’s not a Herculean task to sort of get to the top-end of the range, but it does require a little bit of growth from — in the loan book from where we are today.

And then maybe just, I guess related, I’ll give you a little sense of how mortgage market is sort of doing in the first quarter. We are — we did have a — last couple of quarters have been pretty strong for origination, the mortgage origination market, and as we sort of see the first couple of weeks of January, it’s still pretty strong relative to both volume and margin on that balance. So that should be also constructive as we sort of look into Q1.

Steven Chubak — Wolfe Research — Analyst

That’s great color, Mike. And just for my follow-up on capital, you mentioned that you’re running with significant excess capital. The strategic actions have been outlined should significantly de-risk the overall loan portfolio. And as given your strong CCAR track record in these de-risking efforts, now is there room to manage to a lower target versus the 10.5% internal objective? I know you’re running above that. It just feels like that might be a little bit too conservative given all the actions that you’ve taken?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah. I mean that’s certainly something we think about a lot, Steve, in terms of what’s the optimal level to run. I think publicly we’ve said it’s around 10%, and as you noted, we’re running well above that target. So it’s something we’ll keep in mind. But as you know, we’ve been restricted from returning a lot of that back to shareholders at this point and we always start the conversation first with ensuring that we’re allocating enough capital to grow the underlying businesses and invest in them with inside the Company. But — and at this point, we’re just restricted from returning. So, hopefully that will change over time.

Charles W. Scharf — Chief Executive Officer and President

And then, this is Charlie, if I could just add, when we think about the conservative capital position that we completely agree with and as we look at our performance over time, as CCAR does, that does allow us to rethink about what you’re talking about. We also think about just the position that we have with our allowance for credit losses. And so we’re seeing what everyone else is seeing, which is that the performance is substantially better than we would have thought when we went into this and when a lot of those CECL reserves were established.

But we’ve also — when asked, we’ve been very clear in terms of what it takes to start to use that, which as we’d like to see something which we really do believe is more sustained and more equitable recovery because so many uncertainties exist. So everything that we see is extremely positive, but we think the right thing to do is to be prudent there. And so overall, the only — really the only meaningful reserves that we reverse were because of the student loan sale, which we had to do, but that positions us from a — just a quality of balance sheet perspective even stronger going into 2021.

Steven Chubak — Wolfe Research — Analyst

That’s great. Very helpful color and thank you both for taking my questions.

Charles W. Scharf — Chief Executive Officer and President

Sure.

Operator

Your next question comes from the line of Scott Siefers with Piper Sandler.

Scott Siefers — Piper Sandler — Analyst

Good morning, guys. Thank you for taking the question. So I wanted to revert back to that $8 billion plus of potential gross savings in the slide deck. Would you say, are you guys kind of completely done with the reviews that got you to that $8 billion number or to what extent are those ongoing? I noticed one of the sub-bullets talks about formalizing a program for additional feedback. And then I guess the context to the question is, in the past, you guys have noted that $10 billion number as sort of a kind of a guide post that would have gotten you towards pure efficiency. So just trying to sort of square the two together, if $8 billion is sort of all there is or if there is more as time unfolds?

Charles W. Scharf — Chief Executive Officer and President

Sure, this is Charlie. Thanks for the question. I think we’re actually talking about slightly different things. And so let me just try and walk through what I mean by that. The $10 billion that I referenced on the call was just the very simple math of our efficiency ratio versus our competitors to say that that is the difference in efficiency between with which we run the Company and they run the Company. And when we look at what Wells is, we don’t believe that there is any meaningful difference why that should be different. That doesn’t mean that we’re going to get to that number in a short period of time because these efficiencies take a long time to build in, they’re based upon both expense levels, but also the revenue levels that other people have. And so that was what the math is. But it certainly served as a guide post for us to sit and say, hey, why are others where they are versus where we are, and we didn’t look at it just overall, we looked at it by business. And again, as I mentioned in my comments, now you’ve got the ability to do more direct comparisons by business so you can see a little bit more of what we’ve seen.

So the $8 billion reference is what we have are the list of initiatives that we have that are in progress of moving forward with. It’s as — as these slides mentioned it says there are 250 and plus. There really are a list of 250 initiatives that we go through as an operating committee and each operating committee members in the process of executing on which we believe we will be able to reduce on a gross basis, the expense base by $8 billion. Away from that, we’re not done. We still — first of all, it’s like peeling an onion back, and so once you get a series of efficiencies, it helps you look at everything else that’s left as well. And so we’re confident that there’ll be more after that, which will help continue this multiyear drive to get to what we think is a reasonable efficiency level.

Over a period of time, to be comparable with our competitors, first of all, it took them years to get there and so that’s why it’ll take us a fair amount of time as well. We’ll accomplish a lot of it through expenses, but we certainly need higher net interest income and some growth in our non-interest income expenses would certainly be helpful there. So I still think of efficiency as something longer term that as we focus on of just getting the expenses out and focusing on returns, our efficiency ratio will naturally become more competitive as opposed to a specific target in a specific year.

Scott Siefers — Piper Sandler — Analyst

Yeah, okay. That’s good context and I appreciate that. And then separately, just as it relates to the asset cap, so under the new business line reporting a lot of this becomes a bit more self-evidenced, I appreciate that. But just as you guys look at it on a day-to-day basis, what is the asset cap doing to your ability to retract and attain customers at this point? I feel like all this excess liquidity in the form of deposits that’s washing the system over the past nine or 10 months has just been such an embarrassment of money for the industry, but unfortunately you guys have just a company specific hurdle and having to manage that dollar amount. So as it relates to sort of customer interface with existing ones and potential ones, how is the cap impacting things at this point?

Charles W. Scharf — Chief Executive Officer and President

Yeah. So let me start and then Mike can certainly pick up. I think, first of all, we — I think we ask the question is a good and interesting one and we need to separate the conversation about the asset cap between impact on our financial performance and impact on the franchise. And there’s no question that the impact on our financial performance is material in this environment, right. When you just look at — well, I think when we look at actions that we’ve had to take to prioritize balance sheet usage in an environment where certainly early on there were significant draws and then those preceded with people’s ability to refinance elsewhere, but deposit inflows or having to manage to those things certainly has been a cost to us.

And then I will certainly also add to that as we think about additional stimulus we need to create room on the balance sheet to be able to deal with that stimulus, be it fiscal or monetary. And so even versus where our balance sheet was running when we went into the pandemic, just because of this environment, we have to manage that lower in addition to the specific actions that we’ve had to take because of the request that we’ve had both on the asset and the liability side for management of the balance sheet.

Then we also think about — when we went through the crisis, the ability to add higher yielding assets when we were focused on staying below an asset cap is something that we were not able to do that others are able to do. And then you look at our — need not just to keep the balance sheet flat, but to have it be incrementally lower to create the capacity versus others ability to increases, if you add those things together and financially in this environment, there is no doubt that it is a really meaningful drag on our ability to offset certainly NII.

In terms of the franchise, which is a separate question, as we’ve gone through the exercise, which we were doing daily and now we don’t do as closely daily but we do, do it regularly, the conversation that we have is all around where can we make changes or create capacity which has the least franchise impact. So if you look at what we’ve done, we’re not limiting our consumer deposits, and we’ve seen very, very strong growth there. We have pulled back on our non-conforming corresponding business for a period of time. We think when we turn that back on, if we’re the right provider at the right price, then we’ll be in the market for that.

Certainly on our wholesale businesses, they’ve been more impacted by actions that we’ve taken, I think on the commercial side, we’ve tried to be very, very smart and when I say we I mean the team there, Perry and the team that try to be very smart about operational versus non-operational where our customers have other choices, and they understand the position that we’re in and the same thing on the corporate investment banking side. So that’s just a very long way of saying, I think that we’ve done a very good job of having as little franchise impact as possible. Hard to say nothing, but I think the places that we’ve done are places where people have the sophistication to understand why we’re doing.

We continue to do the other business with them and it’s something that we continue to obviously be really thoughtful about. Mike, anything else you’d add?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

No, I think that’s right and I just kind of underlying would probably say on the consumer side is that we’re not putting any kind of restrictions there and I think that we’re seeing almost a 20% increase in deposit — in consumer deposits, and I think that’s a good sign of how people feel about us and doing more with us. And so I think that’s encouraging to see on the consumer business.

Scott Siefers — Piper Sandler — Analyst

That’s perfect. Thank you very much for your thoughts. I appreciate you guys taking the questions.

Charles W. Scharf — Chief Executive Officer and President

Sure.

Operator

Your next question comes from the line of Brian Kleinhanzl with KBW.

Brian Kleinhanzl — KBW — Analyst

Hi, good morning. Just two quick questions. First one on the reserve, I know you said that you only had the reserve release related to student lending this quarter, but I guess if you think about reserve and where it’s stands as of year-end, I mean, if you could equate that relative, it seems like your reserve for something worse than the base case, I mean if you move the base case in returns to kind of a normal. I mean how much of that imply for potential reserve release relative to what you had at year-end?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Well, I mean, Brian, I think as you sort of think about the reserve levels, I think for anybody, given the way the accounting standard works, you’re not necessarily reserved just for a base case, right, you’re reserved for a whole number of scenarios that could potentially play out that are far worse potentially than a base case scenario. And so — and that’s kind of where we are today. As you sort of look forward, the — I think as we sort of see the path of the recovery, I think we’re hopeful that all the stimulus and support that the government has been putting in, in its many different ways and the potential for more of that should help provide a good bridge to the other side. But as — and as Charlie said, I think if that’s the case, I think we’re — we feel that we’re very conservatively accrued for that kind of positive outcome. But I think — and we’ll see how it plays out over the next couple of quarters.

Charles W. Scharf — Chief Executive Officer and President

Yeah, and the only thing I’d add, I mean it’s just when you wind up quarter-over-quarter, our allowance to loans is that is as a percentage basis is the same. And we sit here today and we say the performance continues to be better than expected which would suggest we feel even better about the level of reserving. But again, we’re just — given the unknowns, we think it’s a good position to be in and a prudent thing to do, but we certainly feel better off quarter-by-quarter.

Brian Kleinhanzl — KBW — Analyst

Okay. And then just a separate question on those selected efficiency initiatives that you outlined on Slide 18, could you just kind of walk-through which ones are the biggest impact to the overall expense savings, I know you had five different ones kind of summarized there but what’s like the number one, two with regards to potential expenses? Thanks.

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah, I would bring you back to Page 17 in the presentation on the right-hand side, we’ve mentioned the percentage that each of the categories contributes to the $8 billion, Brian. So I think that’ll probably give you a good sense of where the most impact is coming from. And really the things that we’re doing across the company in terms of really streamlining the structure and finding ways to optimize those are biggest single piece, but it impacts many — most groups across the company. And then as you sort of look at the other categories it’s a — there is somewhat comparable relative — on a relative basis in terms of their contribution, so you can see what that looks like.

Operator

Your next question comes from the line of Matt O’Connor with Deutsche Bank.

Matt O’Connor — Deutsche Bank — Analyst

Hi, guys. One picky question and one bigger picture. First one is the picky, when we look at that path to the 10% short-term ROTCE, using the fourth quarter as the base, you obviously had very low tax rate, I think, it’s about 3% and if we strip out the reserve release was about 25 basis points charge-offs. So that 10% kind of ROTCE in the short term whenever that is, is that kind of dependent on still unusually low tax rate and reserve release or is that really driven by the incremental expenses beyond what you’ve laid out and obviously the capital too?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah, no. It’s a good question. As we look — as we sort of look forward, I think the — as you think about the different components of what you walked through. I think the — as we said it for 2021, the tax rate is going to be sort of in mid-single digits. And so you get a sense of how we think — how sustainable that is for a little while. And really the big drivers here though are going to be driving the expense down as we sort of outlined, and really getting the annualized benefits of all the stuff we’re doing today and the stuff that we’ll have more impact in 2022.

And then obviously, we’ve got to get — we’ve gotten the restrictions lifted on the buyback, so I wouldn’t over index on sort of the one-timers that you see in the quarter because the reserve releases are offset by some of the restructuring charges and other things that you sort of look that are embedded in that 8%.

Charles W. Scharf — Chief Executive Officer and President

And Brian, sorry, Matt. This is Charlie. The only thing I would add is just being very practical about it is, as Mike said, I think there are lots of pluses and minuses, we would go through each of them and we do think it is a reasonable starting point. But the thing I would add is we obviously at this point have really detailed plans as we look into 2021 by quarter and for the full year and do feel very good about that as a starting point.

Matt O’Connor — Deutsche Bank — Analyst

Okay. And then the bigger picture question and there’s probably no super tactful way to ask this but you’ve assumed every year for the targets and guidance no lifting of the asset cap this year and it seemed like that was being telegraphed by some of the media articles in recent months. But I guess if we do kind of look out a year from now and the asset cap hasn’t been lifted, would that be disappointing to you, Charlie. And I appreciate that it will be a little over two years you’ve been here, but at the same time, it takes time to build a management team and there has been COVID which your firm and the banks in general have done a lot of things for employees, lot of things for customers and that can be distracting.

So I know there’s some puts and takes, but a lot of us on kind of the investor and sell-side obviously look at the asset cap being in place for quite some time and I’m sure you’re impatient and we’re all impatient too. So how would you feel a year from now if it’s still here?

Charles W. Scharf — Chief Executive Officer and President

Yeah, Matt, listen. It’s a very, very tactful way of asking the question of when we think the asset cap will be lifted, which you know that I’m not in a position to answer. And so I think your sentiments are right about what it takes, it takes time, it takes management team. I think what I’ll say, if you look at the remarks that we made in the prepared part of the call, the words are very carefully chosen. And so we do believe that we’re making progress. As I even more broadly that I feel great about the team we have in place, our understanding of what has to get done for this consent order and for the others.

As I said, I’ve made the statement, I do believe that we’re making progress. But if you look at the words that are required in the consent order they’re really clear which is execute and implement that and we’ve got significant work to do. And I can’t share with you, I wish I believe I understand why you’re asking, I said this last quarter too, I really do, I wish I could share with you the specifics of what the plan is, I can’t do that and ultimately it’s up to the FRB anyway. So I really — I’m just not in a position to put the timeframe around it other than I feel very confident that we know what has to get done and we’re moving forward. And I wish I could be more specific than that.

Matt O’Connor — Deutsche Bank — Analyst

Okay. Thank you.

Operator

Your next question comes from the line of John Pancari with Evercore ISI.

John Pancari — Evercore ISI — Analyst

Good morning. Charlie, sorry to hop right back to the asset cap, but one more thing on that I want to see if you can let us know, I know part of that process is the third-party review. Are you able to let us know if you are yet at that stage of the third-party review for the consent order that includes the asset cap?

Charles W. Scharf — Chief Executive Officer and President

I really can’t. I’m just — again, we’re not in a position because of CSI to be able to talk about where we stand, the progress, where we are along that continuum. Again I just I go — I wish I could say more, I go back to the words, I do believe that we’re making progress. As I said, it’s really clear what we have to do. I think we have people that don’t just understand what needs to be done but are capable of adopting and implementing which is what’s required for the third-party review once at the point of which the Fed ultimately accepts the — or just chooses to accept and that’s really all I can say at this point.

John Pancari — Evercore ISI — Analyst

No that’s helpful. All right, thank you. And then separately on the expense front, the $8 billion in cost saves, does that already reflect the real estate rationalization, the 15% to 20% reduction that you mentioned, I know you cited on the slide around the expense efforts but I’m not sure does it reflect that whole rationalization, because that’s a fairly substantial cut to your real estate footprint?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah the bulk of it’s included in the $8 billion number that that we gave you.

John Pancari — Evercore ISI — Analyst

Okay, thank you. One more thing on that, regarding the cadence of the remaining $4.3 billion of that $8 billion beyond 2021. I know you indicated it’d be over several years, is that still going to be more front-end loaded, meaning, could the savings realized in 2022 be higher than what would be realized in 2023. Is that how we should think about it?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Well, I think we’ll give you a better guidance on 2022 as we get towards the end of the year, but it’s something as you — it’s something that will take a few years to sort of work our way through that list. And as Charlie said, we’re not done, there’s a long list of other items that are being vetted as we speak that sort of add to that list.

Charles W. Scharf — Chief Executive Officer and President

And let me just add to it. Just so we’re not trying to be coy in any way, shape or form. We’re trying to do is do what we said we would do, which is we said last quarter that we would give you what we thought was our clearest line of sight to our expenses for 2021, which is what we’ve done. As we look beyond that, we do believe there is significant additional gross cost saves to take out, but we’re also making sure that we’ve got the ability as we go through the year to understand what continuing investments need to get made which include doing everything that we need to do on the risk and regulatory fronts. So we don’t want to give a net number and box ourselves in, then believe we need to spend a different amount on the risk and regulatory stuff because that’s going to be what it ever needs — what it needs to be.

And so what the prepared remarks laid out was the gross saves are significant. We expect to — what we’re targeting is to continue to show net reductions year-over-year. So we continue on this path to increasing efficiency, acknowledging that we’re not giving you the specificity beyond 2021 at this point.

John Pancari — Evercore ISI — Analyst

Got it. That’s helpful. All right. Thank you.

Operator

Your next question comes from the line of David Long with Raymond James.

David Long — Raymond James — Analyst

Good morning, everyone. Charlie, you mentioned in your prepared remarks that the Bank’s Number 1 focus is building the right management team. Obviously a lot of changes near the top and in your top operating team for the last 15 months since you’ve been CEO. Are there still additional changes needed on that team and any specific positions that you would still like to fill?

Charles W. Scharf — Chief Executive Officer and President

Yeah. So just — first of all, our Number 1 priority is getting the risk and regulatory work done, which will ultimately resolve these consent orders that we have. The management — building the management team is one of the key enablers in getting there. Yeah, I just — I feel great about the management team that we have. I think that this is — these are all — it is always an ongoing process where we’re always looking at one level gets filled, everyone’s looking to make sure that they’ve got the right members of the team behind them. And there’s no question that with all of the talent we brought in from the outside, given where we are, that enables us to leverage more of the talent inside the Company and put them in the right roles.

So I don’t foresee this — the pace and the dramatic changes that we’ve made. I think most of that is done at this point and then it’s just going to continuing to build the lower levels and recognizing that there are always some changes that happen here and there for different reasons.

David Long — Raymond James — Analyst

Got it. I appreciate the color. And then the — you talked about additional costs still needed to improve the operations and your investments in 2021 to get out of all the remaining consent orders. Where do you still think you need to spend? Do you have any areas earmarked at this point?

Charles W. Scharf — Chief Executive Officer and President

Yeah. I mean, so when we look at that — what page is it, it’s the Page 19 that shows the — where we break out from the $54 billion going to $53 billion and then we break out the net $1.5 billion [Phonetic] reduction, we show you the gross versus the investments. Embedded in that $1.6 billion is a series of things. Roughly a third of it or so are specific ads that we’re doing to continue the work on building out the risk and control infrastructure. Those are everything from continued ads and compliance, independent risk and all the functions that are necessary to — for the most part build the operational compliance infrastructure that’s required in fed and OCC consent orders, but is the right foundational work to do. We have a series of increases embedded in there which are investments in technology. Some of the expenses relate to things we need to build to get the efficiencies out, but we also have some net increases there also to continue building out some product capabilities and things like that. So, I’d just point you back to that $1.6 billion on a gross basis what’s embedded in our numbers this year, 2021 that is.

David Long — Raymond James — Analyst

Got it. Appreciate the color. Thanks for taking my question.

Charles W. Scharf — Chief Executive Officer and President

Sure. Operator? Operator, are you there? Hold on everyone. Give us a minute. John Campbell, you’re working on this?

Operator

Your next question comes from the line of Gerard Cassidy.

Gerard Cassidy — RBC Capital Markets — Analyst

Thank you and good morning.

Charles W. Scharf — Chief Executive Officer and President

Gerard, better be a good one, given the anticipation.

Gerard Cassidy — RBC Capital Markets — Analyst

There you go. I thought maybe you guys on your expense savings, you only paid for 90 minutes and they cut you off sort of something, so. Anyway, thank you for taking the question. Maybe Mike, I know the net servicing income is always volatile quarter-to-quarter. Can you share with us the — what went on with hedging this quarter? Obviously, it was a negative number, but again I know it’s volatile quarter-to-quarter.

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah, sure. And Gerard I may take you up on that idea by the way of limiting the call, maybe next quarter. Look, I think as you sort of look at the MSR asset, obviously, there’s a bunch of things that sort of impact what’s happening sort of drive the servicing income in there. And I think a couple of things you saw was the higher prepays and sort of the velocity in the mortgage market impacting that. And then you also saw servicing cost as modeled. So as you probably know with these assets like you’re modeling your future cost which then reduces or increases your income in the current period. And you look at the — that servicing income going up a little bit as you sort of look at the cost that you might have to incur given some of the forbearance programs and the extensions of those. And so there wasn’t anything outside of those items that was really driving the results.

Gerard Cassidy — RBC Capital Markets — Analyst

Very good. And then as a follow-up and I understand about the asset cap in the balance sheet, but in your net interest income expectations in Slide 16, what kind of interest rate environment would you need to see for the drag that you gave us in that slide for that to go away? If you had your druthers, if you could paint the interest rate environment that the sensitivity analysis and assuming you guys do, what would we need to see for that to disappear?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah, look, as I said earlier, to get to the top end of that range, we’re using sort of the implicit — the implied forward curve as it stands over the last week or so. And so I think as you think about all else equal, any steepening from here or just overall increase from here, I think would be helpful and additive to that.

Gerard Cassidy — RBC Capital Markets — Analyst

Great. Appreciate it. Thank you.

Operator

And you have time for one more question and that question comes from the line of Erika Najarian with Bank of America.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Hi. Thank you for taking my question, and Charlie, thank you for your patience on this long call. I just wanted to get back to the question on gross versus net and wanted to get clarity on the $1.6 billion of investment spend, I think earlier in the call, you mentioned that it was still mostly related to risk and regulatory-related work, and as we go forward and we think about the potential for a higher ratio of net versus gross, how should we think about offensive — more offensive type of expense of investment? You think one of your peers today laid out $2.4 billion in investment spend and $900 million of which was related to tech?

Charles W. Scharf — Chief Executive Officer and President

Yeah. So just to be clear because I don’t — of the $1.6 billion that’s in the investment line, again roughly a third of that is very clearly the risk and control buildout. But the reality is there could be other things that we’re doing that’s in the remainder. Another big chunk of what’s in that increase are things that we’re doing to drive efficiency in the Company and then there are obviously things that we’re doing to build the future of the business.

To your question of how to think about gross and net and the level of investments for the future, I think that is — that’s — quite frankly that’s one of the reasons why we’re just being very careful not to commit to anything beyond 2021. For 2021, we’ve been very, very thoughtful about what we believe we need to do, what we want to do and what we actually have the capacity to do and that’s what’s reflected in these numbers here. We’ve hired a series of new people both from the business side as well as Ather on the digital side. And as we think through what the expense base could be in ’22 and beyond, we don’t know at this point what we want that increase to be, which over time, hopefully becomes more about building products and services to compete more effectively in the marketplace.

And so, I’m not sure again how to answer the question other than we expect to be doing that. We do have some of the embedded in the numbers today, but we want to make sure that we understand what we might want to do, understand at the same time that we’re saying we believe based on everything we know today that we still should be able to do that and drive the expense base down on a net basis, just not sure what the net number is sitting here today.

Erika Najarian — Bank of America — Analyst

Great. Thank you for taking my question.

Charles W. Scharf — Chief Executive Officer and President

Of course.

Operator

And your last question comes from the line of Vivek Juneja from JPMorgan.

Vivek Juneja — JPMorgan — Analyst

Hi. Thanks for squeezing me in. I’ll be — so a quick one firstly to start with which is expense reduction, that’s Charlie, Mike, sorry I jumped over and didn’t go with the pleasantries of saying hello because I know you’re squeezing me in, you said revenue digits down low-single digits from the business exits, how about expense reduction?

Michael P. Santomassimo — Senior Executive Vice President, Chief Financial Officer

Yeah, Vivek we’ll give you more color as we sort of announce those and we get to the closing of some of those transactions. But it’s probably not that different I think relative to the revenue contribution.

Vivek Juneja — JPMorgan — Analyst

Okay. Then Charlie since this is the only opportunity we have to talk to you. I have a question strategically just to understand since you are making a lot of changes. Three areas, firstly CRE since you are the biggest player have been, what are you thinking there in terms of outlook for that business including your UK commercial real estate, mortgage banking since you’ve cut back disclosure, is that a sign that you’re pulling that back a little? And lastly Charlie also your outlook for trading since assets are down sharply year-on-year and your plans for trading?

Charles W. Scharf — Chief Executive Officer and President

Yeah, listen CRE, as you can see in our disclosures is an extremely important business for us, we think we have a great franchise which is made up of the customer base, but it’s also the people that we have. We’re not — our portfolio is not immune to losses that will inevitably be taken because of this environment, separate out them — separate that out from we believe that we are hopefully more than appropriately reserved for that, but time will tell.

The devil is in the detail when you talk about commercial real estate in terms of — it’s a very broad caption but when you look at who you are lending to, what the structures are, obviously big difference between hotels, retail, office space, the level of security you have. And so I — we continue to believe that done properly it’s — will continue to be a really important part of what we do and we’ve got a team that reacts appropriately and actions they’ve taken certainly going even into COVID will serve us well.

Trading, listen, I think — as I said before, Vivek, I think you’re expanding the impact a little bit, I think there’s no question that when we look at our corporate investment bank in addition to our commercial bank, when we’ve asked people to take actions to reduce balance sheet that’s a place where we’ve done and it’s true on the deposit side, but it’s also true on the trading side as well, both in terms of customer financing as well as trading assets where possible. Again, I would say the same thing here, I think our customers understand what we’re doing and why we’re doing it.

They understand the position that we’re in. And I think when we’ve looked at where we’ve had to make reductions, it’s been with an eye towards when the asset cap does eventually go away and we have a latitude to continue building as we were building in the past, we would expect to see more resources put there certainly to bring us back in line where we were and then to build the business like we want to build the rest of our businesses at Wells.

Vivek Juneja — JPMorgan — Analyst

Okay, great. One last one was mortgage banking, Charlie, any color on that — your plans for that. Obviously you’ve been a leading player, it’s a much bigger piece for you than the other GSFEs. What’s your thinking on that, you’ve cut back on correspondent, what are you thinking as you look ahead, given that you’ve cut back the skills that’s making me wonder?

Charles W. Scharf — Chief Executive Officer and President

No, listen I think it’s a — home lending isn’t really an important business for us to be in. I don’t — when we look at what we want to do to serve consumers across Wells Fargo, home lending — when I say consumers, I mean, both in our consumer and small business bank as well as customers that they deal with directly through their own channels as well as our wealth segment. Home lending products are extremely important to that relationship. We’ve got a great team there — as you know Mike Weinbach runs all of Home Lending, Kristy Fercho joined us as the CEO of our Home Lending business.

And I think for us it’s going to be going to that next level of detail, which is really understanding on the origination side by channel, what does profitability look like, how do we continue to drive more profitability, how do we compete more effectively in digital originations where the banks generally have not done a great job versus what others have done. And on the service, excuse me, on the servicing side being more thoughtful probably than we’ve been about portfolio-by-portfolio, what are the servicing economics, where do we think it makes sense for us to service, where does it not make sense for us to service. And so I think what you’ll see is us becoming a finer point on what that looks like from a service perspective and driving more profitability on the origination side, but it’s important for us.

Vivek Juneja — JPMorgan — Analyst

Okay. Thank you.

Charles W. Scharf — Chief Executive Officer and President

Okay, listen. Thank you very much. Certainly, we appreciate all the time that you put in not just on this call but we know the revised disclosures create a bunch of work for you all. But hopefully, it helps us have a better conversation going forward as we talk about what the future of the company is. And as I said, I think we’ve got a lot of work still to do, I believe we’re making great progress and when these headwinds abate and the actions that we’re taking are reflected in our performance, I continue to feel really good about what the opportunity holds for us. So thanks again for the time and look forward to talking to you some more. Take care.

Operator

[Operator Closing Remarks]