Earnings Call Transcript - WFC Q1 2021

Operator, Conference Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo First Quarter 2021 Earnings Conference Call. Operator provided instructions to participants. 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, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings materials, including the release, financial supplement and presentation deck, are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Charles Scharf, Chief Executive Officer

Thanks, John, and good morning, everyone. I'll make some brief comments about our first quarter results, the operating environment, and update you on a few important topics. I'll then turn the call over to Mike to review the first quarter results in more detail. We earned $4.7 billion or $1.05 per common share in the first quarter. As you can see, these results included a $1.6 billion decrease in the allowance for credit losses. Higher noninterest income more than offset a decline in net interest income, and expenses are just beginning to reflect progress on our efficiency work. The impact of this work should increase in the latter half of the year. Credit quality continued to outperform our expectations with charge-offs at historical lows, but low interest rates and tepid loan demand remained headwinds for us during the quarter. And we continue to manage within the constraints of our asset cap which require us to anticipate the inflows from government stimulus, effects of quantitative easing, and additional fiscal actions which could impact our balance sheet. Overall economic trends improved during the quarter, and while there are risks, the likelihood of improvement continues to increase, and you certainly see this in the markets. Equity markets are rising, spreads have tightened, and liquidity is strong. Additional fiscal stimulus, continued monetary support, and the acceleration of vaccine availability provide a path to a more complete reopening and further economic expansion. U.S. GDP growth is on track to surpass its pre-pandemic peak by the end of the summer and is expected to increase in 2021 by more than any year since 1984. Overall, the consumer is strong, though there are inconsistencies which I will address later. Consumer net worth was up 10% in 2020, hitting a new all-time high of $130 trillion. Personal savings is approximately $1.3 trillion greater today than it was a year ago. It's expected that more than $1 trillion will be spent over the next five months, and this does not include the impact of President Biden's proposed initiatives. Wells Fargo customers specifically, as of last week, over $46 billion has flowed into our customers' deposit accounts related to round two and round three of federal stimulus payments, and we estimate that half has been spent and half remains in their accounts. For our customers who received federal stimulus payments, their median deposit balance was up 80% from a year ago. And for all of our customers, including customers who did not receive stimulus payments, median balances were up 62% from a year ago. Weekly debit card spend was up every week compared to a year ago during the first quarter. The year-over-year increase accelerated in mid-March due to the impact of last year's COVID-related restrictions and the impact of stimulus payments and was up approximately 70% during the comparable week last year of the quarter compared to a year ago but was up 35% compared to the same week in 2019. We are seeing increased consumer spending activity in both travel and restaurants, two categories that have been particularly suppressed since the onset of COVID-19. Specifically for travel, for the week ended April 2, debit card spend was up 422% compared to 2020 but was still down 4% compared to 2019. Consumer credit card weekly spend continues to strengthen over the course of the first quarter as well and ended the quarter up approximately 70% during the last week of the quarter compared to a year ago, but importantly up 8% compared to the same week in 2019. Businesses remained strong as well. Most clients still have strong cash positions, and line utilization remained low. Demand for consumer products is high, and dealer inventory levels are meaningfully lower versus historical levels. After declining during the second half of the year, commercial loan balances seem to have stabilized. And if the economy continues to pick up, we would expect to see increased loan demand from our commercial customers in the second half of the year. With vaccine distribution accelerating, I'm hopeful that we will be shifting to a more normal way of life soon, but there are still many that will continue to need help as not all have benefited equally during the recovery. Throughout the pandemic, our focus has been providing support for our customers and the communities we serve, and we continued those efforts during the first quarter. Since the pandemic began, we've helped 3.7 million consumer and small business customers by deferring payments and waiving fees. In addition to our $10.5 billion of PPP funding in 2020, in the first quarter, we funded approximately 70,000 loans, totaling $2.8 billion under the latest round of the Paycheck Protection Program. This year, we focused even more on small and diverse businesses, and our average loan size was $40,000, down from $54,000 last year. We had the lowest average loan size amongst our large bank peers. Ninety-six percent have been for businesses with fewer than 20 employees. Forty-three percent have gone to businesses in either low- to moderate-income areas or majority-minority census tracts totaling more than $6 billion between this year and last year. We committed last year to donate approximately $420 million of our fees from the PPP program and established our Open for Business Fund. We're in the process of distributing these funds to a combination of community development financial institutions and not-for-profits that serve diverse small businesses. To date, we have distributed over $125 million and are working to accelerate distribution of the remaining funds. We estimate that these actions have protected more than 66,000 jobs and hope to make an even more substantial impact with the funds remaining. As we announced yesterday, we have invested in 11 Black minority-owned depository institutions as part of our $50 million commitment to support minority depository institutions. We expect to complete our investments in another two by the end of the second quarter. And as I mentioned before, we processed over $46 billion of customer deposits related to the federal stimulus payments through last week and have cashed stimulus payments for noncustomers without charging fees. While we're proud of these actions, we know there is still more to do. Lower-income families and individuals, as well as minority-owned small businesses, will continue to need support, and we will continue to look for ways to help. Climate change is one of the most urgent environmental and social issues of our time. Last month, Wells Fargo announced a major step in our efforts to support the transition to a low-carbon economy by setting a goal of net zero greenhouse gas emissions, including financed emissions, by 2050. We committed to publish data on our financed emissions and set interim goals as we work closely with our clients in this transition. We also released our first Task Force on Climate-related Financial Disclosures report in the first quarter, which provides an update on our progress managing climate-related risks and opportunities. Let me turn to make some comments about our strategic priorities. Last quarter in my shareholder letter, I discussed the actions we're taking to improve our performance, and we're making good progress. We continue to prioritize the work necessary to build the appropriate risk and control infrastructure, and it remains our top priority. As a reminder, this is a multiyear journey. Progress may not be a straight line. And while we still have significant work to do, we are diligently doing what's necessary, issue by issue. It's hard to share specifics given the nature of the work, but I believe we're making progress, and we're confident in our ability to complete the work. In terms of business exits, I highlighted on the call last quarter that we were focusing our efforts on our core scale businesses. After rigorous reviews, we were in the process of exploring options for businesses that were not consistent with our strategic priorities. Mike will cover the financial details. But in the first quarter, we announced agreements to sell Wells Fargo Asset Management and the Corporate Trust Services businesses, and both are expected to close in the second half of this year. In addition, we completed a portion of the sale of the student loan portfolio in the first quarter, and we completed the sale of the majority of the remaining portfolio recently. We're pleased that we have found buyers who we believe have a similar approach to service and are focused on providing clients with innovative products and solutions. These announcements are an important step to simplifying our business and allowing us to focus on our core strategic priorities. Our work to simplify how we operate and create a more efficient organization continues. We made progress on our branch staffing and network optimization plans as we calibrate for changing customer behaviors and more traffic migrates to digital channels. We continued to execute on our commercial banking transformation as we optimize our coverage and operations model, consolidate lending platforms and automate and standardize many manual processes, such as onboarding— a customer pain point which has been key for us. And across the entire enterprise, we continue our ongoing efforts to reduce management layers to speed decision-making and reduce unnecessary bureaucracy. We are also focused on moving our businesses forward. A few examples. On the consumer banking side, we're accelerating our investments in digital with a particular focus on delivering a simple, easy-to-use, best-in-class customer experience for the most-used mobile app features. We're also simplifying and enhancing our product line, including launching Clear Access Banking, our low-cost, no overdraft product, and we've opened over 500,000 new accounts since the launch last fall. This summer, we will be improving the benefits of our portfolio by Wells Fargo checking customers. As I've spoken about before, we're underpenetrated in credit card given our customer footprint, and we're working on developing a significantly improved value proposition that we can introduce to the market. On the commercial side, we're going after the middle market investment banking opportunity in a different way than we have previously. This includes joint accountability, investments in talent, name-by-name client prioritization and joint account planning. Mike will discuss capital more in his remarks, but our position remains extremely strong. We repurchased almost $600 million of common stock in the quarter. And based on the restrictions still in place for the second quarter, we have the capacity to return approximately $1.8 billion to shareholders. As a reminder, our asset cap limits our ability to deploy excess capital to our customers. Returning capital to shareholders remains a priority, and we look forward to resuming capital returns under the stress capital buffer methodology starting in the third quarter. Last quarter, I discussed constraints to achieving return on tangible common equity greater than 10% and then around 15%. I should note that those returns did not include credit loss reserve releases. The asset cap and capital return restrictions continue, but the progress on vaccination distribution, ongoing monetary policy, additional fiscal stimulus and higher interest rates are helpful. We're in the midst of a multiyear transformation, and I'm confident that our operational and financial performance will continue to benefit from the progress we're making. I'd like to end by acknowledging that we've asked so much of our entire Wells Fargo team, and I'm proud of all the work they've done to support our customers and the communities we serve. We will continue to do all we can to support an equitable recovery and help those most in need of our support. I will now turn the call over to Mike.

Michael Santomassimo, Chief Financial Officer

Thanks, Charlie, and good morning, everyone. Charlie highlighted many of the ways we're actively helping our customers and communities, which we highlighted on Slide 2, so I'm going to start with our first quarter financial results on Slide 3. Net income for the quarter was $4.7 billion or $1.05 per common share. Revenue grew from both a year ago and the fourth quarter as the decline in net interest income was more than offset by higher noninterest income. Our first quarter results included a $1.6 billion decrease in the allowance for credit losses. And as a reminder, in the first half of last year, we built reserves by a total of $11.5 billion, and we had $18 billion of allowance for credit losses at the end of the first quarter. We completed the sale of approximately half of our student loan portfolio in the first quarter, which resulted in a $208 million gain and $104 million goodwill write-down, and we closed the majority of the remaining portfolio just this past weekend. Our effective income tax rate in the first quarter was 6.4%, which included net discrete income tax benefits related to closing out prior year's tax matters. Our capital and liquidity remained strong. Our CET1 ratio increased to 11.8% under the Standardized Approach and 12.6% under the Advanced Approach. We repurchased 17.2 million shares of common stock for a total of $596 million, and we had $33 billion of excess capital over our CET1 regulatory minimum at quarter end. Our liquidity coverage ratio was 127%. Turning to Slide 5, which summarizes the financial impact of the business sales Charlie highlighted. We have included the 2020 revenue and expense associated with the businesses in the slide. While they represented a little over 3% of 2020 revenue, the pretax earnings is much smaller. Note that the table does not include the credit cost associated with the student loan portfolio, which can have a meaningful impact on the business's P&L, and the expected expense reductions related to this business are incorporated into our $53 billion outlook for the year. Also, the expenses we have included related to the Corporate Trust and Asset Management businesses are the total expenses for those businesses. Some of those expenses may continue after we close the deals as we have transition service agreements, and roughly 10% to 20% of those expenses are items, such as corporate overhead, that will take time to manage out of the expense run rate. In terms of segment reporting, the Asset Management business is now reported in Corporate. Given that we announced the sale of the Corporate Trust business late in the quarter, that business is still included in Commercial Banking and will move to the Corporate sector in the second quarter. Turning to credit quality on Slide 6. Our net charge-off ratio in the first quarter declined to 24 basis points, the lowest it's been in a number of years and down 14 basis points from a year ago. Our losses have trended significantly better than our expectations due to the impact of forbearance programs and the unprecedented amounts of government stimulus. While there's still a lot of uncertainty, there are encouraging and improving trends related to commercial credit quality. Commercial net loan charge-offs declined $159 million from the fourth quarter to 13 basis points, the lowest loss rate since the third quarter of 2019. The improvement was broad-based with declines in all asset types, including $116 million of lower commercial real estate losses. As we have done since the start of the pandemic, we continue to closely monitor our exposure to retail, hotel and office property types. The reopening of the economy has had a positive impact on retail and hotel as cash flow levels have begun to improve. That said, stress remains, and retail, in particular, was the driver of charge-offs in the first quarter. Though, clearly, there are negative demand trends in many office markets, the office portfolio continued to perform well, and we're not seeing any widespread stress in the portfolio as of now. Consumer net charge-offs declined $221 million from a year ago with improvements across all asset types but increased $88 million from the fourth quarter with higher losses in other consumer loans and credit card but still continue to be low. Nonperforming assets declined $692 million or 8% from the fourth quarter driven by lower commercial nonaccruals, primarily due to declines in energy and commercial real estate nonaccruals. $10.7 billion of our consumer loan portfolio, excluding government-insured loans, remained in COVID-related payment deferrals at the end of the first quarter. We stopped offering non-real estate-related COVID deferrals in the fourth quarter, and 98% of the balances that were still in deferral at quarter end were real estate-related. Loans that have already exited COVID deferrals have continued to perform better than we anticipated with over 95% of the balances current as of the end of the first quarter. Though we're still not all the way back to pre-pandemic levels, we've continued to adjust our credit policies to reflect better economic conditions. Due to the reserve release in the first quarter, our allowance coverage ratio declined from the fourth quarter but was up 90 basis points from a year ago. Similar to the fourth quarter, while observed performance has been strong, there was still a significant amount of uncertainty reflected in our allowance level at the end of the first quarter, and we'll continue to assess the level of our allowance. If the economic trends continue, we would expect to have additional reserve releases. On Slide 8, we highlight loans and deposits. Our average loans declined for the third consecutive quarter and were down 9% from a year ago. The decline from the fourth quarter was driven by lower residential real estate loans due to continued high prepayments and re-securitization of loans we purchased out of mortgage-backed securities last year. Real estate loan balances have been impacted by actions we took early last year to discontinue correspondent nonconforming originations in home equity lending. We have started to originate correspondent nonconforming loans again and should start to see more volume from this channel over time. Commercial loans were relatively stable from the fourth quarter but were down 8% from a year ago when there was a strong borrower draw activity during the early stages of the pandemic. Average deposits grew $55.5 billion or 4% from a year ago and 1% from the fourth quarter with growth in our consumer businesses and commercial banking, partially offset by declines in the Corporate, Investment Banking business, Corporate Treasury, reflecting targeted actions to manage under the asset cap. With continued deposit growth, we have been actively managing down our long-term debt outstanding. We tendered for $6.8 billion of senior and subordinated debt in the first quarter. And along with maturities, total long-term debt declined $29.6 billion or 14% from the fourth quarter and was down 23% from a year ago. Turning to net interest income on Slide 9. Net interest income declined 5% from the fourth quarter driven by two fewer days, unfavorable hedge ineffectiveness accounting results, continued repricing of the balance sheet and lower loan balances. These impacts were partially offset by the benefit of lower long-term debt. On the call last quarter, we provided our 2021 net interest income outlook. We still expect net interest income to be flat to down 4% from the annualized fourth quarter level of $36.8 billion as the benefit of a steeper yield curve has been largely offset by softer-than-anticipated loan demand, low utilization rates on commercial loans and faster-than-expected prepayments on residential mortgages. That said, it's important to recognize we are still early in the year, and our ultimate results for the year will remain dependent on how rate and lending environments evolve. If rates follow the current forward curve and commercial loans grow as the economic recovery gains momentum, which is expected by the industry, we would expect NII to land near the high end of the range. However, if loan demand proves softer than expectations, and our total loan balance remains flat compared with where we ended the first quarter, we would expect to finish closer to the middle of the range. We continue to closely monitor the evolving trends across each of the major drivers, and we'll provide updates to our outlook as the year progresses. Turning to expenses on Slide 10. Noninterest expense increased 7% from a year ago driven by increased personnel expense. Deferred comp expense reduced personnel expenses in the first quarter of last year by $598 million. As a reminder, late in the second quarter of last year, we changed how we hedge deferred compensation, which reduced the volatility in our reporting for this item starting in the third quarter of last year. Personnel expense also increased from a year ago from higher incentive and revenue-related compensation, including the impact of higher market valuations on stock-based compensation, which was partially offset by lower salaries. All other expense was down 4% from a year ago driven by lower professional services expense due to efficiency initiatives. Our expenses declined 5% from the fourth quarter as seasonally higher personnel expense was more than offset by lower restructuring charges and operating losses. Our 2021 expense outlook is unchanged at approximately $53 billion with lower annualized expenses toward the end of the year. As we said on our last earnings call, our outlook excludes restructuring charges and the cost of business exits, such as the $104 million goodwill write-down related to the sale of student loans. We assumed $1 billion of operating losses in the outlook. The first quarter included $213 million of operating losses. But as you know, these expenses can be lumpy, especially as we continue to resolve legacy issues. We also assumed approximately $500 million of incremental revenue-related expenses as these have been higher than expected so far this year due to strong equity markets, which is a good thing, as revenue more than offsets any increase. If the current market level holds, we would expect incremental revenue-related compensation this year to be approximately $800 million, but we are still early in the year, and we'll update you as the year progresses. We are continuing to execute on efficiency initiatives, and additional initiatives continue to be identified and vetted. Turning to our business segments, starting with Consumer Banking and Lending on Slide 11. Net income increased from a year ago driven by revenue growth in home lending and lower provision for credit losses. Consumer and small business banking revenue declined 6% from a year ago, primarily due to the impact of lower interest rates and lower deposit-related fees. The decline in deposit-related fees was driven by higher average checking account balances and higher COVID-related fee waivers. We expect a high level of Paycheck Protection Program loan forgiveness in the second quarter, which would result in higher net interest income. But as a reminder, the fees on those loans originated last year are being donated, so you will see a corresponding increase in donation expense, so it won't impact the bottom line. Home lending revenue increased 19% from a year ago on higher retail originations and gain-on-sale margins. The 12% increase from the fourth quarter was primarily due to higher mortgage banking income related to the re-securitization of loans we purchased from mortgage-backed securities last year and an increase in retail originations. Credit card revenue declined 2% from both the fourth quarter and a year ago due to lower loan balances, reflecting elevated payment rates. We continue to make progress in executing our efficiency initiatives in our branches. Transaction volume continues to shift away from our branches with 82% of consumer and small business deposits in the first quarter done digitally, up from 76% a year ago. We have closed 395 branches since the first quarter of 2020, including 90 branches in the first quarter of 2021. We are on track to complete the remainder of the 250 branches we expect to consolidate this year. We've also continued to adjust staffing levels, including the reductions related to branch closures. Importantly, to date, we've been able to make these adjustments while reducing customer attrition and improving client satisfaction. Turning to some key business drivers on Slide 12. Our first quarter retail mortgage origination volume was the highest since 2016. Total mortgage originations increased 8% from a year ago as a $6.7 billion decline in correspondent originations was more than offset by $10.5 billion of higher retail originations. Total mortgage originations declined 4% from the fourth quarter due to the seasonal slowdown in the purchase market and as growth in retail originations was more than offset by a decline in correspondent originations. While the mortgage origination market is expected to decline in the second quarter as the anticipated increase in the seasonal purchase market is expected to be more than offset by decline in refinancings, we currently expect our origination volume to be robust as we have strong demand in the retail channel, and we continue to build up volume in the correspondent nonconforming market. Auto originations increased 32% from the fourth quarter and 8% from a year ago in a strong market with supply shortages for both new and used cars. With the improving economic forecast, we are gradually returning to pre-pandemic underwriting policies. Turning to debit card. Purchase volume increased 3% from seasonally strong fourth quarter levels. Debit card volume increased 20% from a year ago, reflecting higher consumer spending due to stimulus payments and improving economic conditions. And credit card purchase volume declined from seasonally high fourth quarter levels. Purchase volume was up 6% from a year ago as lower year-over-year volume early in the quarter due to continued reductions in travel and entertainment spend was more than offset by growth in March. Commercial Banking net income was up from both the fourth quarter and a year ago due to a decline in the provision for credit losses. Middle Market Banking revenue declined 20% from a year ago driven by the impact of lower interest rates as well as lower loan balances from reduced client demand and line utilization. Asset-Based Lending and Leasing revenue grew 7% from a year ago driven by higher net gains on equity securities in our strategic capital business as first quarter 2020 included impairments due to a decline in market valuations. This was partially offset by lower net interest income in first quarter 2021 from lower loan balances. Noninterest expense increased 4% from a year ago, primarily driven by higher technology spend, partially offset by lower headcount and consulting expense related to efficiency initiatives. Average loans declined for the third consecutive quarter and went down 19% from a year ago as COVID-related draws were repaid, and loan demand and credit line utilization remained weak. Average deposits were up 8% from a year ago as stimulus programs have injected significant liquidity into the market. Turning to the Corporate and Investment Banking business on Slide 14. In Banking, revenue declined 6% from a year ago driven by the impact of lower interest rates and lower deposit balances and grew 7% from the fourth quarter. The linked-quarter growth was driven by a 20% increase in Investment Banking revenue with strong debt and equity originations, partially offset by decline in advisory fees from strong fourth quarter levels. Commercial real estate revenue grew 5% from a year ago, primarily due to improved CMBS gain-on-sale margins driven by spread tightening as well as an increase in low-income housing tax credit income. Market revenue increased 19% from a year ago on strong client demand for asset-backed finance products, other credit products and municipal bonds, which was partially offset by lower demand for rates products and lower equities and commodities revenue. Average deposits declined 27% and average trading-related assets were down 14% from a year ago, primarily driven by continued actions we've taken to manage under the asset cap. As I mentioned earlier, Wealth and Investment Management results exclude Wells Fargo Asset Management, which is now reported in Corporate and prior periods have been revised. Net income declined 18% in the business from the fourth quarter. Revenue grew, reflecting higher asset-based fees and higher retail brokerage transactional activity. Expenses were up due to seasonally higher personnel expense. Net income declined 8% from a year ago, reflecting the impact of lower interest rates on net interest income, partially offset by the higher asset-based fees. We ended the first quarter with record client assets of $2 trillion, up 28% from a year ago, reflecting strong market performance. Net flows into advisory accounts improved in the first quarter from a year ago and the fourth quarter. Average deposits were up 19% from a year ago, and average loans increased 4% from a year ago, largely due to customer demand for securities-based lending offerings. Slide 16 highlights our Corporate results, which included $1.2 billion of lower net interest income from a year ago, primarily due to the impact of lower interest rates, offset by a $1.4 billion increase in noninterest income. First quarter 2020 included equity impairments in our affiliated venture capital and private equity partnerships, and results in the first quarter of 2021 included a $208 million gain on the sale of the student loans portfolio. Noninterest expense declined from the fourth quarter on lower restructuring charges. And we'll now take your questions.

Operator, Conference Operator

Operator provided instructions to participants. Our first question comes from the line of Scott Siefers with Piper Sandler.

Scott Siefers, Analyst, Piper Sandler

I guess first one I wanted to ask about is on NII guidance. So specifically in terms of premium amortization, there's about a $250 million delta between today's level of premium amortization and where it was a year ago. Does that—last year's level of about $360 million or so—does that represent, in your mind, a pretty typical level? And then kind of how quickly does it move back down to there?

Michael Santomassimo, Chief Financial Officer

Scott, it's Mike. I think you really got to remember what happened last year that would have impacted premium amortization. It was a bit of an abnormal quarter as you sort of got to the end of the quarter. I think from here, based on what we're seeing, premium amortization probably has peaked in the first quarter and starts to trend down from here. How long it takes to sort of get to a kind of normalized view, I think we'll have better clarity on that over the next couple of quarters. But we would expect it to start trending down from here.

Scott Siefers, Analyst, Piper Sandler

Okay, perfect. And then just a separate question. So the lending recovery is kind of a big question for you guys and others. I guess, just regardless of what happens with industry trends, maybe if you could speak to where you feel you guys are getting your fair share of loan growth and where you think you might still need to do better. I know you had mentioned, for example, credit card as being very underpenetrated, but just curious to hear broader thoughts there as well.

Michael Santomassimo, Chief Financial Officer

Yes. Look, as what you'll probably hear from a lot of folks, the demand across really most commercial client segments has been pretty weak now and probably has stabilized or seems to have stabilized over the last couple of months. I think we'll see how that progresses into later this quarter. I think as we look at where the opportunity is, as the economy and the momentum in the economy really starts to take off more, it's really across the board in our core client segments. In our Middle Market, our Commercial Banking more broadly, I think there'll be opportunity in the core large Corporate segment, maybe to a lesser degree, but we do really expect to see that Commercial Banking demand start to pick up as the economy picks up. I would highlight that. I think Charlie has talked a lot about the credit card space. I think there'll be growth there, but given the relative size of our portfolio to the balance sheet, I think the impact there will be modest to the overall size of our loan portfolio.

Operator, Conference Operator

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

Ken Usdin, Analyst, Jefferies

Just wondering, Mike, if you can kind of just recodify that expense commentary for the year. You said the $53 billion number, and then you also talked about the revenue-related lift of about $800 million. So, is that just the reset to $53.8 billion, all things equal? I just want to make sure we know what that includes and doesn't include and how you expect it to trajectory from here.

Michael Santomassimo, Chief Financial Officer

Sure, Ken. Thanks for the question. So, if you recall how we set the $53 billion target, I'll just give you a little bit of background there that we covered last quarter. Embedded in that $53 billion target was an increase of about $0.5 billion of revenue-related expenses and about $1 billion of operating losses. And what we excluded from there is the cost to exit the businesses, which you saw a little bit this quarter, the $100 million or so this quarter for the student loans business and any restructuring charges that come throughout the year. So, as you think about the go-forward piece of it, the $53 billion, we still feel really good about. I think what's putting a little bit of pressure on that is the incremental $300 million of revenue-related expense. So, I don't think it's a foregone conclusion that we're $300 million higher, but that's putting pressure on the $53 billion. So, it's possible we're a little over that if the revenue-related expenses hold, which by the way should be a good thing because that means there's plenty of revenue on the other side of that to offset it.

Ken Usdin, Analyst, Jefferies

And that was going to be my follow-up, Mike, which is was the revenue uplift what you had already seen in the first quarter or is it things that you feel better about going forward that we haven't necessarily seen yet but you're now anticipating a better revenue environment?

Michael Santomassimo, Chief Financial Officer

We did see a little bit of it in the first quarter as equity markets outperformed expectations. So, if those market levels hold throughout the rest of the year, that's when you'll see the rest of that revenue-related compensation come in. And so, you'll see the revenue associated with it throughout the rest of the year.

Ken Usdin, Analyst, Jefferies

Okay. And then I'm sorry, just last one on it. Are you still expecting the end-of-year on expenses to be lower than the beginning, as you had said in the fourth quarter, that trajectory still holds directionally?

Michael Santomassimo, Chief Financial Officer

Yes. Directionally, that's right. We'll get more benefit from the efficiency initiatives that we're executing later in the year, so that will impact the run rate, and I would just point out and remind people that we do have a lot of seasonal expenses that hit the first quarter. So you sort of need to normalize for those as you go out for the rest of the year as well.

Operator, Conference Operator

Your next question comes from the line of Erika Najarian with Bank of America.

Erika Najarian, Analyst, Bank of America

My first question is a clarification for Mike. Clearly, the market responded to this comment. I think you noted that if loan growth was going to be tough this year, that you would be—NII would be down 2% from annualized fourth quarter, which I think the market is taking that you're bringing in your NII guide for the year. I just wanted to make sure we interpreted that correctly, that it seems like a more realistic outlook for NII now with the curve steepening and perhaps green shoots on loan growth is flat to down 2%.

Michael Santomassimo, Chief Financial Officer

Thanks, Erika. Our guidance still holds that it's somewhere between flat to the fourth quarter run rate to down 4%. Consistent with what we said in the first quarter, to get to the top of the range, we need to see some loan growth. That's still the case, although rates have offset some weakness that we've seen so far. To get to the middle of the range, we really need rates to hold where they are, and we won't need a lot of loan growth from here to hit that. But there are plenty of scenarios that put you elsewhere in the range. What we tried to give you were a couple realistic data points relative to where we think it is possible to land within the range.

Erika Najarian, Analyst, Bank of America

Got it. Very helpful. And my second question is for Charlie. Charlie, clearly, the market is reacting to what seems to be a brighter revenue picture for Wells and continued progress in your transition and turnaround, and it feels like it's shrugging off. Typically, your stock wouldn't be up 3% after saying that expenses could slip higher. The market doesn't seem to care given the revenue outlook. I guess I'm wondering as we look forward to 2021 and hearing you loud and clear on some of the investments that you're already planning to make in the consumer side, what are the puts and takes in terms of a greater bottom line or benefit from the second half of that $8 billion cost savings that you've identified versus an economic picture that is clearly brightened, even over the past three months? In other words, should we think of your expenses having a higher floor, say $50 billion to $51 billion, as we look out to 2022? That would come with greater efficiencies as revenue continues to improve.

Charles Scharf, Chief Executive Officer

Thanks, Erika. I don't think there's anything more that we're going to say in terms of what we would expect expenses to be going forward beyond what Mike covered in his remarks and what we said last quarter. When we look at the opportunities to continue to drive efficiency in the company, which is really all about just running a better company, those continue to be extremely significant. We laid out, just on a gross basis, what we thought those opportunities were and our degree of confidence in being able to achieve that given the level of specificity that we had in the line of sight. I think that still holds true. And over time, we would expect to continue to find more, kind of peeling the onion back. At the same time, we are investing in the business. It's on the consumer side. It's on data. It's across the Home Lending platform, the card platform, our products in the consumer bank, what we're doing in our Middle Market Business with technology and account work— I can go on of all the things that we're doing. So I think that's all embedded in our statement that we would expect the fourth quarter, in order to get to $53 billion, would be a lower run rate than the $53 billion itself. As we look forward, we hope to see net expense reductions as we continue to drive efficiency while continuing to add investments into the business. So hopefully, that's responsive to what you're asking.

Operator, Conference Operator

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

Betsy Graseck, Analyst, Morgan Stanley

I had a question around how you're thinking about the dividend and the buybacks. We know that post-CCAR stress test, assuming you pass that, that there's a little bit more room for you to do both of those things. Maybe you could give us a sense as to how you would approach the buyback and the dividend decision post stress test. In particular, what kind of time frame are you thinking about that you would need to optimize the capital structure down to your management targets because you're sitting with a lot of excess capital today, as you know?

Charles Scharf, Chief Executive Officer

Sure. Mike, why don't I start and then you can pick up? I guess we'd start with the dividend. It's not lost on us that our dividend is quite low, certainly relative to where we're earning today and as we look forward. That's a consequence of two things. It's a consequence of the restrictions that were put in place by the Federal Reserve in terms of what those limitations were, but it was also a point of view that we had, which was we didn't want to have to, if the environment even got worse from that point in time, be in a position to have to reduce the dividend again. We would like to increase the dividend to a more reasonable level. We think about it as targeting a payout ratio, excluding reserve releases and things like that. And then beyond that, it is investment in the business and deploying our capital for our clients and the difference being buybacks ultimately, given the amount of excess capital that we have today. Mike, you can talk a little bit about the timing.

Michael Santomassimo, Chief Financial Officer

As you think about timing, obviously, we've got a lot of components to think about there. But you can think about it over the next year or so— a year is probably a reasonable time frame to work our way down, assuming, as we've been told, that the restrictions come off and we're back to a more normal stress capital buffer regime. So I would think about it over that time frame in terms of what the timing looks like. And obviously, some of that is dependent upon CCAR and the results and how that all plays out.

Betsy Graseck, Analyst, Morgan Stanley

Got it. And on the payout ratios, the dividend had been on the higher end of the peer group, but your peer group is running somewhere between 30% and 40%. That's what you mean by reasonable. I'm not asking you to tell me what ratio, but would you say that's the right peer group? Or would you widen your aperture a little bit and go more like 25% to 40%, bring in some of the G-SIBs in there?

Michael Santomassimo, Chief Financial Officer

I think as you think about the payout ratio over time, we'll come up. It's going to be a Board decision in terms of what the dividend trajectory looks like. It's not lost on us that we need to be in a reasonable payout range over time, and that will be dependent upon what we think the earnings capacity is going to look like. I think you'll see that come through over time as we have more ability to distribute capital.

Charles Scharf, Chief Executive Officer

I would just add, Betsy, the way you framed it is generally the right way to think about it. We would like to do something sooner rather than later. That might not get us to where we ultimately want to be, but it would be an important step in the direction that we're going.

Operator, Conference Operator

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

John Pancari, Analyst, Evercore ISI

Just on the margin front. I wanted to see if you could quantify the impact of the hedge ineffectiveness on the net interest margin this quarter. And then separately, could you just talk about margin expectations from here, given the rate backdrop as we look — we're looking at the bottom here, and we could see some upside as we move through the rest of the year?

Michael Santomassimo, Chief Financial Officer

John, it's Mike. The hedging effect in this had about a three basis point impact on net interest margin. And as you probably know, we'll get that back over time. Hedge ineffectiveness is a temporary difference that comes back. As you think about the outlook from here, if the case we laid out that gets us to the top of our NII range plays out, then we should see some growth in both NII and NIM from here. Hopefully this will be either the bottom or pretty close to the bottom as you look forward, if that case plays out. Now, NIM can move around a little bit quarter-to-quarter, so it might bounce around, but the general trajectory should be positive.

John Pancari, Analyst, Evercore ISI

Okay. Got it, Mike. And then lastly on the cost save side, I know you expect about $1.5 billion to follow the bottom line of the $3.7 billion this year. Can you help us think about the magnitude that can fall to the bottom line of the remaining savings, the remaining $4.3 billion as they're received? Any additional color now that you're beginning to peel the onion?

Michael Santomassimo, Chief Financial Officer

John, I would go back to what we talked about. As you think about the trajectory of expenses, we'll get more of that impact as we go throughout the year. As Charlie mentioned, the run rate as we go into the fourth quarter will be at a lower rate. As we think about the investments we need to make and additional efficiency initiatives that we vet and are working on, we'll provide more guidance on that as we think about 2022 when we get later in the year.

Charles Scharf, Chief Executive Officer

I just want to add a couple points. First, we have a tremendous amount of work to do on our control environment and the consent orders. There's very little we can say specifically, but we have a lot of work to do. We're committed to spend whatever is necessary, and it is a significant amount of money. As we get into next year, we're not going to lock ourselves into a certain number because we have to spend what's appropriate. As we get closer, we'll be in a better position to give you more color. Also, we are very focused on improving efficiency, but the world is moving quickly. We have to build the businesses and put ourselves in a position to create the kind of revenue growth we expect from this franchise. That's part of the reason why we're not being too specific about what we expect beyond this year. We will continue to execute and, overall, expect expenses to be down on a net basis as we look into the out-years. More to come as time goes on.

Operator, Conference Operator

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

David Long, Analyst, Raymond James

Charlie, we've talked a lot about the businesses and becoming more efficient and focusing on those that impact your strategic priorities. Are there any businesses that you would like to increase your critical mass in or new businesses to get into that you think would be helpful to your strategic priorities?

Charles Scharf, Chief Executive Officer

When we look at our four public reporting businesses, we generally believe there are material growth prospects in all of them for different reasons. It's hard to say one should be higher than the others; we feel great about the positions we have and the opportunities in each. On critical mass or new areas, our focus is on continuing to build out products and services at the core of the franchise. We're spending a significant amount and see an opportunity given the size of our consumer footprint and in terms of what we should be doing from a digital perspective. Internally we think we're in the game but not a market leader on digital capabilities. We have a clear roadmap to build out and start bringing things to market this year, and that spending is included in the $53 billion. We have similar opportunities across the businesses. We're focused on strengthening what we have rather than making acquisitions right now.

David Long, Analyst, Raymond James

Just thinking about any areas where if you had some excess capital, could you invest it there to gain market share and enhance your strategic priorities?

Charles Scharf, Chief Executive Officer

All the things we need to do right now are continuing to build out our product and service capabilities, which we will fund. We believe there are material opportunities, some shorter-term and some longer-term. Our focus is on using our capital to strengthen the core rather than buying new businesses at this point.

Operator, Conference Operator

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

Matt O'Connor, Analyst, Deutsche Bank

As we think about the Investment Bank longer term, what is the vision? You've got a competitive advantage in the supplementary leverage ratio, which is becoming more evident with the Fed exemption going away. Is there a way to better leverage that? And then could you comment on equity trading? It wasn't huge numbers, but was that impacted by a hedge fund out there?

Charles Scharf, Chief Executive Officer

Our aspirations for the Corporate and Investment Bank are a continuation of what we've been doing. The Corporate and Investment Bank is an extremely important part of the company. A significant part is the Corporate Bank, but Investment Banking is also meaningful. We want to continue to build it out in a linear, methodical way, not exponentially, and not beyond our risk appetite. We want to serve existing customers more holistically, which will allow us to expand reach over time. We will focus on products and services our predominantly U.S. customers want. There's opportunity to penetrate the middle market and also significant opportunities in the large corporate market in the U.S. where we have strong treasury and lending relationships but are underpenetrated in fees. It's a methodical build out focused on customer relationships. On the equity piece and prime brokerage, our exposure has been consistent with the size of our platform and the way we manage risk in the Corporate and Investment Bank. We did have a relationship with Archegos. We were always well collateralized, we exited it with all exposure and no loss, and we had substantial excess collateral after liquidation. That underscores the way we manage businesses with risk—lessons are learned and will be factored into how we manage the business.

Michael Santomassimo, Chief Financial Officer

I would add that our ability to grow the Investment Bank is somewhat constrained by the asset cap restrictions, given significant deposit growth. As you think about that timeline and approach, it will take some time to play out.

Charles Scharf, Chief Executive Officer

Just to reiterate, in managing the liquidity we've seen, the Corporate and Investment Bank has borne the biggest brunt to create capacity. So the first step is getting back to where we were.

Matt O'Connor, Analyst, Deutsche Bank

To clarify, the decline in equity trading year-over-year — if it wasn't from Archegos — was that distortion from the prior year? Was that driving it?

Michael Santomassimo, Chief Financial Officer

It's activity levels in the business. Our business is a little different than others and a bit smaller in the cash business, which drove less activity this quarter. It's a number of factors, not any single significant item.

Operator, Conference Operator

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

Steven Chubak, Analyst, Wolfe Research

Wanted to start with Mike on fee income outlook. Lots of moving pieces in the quarter. How should we think about the appropriate jumping-off point for core fee income as we think about the completion of the business sales and maybe some normalization in investment banking and mortgage activity? I know there's more explicit guidance on the NII side. Hoping you can unpack how to think about core fee income run rate pro forma the completion of those sales.

Michael Santomassimo, Chief Financial Officer

We've given detail on the sales so you can model their impact on fee income. As to other big items, we had about $2.8 billion in the quarter for advisory and asset-based fees, primarily in wealth. The key driver there is equity market levels and flows. Mortgage had about $1.3 billion in the quarter; that's cyclical, but based on what we see for the second quarter, we expect robust origination volumes in our business. Deposit and lending fees are just under a couple billion and are pressured in the short run but should normalize over time. Card fees should grow with economic activity. There are another couple billion that's transactional in nature—commissions or investment banking fees. Think about those drivers and model them to form a view on where it's headed.

Steven Chubak, Analyst, Wolfe Research

On NII, focusing on liquidity deployment. You're in a very strong excess liquidity position. A couple of quarters ago, your predecessor noted a tepid appetite to redeploy into securities given a flat curve. Now with steepening, what's contemplated in NII guidance in terms of excess liquidity deployment and appetite to grow the securities book, given liquidity capacity to do so?

Michael Santomassimo, Chief Financial Officer

We've got plenty of capacity and have started to redeploy a bit—just under $10 billion increase in the portfolio this quarter. Although the curve has steepened, rates are still relatively low. We're balancing the short-term carry with other impacts like other comprehensive income and trying to do this in the most effective way. When we get good entry points, we're taking advantage. We will continue to redeploy at a prudent pace as opportunities make sense from both short-term carry and other considerations.

Operator, Conference Operator

Your next question comes from the line of Saul Martinez with UBS.

Saul Martinez, Analyst, UBS

Mike, you mentioned that some of the expenses associated with the Asset Management and Corporate Trust businesses will be sticky and will remain for a bit. We're talking about roughly $1.7 billion in aggregate for 2020. What's unclear is in the $53 billion expense number, what proportion of that $53 billion or $1.7 billion is embedded in the $53 billion guide? And can you talk about how sticky those expenses are—what proportion will stick around and how they roll off? With the sale of the three businesses, you're creating about a $2.3 billion revenue hole and I want to ensure there's no notable impact on the expense base. Help unpack this.

Michael Santomassimo, Chief Financial Officer

Good question. On Corporate Trust and Asset Management, we assume those expenses would be here for the full year in the $53 billion. So there's no savings assumed relative to the outlook we gave you. With both businesses, we'll have transition service agreements as they migrate these businesses, so some expenses stay temporarily and will be offset by other items, and some will be reimbursed. Certain shared expenses, like corporate overhead, will take longer to work out—roughly 10% to 20% of those expenses will take a bit longer to manage out. As we get to closings, we'll be transparent and update our guidance on how these will impact it.

Saul Martinez, Analyst, UBS

If we're thinking about 2022 relative to the ongoing expense run rate reflected in the $53 billion, the $1.7 billion for Asset Management and Corporate Trust — by next year, assuming the deals close, would you expect that 80% to 90% of that to be out of the run rate?

Michael Santomassimo, Chief Financial Officer

Yes, subject to any impact from transition services agreements. As we get closer, we'll give more detail.

Saul Martinez, Analyst, UBS

Which we would get paid for in revenue.

Michael Santomassimo, Chief Financial Officer

Yes. In most cases for these transition service agreements, we'll have some expense still there, but we'll get reimbursed and the accounting shows revenue offset by these expenses.

Saul Martinez, Analyst, UBS

Is there a reason why these are not placed in discontinued operations until the deals close?

Michael Santomassimo, Chief Financial Officer

We moved Asset Management to Corporate, and so moved it out of the segment it was in. We'll move Corporate Trust out of the Commercial Banking segment in the second quarter, so you'll be able to see the impact in operating segments.

Operator, Conference Operator

Your next question comes from the line of John McDonald with Autonomous Research.

John McDonald, Analyst, Autonomous Research

Mike, two quick cleanup items. On the tax rate, can you remind us what's making the tax rate low this year and whether the reserve releases put some upward pressure on that? Is it sustainably low as you look out into further years because of tax-advantaged investments or is part of it profitability related? Just give us the factors there.

Michael Santomassimo, Chief Financial Officer

The biggest impact on the tax rate relative to the marginal rate is the tax credits we get on low-income housing and renewable energy investments. Those have been growing year over year and we expect them to grow in 2021 as well. Those credits are identifiable and forecastable and are the main factor bringing down the effective tax rate. If pre-tax income increases, the effective tax rate will inch up toward the marginal rate.

Charles Scharf, Chief Executive Officer

Just to add, the reserve releases affect the rate but not that significantly; the substantial impact on the lower rate is the dollar benefit from tax-advantaged investments. On income going forward, think about the marginal rate for incremental earnings.

John McDonald, Analyst, Autonomous Research

So you're still expecting a single-digit tax rate this year, Mike, correct?

Michael Santomassimo, Chief Financial Officer

Yes. At this point, that is the case.

John McDonald, Analyst, Autonomous Research

And then to clarify on the mortgage outlook, you mentioned the industry might be down in volume, but you expect to buck that a little bit because of retail strength. Were you saying you'll be down a little bit but still robust? Clarify your mortgage outlook.

Michael Santomassimo, Chief Financial Officer

The industry forecast typically lags actual activity. Industry is projecting second quarter down a bit, but based on our pipeline we feel like it will be a pretty robust quarter on the origination side. You'll likely see gain-on-sale margins come down, but we expect an increase in volume.

Operator, Conference Operator

Your next question comes from the line of Vivek Juneja with JPMorgan.

Vivek Juneja, Analyst, JPMorgan

A couple cleanup items on mortgage banking. You talked about Ginnie Mae buyouts boosting mortgage banking gains. How much was that and what did your gain-on-sale margin do in Q1 versus Q4? And how much more do you expect Ginnie Mae buyouts to continue in the next couple of quarters?

Michael Santomassimo, Chief Financial Officer

Vivek, I don't have the specific buyout number in front of me, but we can follow up with you after. Early buyouts as we re-securitize them impact our Home Lending balance as well, and that's another driver. We expect to continue to re-securitize more of those loans over the coming quarters.

Vivek Juneja, Analyst, JPMorgan

Second, on the expected gain on sale on the businesses— is that net of goodwill or do we need to adjust for a goodwill write-down and how will that play into buybacks? And Charlie, given expectations that the asset cap will be lifted at some point, how are you thinking about the pace of buybacks since that gives you an opportunity to put some capital to work in growing the balance sheet too? I know you won't comment on timing of the asset cap but just thoughts.

Michael Santomassimo, Chief Financial Officer

On the accounting, we accounted for the student loan business as the sale of the portfolio which resulted in a discrete goodwill write-down. For the Corporate Trust and Asset Management sales, you won't have a corresponding write-down of goodwill; gains are net of exiting items so you don't need to adjust for goodwill write-downs there. On the asset cap question, we'll stick to our prior answers and not comment beyond saying it's our top priority and we're making progress. We continue to have a significant amount of excess capital.

Operator, Conference Operator

Our final question comes from the line of Charles Peabody with Portales.

Charles Peabody, Analyst, Portales

Two questions, one on cards and one on NII. On cards, you mentioned that you're punching below your weight. Many card issuers plan to accelerate marketing spend in the second half of the year. How are you expecting to grow and gain market share? Is it pricing, rewards? How will you improve your relative position?

Charles Scharf, Chief Executive Officer

We have a business with about $35 billion of receivables and a large consumer footprint we're underpenetrated in. Our card propositions are currently not competitive with what is available in the market. We see opportunities to make material improvements in offerings—fraud prevention, customer service, and overall product experience. We have clear actions to increase penetration by making our products more attractive as primary cards for existing customers and more attractive for customers we touch. It's a basic opportunity to improve competitiveness across the product and service stack.

Charles Peabody, Analyst, Portales

Follow-up on NII: I believe you modeled scenarios for negative short-end rates. Can you share findings on that?

Michael Santomassimo, Chief Financial Officer

Negative short-end rates won't have a significant impact on us. We have an outlet at the Federal Reserve at 10 basis points, so I don't see that being an impact for us.

Operator, Conference Operator

I'll now turn the conference back over to management for any concluding remarks.

Charles Scharf, Chief Executive Officer

This is Charlie again. I just want to thank everyone for the time, and we look forward to talking to you during the quarter and then on the call next quarter. Take care.

Operator, Conference Operator

Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.