Earnings Call Transcript - WFC Q4 2020

Operator, Conference Operator

Good morning. My name is Katherine, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Wells Fargo Fourth Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Operator provided instructions on how to ask questions. 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 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.

Charlie Scharf, CEO

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 continue to see an uneven recovery and increases in COVID cases towards the end of the quarter are negatively impacting the path to recovery. Overall, our customers continue 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’s 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 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 clearer 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’ve 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 continues 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 remains soft driven by continued strong capital markets conditions, and an improving but still uncertain economic backdrop. Credit continues to form 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 multiyear lows, but again, the ultimate timing and magnitude of losses depends 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 remain 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 focus is as follows. Number one, building the right management team; number two, making progress on our risk and control build-out 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 noncore 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 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 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 build-out. In 2020, we announced an enhanced corporate risk organizational structure to find 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 multiyear 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 build out 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. It 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 preeminent 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 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 are 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 allows us to have a differentiated physical presence and technology platform you can compete with. The importance of scale is clear and will 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 then, there’s the great power of an integrated Wells Fargo. While our businesses are strong individually, they’re even more powerful when working together. When 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 served as artificial boundaries for us, preventing us from 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 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 in how we manage the Company. As we do this, we will reduce complexity and 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 build-out. 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 timeframes 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 to 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. We believe we’re making meaningful progress, yet 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 the 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 we’ll 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 timeframes 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, the Federal Reserve authorized the nation’s largest banks to pay common stock dividends 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 this criterion, we have the capacity to return approximately $800 million in the first quarter. Assuming the Board declares a first quarter dividend, consistent with the past few 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, freeing 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’re operating today, as I’ve said before, I continue to believe there’s 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 multiyear 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.

Mike Santomassimo, CFO

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 will 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 included 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 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 to delay the recognition of charge-offs, which is reflected in our allowance level. Nonperforming assets increased 9% from the third quarter, commercial nonaccrual loans increased $381 million, primarily due to a small number of commercial real estate exposures. While there’s 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 nonaccrual loans were current on interest and principal as of the end of the fourth quarter. Consumer nonaccrual loans increased $325 million on higher consumer real estate and auto nonaccruals. 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’re 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 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 continued to be very low amid strong capital markets and a soft economic backdrop. 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 runoff 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 a repricing of the balance sheet. The decline also reflected lower loan balances and investment securities as well 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 hedging affecting the accounting results and lower mortgage-backed security premium amortization. As a result, our net interest margin was flat compared with the third quarter. Turning to expenses on slide 9. Noninterest 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 the 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 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 in 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 third quarter. Our underwriting policies remain slightly more conservative than pre-COVID levels. Turning to debit card, both transactions and dollar volume increased on a linked-quarter basis, 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 a 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 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 and loan balances. Noninterest expenses declined 4% from the third quarter, partially reflecting efforts to increase efficiency and client coverage and streamline the organization. While overall headcount is 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 balances 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 Investment Banking on slide 13. Banking revenue growth from 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 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. Noninterest expense declined 10% from the third quarter, primarily reflecting the timing of incentive compensation accruals, and average deposits declined 20% with average trading assets 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. Noninterest 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 nonconforming mortgages. Average deposits grew 22% from a year ago, and we ended the year with 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 and 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 rates 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 assumed 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 resecuritization 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 remains in place. Regarding the asset cap, we are focused on getting the work done properly and believe we’re 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’re 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 savings 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 forgoing opportunities with good returns to grow revenue even if they may increase expenses. We are targeting net expense reductions each year and as our restructuring charges become clear, we will build our growth plans each year and 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 these 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 underutilization 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 the acceleration of digital adoption and 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% by 2022, up from 59% in 2020, enhancing the customer experience while improving controls. We also have 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 and expenses. This includes working to reduce the number of Commercial Banking lending platforms by over 50% and standardizing and automating customer onboarding, 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 noninterest 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 remain 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 had 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’ve 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 charges 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 2021 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 or 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 factors we believe would take our return on tangible common equity from approximately the 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 an 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.

Operator, Conference Operator

Operator provided instructions on how to ask questions. Your first question comes from the line of John McDonald with Autonomous Research.

John McDonald, Analyst, Autonomous Research

Hi. Good morning. Mike, if I could ask about the expense slide on page 19. Is the right way to look at it that you said you’ve identified over $8 billion of gross saving opportunities and you expect to realize $3.7 billion of that $8 billion or so in 2021?

Mike Santomassimo, CFO

Hey John, thanks for the question. Yes. 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. So, that implies the exit rate is better than the $53 billion.

John McDonald, Analyst, Autonomous Research

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

Mike Santomassimo, CFO

Yes. 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 what you’re seeing, you sort of have to look at that over a couple year period as you get the full annualized benefit of all the savings coming into the P&L.

Charlie Scharf, CEO

John, this is Charlie. I would also just add that the $1.6 billion of investments that’s broken out on slide 19 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 is a point at which that increase certainly slows.

Operator, Conference Operator

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

Betsy Graseck, Analyst, Morgan Stanley

Couple of questions. One, Charlie, you walked through the businesses that you have sold or are in the process of contemplating selling. 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’s anything else beyond those areas not being contemplated for sale? 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?

Charlie Scharf, CEO

Sure. Yes. 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 made are accurate. But we’ve 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’ve 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 use, 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? We also look at risk returns. I would just make a 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, when you add that together, the businesses that we’re exiting, they are perfectly good businesses. 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, Analyst, Morgan Stanley

And then, you’ve outlined where there’s been a pullback in loan balances or earning assets because of these exits. But what do you do with that opportunity there? There’s a lot of discussion 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?

Charlie Scharf, CEO

Yes. I would start with we did not approach this exercise with the view that we have to sell businesses to create room under the asset cap. It was really driven by what 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 viewed 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. Over time, it creates the ability for us to redeploy that capacity elsewhere, but we did not approach it as a way to simply manage under the cap.

Betsy Graseck, Analyst, Morgan Stanley

Okay. And then just lastly on the tax rate. I think you mentioned this year it’s going to be mid-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—does the tax rate start super low and then normalize by year end? Help us think through the seasonality there.

Mike Santomassimo, CFO

Hey Betsy, it’s Mike. Yes. It bumps around a little bit based on earnings and what’s in the quarter. But the simple way to think about why it’s lower than in the past is we’ve got a significant amount of investments that are multiyear investments in areas like low-income housing and other renewable energy that create tax credits. And those tax credits are what’s driving the lower effective tax rate relative to the statutory rate. 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 look at 2021, that’s the big driver.

Charlie Scharf, CEO

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

Operator, Conference Operator

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

Ken Usdin, Analyst, Jefferies

Coming back to your slide 20, just wondering, I know that that—it's a path and it’s a hypothetical and that long-term ROE is a long ways away. But on that interim step, 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 step, that 10%?

Mike Santomassimo, CFO

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 to get to 10% without any changes to the revenue equation at this point, we also have optimized capital levels, which means that the Fed would 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. So, the timing is dependent on that. But in our minds, very clear line of sight when that occurs to be able to get there in a relatively short time frame. On the longer-term piece, when we look at what is possible with modest balance sheet growth, moderate increases in the rate curve or steepening and efficiencies that we believe we can get, we believe that is achievable. It’s just we’re not in a position to put timing around it because we don’t control the timing on most of those items.

Ken Usdin, Analyst, Jefferies

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 contemplated in these ROE improvements, or would that be incremental use to—at that point when you’re able to do something with the capital generated to offset some of the lost earnings?

Mike Santomassimo, CFO

Yes. Thanks for the question. We’ll give you more detail as we announce plans for each of the businesses. But think of the revenue impacted by the ones Charlie outlined as low single digits, around a few percent of revenue. As we divest items, if we book gains, that’s helpful from a capital perspective that can either get redeployed in the business or through buyback capacity.

Charlie Scharf, CEO

Given what we’ve announced, those are announced transactions, not closed. So, it will take a period of time for these things to close. Once you factor in what will impact 2021, it’s a smaller amount. 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. 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 got the Company set up properly going forward.

Operator, Conference Operator

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

Steven Chubak, Analyst, Wolfe Research

I wanted to start off with a question on the NII guidance. What are some of the assumptions informing the lower and upper bound of the guidance range for 2021? More specifically, where are you reinvesting today versus the back-book yield of 196 basis points?

Mike Santomassimo, CFO

Hey Steven. As you think about the top end of the range, we’re assuming the implied forward curve, even though that’s bumping around day by day and week by week. So assume little improvement from where it is to get to the top of the range. We’re assuming loan balances are roughly flat in total. We’ll see some declines we think on the consumer side, particularly in the mortgage book, as we go into this year, so we’ll need to see a little bit of growth on the commercial and corporate side to get there. 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. Further steepening of the curve would be positive relative to our assumptions. The biggest downside risk is what happens to loan growth, particularly on the commercial and corporate side. The activity we’re seeing from stimulus and the potential for recovery, particularly in the latter part of the year, should be constructive for that. Also, on mortgages, we had pretty strong origination quarters and the first couple weeks of January are still pretty strong relative to both volume and margin, which should be constructive for Q1.

Steven Chubak, Analyst, Wolfe Research

And 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. Given your strong CCAR track record and these de-risking efforts, is there room to manage to a lower target versus the 10.5% internal objective? It feels like that might be a bit conservative given the actions taken.

Mike Santomassimo, CFO

Yes. That’s something we think about a lot. Publicly, we said it’s around 10% and as you noted, we’re running well above that target. That’s something we’ll keep in mind. But we’ve been restricted from returning a lot of that back to shareholders at this point. We always start the conversation first with ensuring that we’re allocating enough capital to grow the underlying businesses and invest in them. At this point, we’re just restricted from returning, so we hope that will change over time.

Charlie Scharf, CEO

If I could add, when we think about the conservative capital position, it does allow us to rethink about what you’re talking about. We also think about our allowance for credit losses. We’re seeing performance that is substantially better than we would have thought and when asked we’ve been clear about what it takes to start to use that. We’d like to see a more sustained and even recovery because many uncertainties exist. So while everything we see is extremely positive, the right thing to do is be prudent. Overall, the only meaningful reserves we reversed were because of the student loan sale, which positions us from a quality of balance sheet perspective even stronger going into 2021.

Operator, Conference Operator

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

Scott Siefers, Analyst, Piper Sandler

I wanted to revert back to that $8 billion plus of potential gross savings. Would you say you’re completely done with the reviews that got you to that $8 billion number, or are those ongoing? I noticed one of the sub-bullets talks about formalizing a program for additional feedback. The context is you previously noted a $10 billion number as a guidepost to get to peer efficiency. So trying to square the two together—if $8 billion is all there is or if there’s more as time unfolds?

Charlie Scharf, CEO

Thanks for the question. We’re actually talking about slightly different things. The $10 billion reference was the simple math of our efficiency ratio versus competitors; that’s the difference in efficiency between how we run the company and how competitors run theirs. That doesn’t mean we’ll get to that number in a short period of time because these efficiencies take a long time to build. The $8 billion reference is the list of initiatives that are in progress. There are 250-plus initiatives that we review and execute through the operating committee, which we believe will reduce the expense base by $8 billion gross. We’re not done. Peeling the onion back reveals more opportunities. We’re confident there’ll be more that will help continue the multiyear drive toward peer efficiency. It took others years to get there, so it will take us time too. We’ll accomplish a lot through expenses, but we also need higher net interest income and some growth in noninterest income.

Scott Siefers, Analyst, Piper Sandler

That’s good context. Separately, on the asset cap, under the new business-line reporting, a lot of this becomes self-evident. But how is the asset cap impacting your ability to attract and retain customers at this point? With so much excess liquidity in the industry, you’ve had to manage that dollar amount. How is the cap impacting customer interface with existing and potential customers?

Charlie Scharf, CEO

We need to separate the conversation about the asset cap between impact on financial performance and impact on the franchise. Financially, the impact is material in this environment—prioritizing balance sheet usage has been a cost to us. Deposit inflows and the need to create room for potential additional stimulus require us to manage the balance sheet differently than if the cap were not in place. We have been less able to add higher-yielding assets and must manage the balance sheet so it is incrementally lower versus others' ability to increase it. That is a meaningful drag on our ability to offset net interest income headwinds. On the franchise side, we’ve tried to create capacity with the least franchise impact possible. We’re not limiting consumer deposits; consumer deposits have grown significantly. We pulled back on nonconforming correspondent business for a period to maintain margins and will turn it back on when appropriate. On wholesale businesses, we’ve made targeted reductions and have been thoughtful to avoid undue franchise harm. Our commercial and Corporate Investment Banking teams are being smart in managing operational versus nonoperational items and communicating with customers about our position. Overall, we’ve tried to limit franchise impact while managing financial constraints.

Mike Santomassimo, CFO

I would underline what Charlie said. On the consumer side, we’re not putting restrictions and we’re seeing almost a 20% increase in consumer deposits, which is a good sign of how people feel about us and doing more with us.

Operator, Conference Operator

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

Brian Kleinhanzl, Analyst, KBW

Two quick questions. First on the reserve: you said the reserve release was related to the student lending sale this quarter. But looking at the reserve and where it stands as of year-end, it seems like you reserved for something worse than the base case. If we move to a base case and we see a return to more normal conditions, how much potential reserve release is implied relative to year-end?

Mike Santomassimo, CFO

Brian, as you think about reserve levels, given the accounting standard, you’re not necessarily reserved just for a base case. You reserve for a number of scenarios including ones worse than a base case. That’s where we are today. As we see the path of the recovery, we’re hopeful that stimulus and government support provide a good bridge. If that’s the case, we feel that we’re very conservatively accrued for that kind of positive outcome. We’ll see how it plays out over the next couple of quarters.

Charlie Scharf, CEO

The only thing I’d add is quarter-over-quarter our allowance to loans as a percentage is the same. Performance continues to be better than expected, which suggests we feel better about the level of reserving. But given the unknowns, being prudent is the right position.

Brian Kleinhanzl, Analyst, KBW

Okay. Separate question on the selected efficiency initiatives on slide 18. Which ones are the biggest impact to the overall expense savings? I know you had five categories summarized there, but what’s number one, number two with regard to potential expense saves?

Mike Santomassimo, CFO

Refer to page 17 in the presentation. On the right-hand side we’ve shown the percentage that each of the categories contribute to the $8 billion, which gives you the sense of where the most impact is coming from. The things we’re doing across the Company in terms of streamlining the structure and finding ways to optimize are the biggest single piece and they impact most groups across the Company. The other categories are somewhat comparable on a relative basis.

Operator, Conference Operator

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

Matt O’Connor, Analyst, Deutsche Bank

One nitpicky and one bigger-picture question. Nitpicky: on the path to 10% ROTCE using Q4 as a base, you had a very low tax rate this quarter. If we strip out the reserve release and look at charge-offs, is that 10% dependent on an unusually low tax rate and reserve release, or is it driven by the incremental expenses beyond what you laid out and the capital assumptions?

Mike Santomassimo, CFO

Good question. As we look forward, the tax rate we expect to be mid-single-digits for 2021. The big drivers to get to 10% are driving expense down, getting the annualized benefits of our initiatives, and optimizing capital levels closer to our target when restrictions are lifted. I wouldn’t over-index on one-time items in the quarter because reserve releases are offset by restructuring charges and other items in the quarter.

Charlie Scharf, CEO

As Mike said, there are pluses and minuses, and we think our 2021 plans are a reasonable starting point. We have detailed plans by quarter for 2021 and feel good about that as a starting point.

Matt O’Connor, Analyst, Deutsche Bank

On the asset cap—if a year from now the asset cap hasn’t been lifted, would that be disappointing to you? I know you’re impatient—how would you feel a year from now if it’s still here?

Charlie Scharf, CEO

I appreciate the question. I’m not in a position to answer when the asset cap will be lifted. The words in the consent order are very specific about execution and implementation. I do believe we’re making progress and have the team and understanding to execute what must be done, but ultimately it’s up to the Federal Reserve. I wish I could be more specific, but I cannot provide timing.

Operator, Conference Operator

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

John Pancari, Analyst, Evercore ISI

Charlie, one more thing on the asset cap. I wanted to see if you can let us know—are you at the stage of the third-party review for the consent order that includes the asset cap?

Charlie Scharf, CEO

I can’t provide specifics due to confidentiality and the process. We are making progress, have people that understand what must be done and can implement it, which is required for any third-party review, but I cannot provide further details on the stage of such reviews.

John Pancari, Analyst, Evercore ISI

Regarding the $8 billion of cost saves, does that already reflect the real estate rationalization of 15% to 20% that you mentioned?

Mike Santomassimo, CFO

Yes. The bulk of it is included in the $8 billion number we gave you.

John Pancari, Analyst, Evercore ISI

Regarding cadence of the remaining $4.3 billion beyond 2021, will the savings realized in 2022 be higher than in 2023? Should we think front-end loaded?

Mike Santomassimo, CFO

We’ll give better guidance on 2022 as we get towards the end of the year. This will take a few years to work through. Also, as Charlie said, we’re not done and there are additional items being worked that can add to that list.

Charlie Scharf, CEO

We’re giving our clearest line of sight to expenses for 2021. Beyond that, we believe there are significant additional gross saves to take out, but we also need to ensure continued investments for risk and regulatory work. We intend to show net reductions year-over-year but are not giving specificity beyond 2021 at this point.

Operator, Conference Operator

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

David Long, Analyst, Raymond James

Charlie, you mentioned the bank’s number one focus is building the right management team. Are there still additional changes needed on that team? Any specific positions you would like to fill?

Charlie Scharf, CEO

Our number one priority is getting the risk and regulatory work done. Building the management team is a key enabler for that. I feel great about the management team we have. Most of the dramatic changes are done; now it’s about continuing to build lower levels. There will always be some changes but I don’t foresee another wave of major changes.

David Long, Analyst, Raymond James

Where do you still need to spend to improve operations and investments to get out of remaining consent orders? Any areas earmarked?

Charlie Scharf, CEO

Refer to page 19. Of the $1.6 billion in investments embedded in our 2021 outlook, roughly a third are adds for the risk and control build-out—compliance, independent risk and similar functions. There are also investments in technology, initiatives to drive efficiencies, and product capability investments. That $1.6 billion is on a gross basis what’s embedded in our numbers for 2021.

Operator, Conference Operator

Your next question comes from the line of Gerard Cassidy.

Gerard Cassidy, Analyst

Thank you and good morning. Maybe Mike, I know net servicing income is volatile quarter-to-quarter. Can you share what went on with hedging this quarter? It was a negative number, but I know it’s volatile.

Mike Santomassimo, CFO

Gerard, sure. On the MSR asset, several things impact servicing income: higher prepays and velocity in the mortgage market impacted results, and servicing cost as modeled increased. With these assets you model future costs which can reduce or increase current period income. Servicing income reflects higher prepays and modeled servicing costs; there wasn’t anything outside of those items driving the results.

Gerard Cassidy, Analyst

And on the NII sensitivity, what kind of interest rate environment would you need to see for the drag to disappear?

Mike Santomassimo, CFO

To get to the top end of our NII range, we’re using the implied forward curve as it stands. Any steepening from here or overall increase would be helpful and additive to our outlook.

Operator, Conference Operator

You have time for one more question. Your last question comes from the line of Erika Najarian with Bank of America.

Erika Najarian, Analyst, Bank of America

Hi. Charlie, Mike—thanks for taking my question. Charlie, you mentioned the $1.6 billion of investment spend is mostly related to risk and regulatory work. As we think about potential for a higher ratio of net versus gross savings, how should we think about more offensive-type investment? One peer laid out $2.4 billion in investments with $900 million related to tech.

Charlie Scharf, CEO

Of the $1.6 billion in the investment line, roughly a third is clearly the risk and control build-out. A large chunk of the remainder is for driving efficiency. We also have investments to build the future business. How to think about gross versus net and the level of investments for the future is one reason we are cautious beyond 2021. For 2021 we have been thoughtful about what we need to do and what we want to do and that’s reflected in these numbers. We’ve hired new people on the business and digital sides. Over time we expect to invest more to build products and services that compete in the marketplace, but we want to make sure we understand what we might want to do while continuing to reduce net expenses year-over-year.

Operator, Conference Operator

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

Vivek Juneja, Analyst, JP Morgan

A quick one on expense reduction—how about expense reduction associated with the businesses you plan to exit? You said revenue would be low single digits—how about expense reduction?

Mike Santomassimo, CFO

We’ll give more color as plans develop and transactions close, but the expense impact is probably not that different relative to the revenue contribution.

Vivek Juneja, Analyst, JP Morgan

Charlie, strategically you’re making a lot of changes. A few areas: firstly CRE—what’s your outlook for that business, including your UK commercial real estate mortgage banking since you’ve cut back disclosure? Secondly, your outlook for trading since assets are down sharply year-on-year?

Charlie Scharf, CEO

CRE is an important business for us. We have a great franchise in terms of customers and people. The portfolio is not immune to losses given the environment, and we hope our reserving is appropriate. The details matter—different segments like hotels, retail, and office have different risk profiles. We believe done properly it remains an important business and we have a team that will act appropriately. On trading, when asked to reduce balance sheet we reduced trading-related assets as well. Customers understand what we’re doing. When the asset cap is lifted, we would expect to reallocate resources to build those businesses back toward prior levels and beyond as appropriate.

Vivek Juneja, Analyst, JP Morgan

One last question on mortgage banking—what are your plans? You’ve been a leading player and it’s a bigger piece for you than other large banks. You’ve cut back on correspondent—what’s your thinking going forward?

Charlie Scharf, CEO

Home lending is an important business for us to be in. It’s important across consumer, small business and wealth channels. We have a strong team—Mike Weinbach and Kristy Fercho run home lending. We will put a finer point on origination by channel, driving profitability and competing more effectively in digital originations. On servicing, we’ll be more thoughtful by portfolio on the economics of servicing and where it makes sense for us to serve versus not. Expect us to focus on profitability and customer experience in home lending. Listen, thank you very much. We appreciate all the time you’ve put in, and we know the revised disclosures create a lot of work for you. Hopefully it helps have a better conversation going forward as we talk about the future. We’ve got a lot of work to do. I believe we’re making great progress and when headwinds abate and our actions are reflected in performance, I’m optimistic about the opportunity. Thanks again and take care.

Operator, Conference Operator

Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation.