Earnings Call Transcript
WELLS FARGO & COMPANY/MN (WFC)
Earnings Call Transcript - WFC Q2 2022
Operator, Operator
Welcome, and thank you for joining the Wells Fargo Second Quarter 2022 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. Please note that today's call is being recorded. I would now like to turn the call over to your host, John Campbell, Director of Investor Relations. Sir, you may begin the conference.
John Campbell, Director of Investor Relations
Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss second quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second quarter earnings materials, including the release, financial supplement, and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.
Charlie Scharf, CEO
Thanks very much, John. Good morning. I'll make some brief comments about our second quarter results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review second quarter results in more detail before we take your questions. Let me start with some second quarter highlights. We earned $3.1 billion in the second quarter, our results included a $576 million impairment of equity securities, predominantly in our venture capital business due to market conditions. Revenue declined as growth in net interest income driven by rising interest rates and higher loan balances was more than offset by lower non-interest income as market conditions negatively impacted our venture capital, mortgage banking, investment banking, and wealth management advisory businesses. We continued to execute on our efficiency initiatives and our expenses declined from a year ago even with inflationary pressures and higher operating losses. We had broad-based loan growth with both our consumer and commercial portfolios growing from the first quarter and a year ago. Credit performance remained strong; our allowance reflected an increase due to loan growth. While we're monitoring risks related to continued high inflation, increasing interest rates, and the slowing economy, which will impact our customers, consumers and businesses have been resilient so far. When looking at simple averages across our entire portfolio, consumer deposit balances per account increased from first quarter and a year ago and remained above pre-pandemic levels. Overall, our consumer deposit customers' health indicators, including cash flow, payroll, and overdraft trends are not showing elevated risk concerns. However, we're closely monitoring activity by segment for signs of potential stress and for certain cohorts of customers, we have seen average balances steadily decline to pre-pandemic levels following the final federal stimulus payments early last year and their debit card spend has also been declining. Overall, debit card spending was up 3% compared to a year ago when consumers received stimulus payments, and inflation appears to be impacting certain categories of spending, including a 26% increase in fuel driven by higher prices, while discretionary categories like apparel and home improvement spending were down double digits, driven by fewer transactions. Credit card spend increased 28% from a year ago. Above the industry trend driven by the new products we launched last year, with double-digit increases across all spend categories. However, spending while still strong started to slow in May and June. Consumer credit card utilization rates remain below pre-pandemic levels. Payment rates remained strong and delinquency rates remain low. Our small business portfolio continues to perform well in the aggregate in both delinquencies and losses. Leading indicators such as payment rates, deposit levels, utilization, and revolving debt trends do not yet indicate signs of stress. Loan demand from our commercial customers remained strong with broad-based balance and commitment growth. Our commercial customers' credit performance remained strong with exceptionally low net charge-offs, and non-accrual loans were at their lowest level in over 10 years. However, we are monitoring early warning indicators across portfolios including cash flow activity, credit line utilization rates, and industry fundamentals for inflation impacts. Now let me update you on the progress we've made on our strategic priorities. Our work to build an appropriate risk and control infrastructure is ongoing and remains our top priority, but we also continue to invest in our businesses to better serve our customers and to help drive growth. This week, we launched our fourth new credit card offering in the past year, Wells Fargo Autograph. Our latest card reflects our momentum in growing our consumer credit card business with new accounts up over 60% from a year ago. We're focused on delivering competitive offerings and our new reward card provides three times points across top spending categories including restaurants, travel, and gas stations. This is the first of several rewards-based cards we plan to introduce. We continue to improve the digital experience in the second quarter with the relaunch of Intuitive Investor, our automated digital investing platform. We simplified the account opening process and created a faster and better experience for both new and experienced investors. During the second quarter, we began rolling out Wells Fargo Premier, which provides differentiated products and experiences focused on strengthening and growing our affluent client relationships. We are working towards offering one set of products and services that are tailored to the needs of these customers regardless of where they sit within our individual businesses. We will be rolling out more enhancements in the coming quarters to provide a more compelling offering for Premier clients. We started to roll out overdraft policy changes late in the first quarter, which included the elimination of fees for non-sufficient funds and overdraft protection transactions. Additional changes will be rolled out in the second half of this year, including providing customers who overdraw their account with a 25-hour grace period to cure a negative balance before incurring an overdraft fee, giving early access to eligible direct deposits, and providing a new easy short-term credit product. We expect these changes will help millions of consumer customers avoid overdraft fees and meet short-term cash needs, and we continue to review other ways we can help consumers manage their finances. We also continue to invest to better serve our commercial customers. And early in the second quarter, Tim O'Hara joined the Corporate Investment Bank from BlackRock as Head of Banking. Tim's expertise and insights will help us maximize our potential and achieve even greater partnership and strategic dialogue with our corporate and institutional clients, and he complements the strong leadership team in our markets and commercial real estate businesses, who have helped us navigate recent market volatility. We believe we have a significant opportunity to serve our existing commercial customers with corporate and investment banking products in a way that works within our existing risk tolerance. We also believe that for us to be successful as a company, we must consider a broad set of stakeholders in our decisions and actions. Last week, we announced that Otis Rolley will be joining Wells Fargo from the Rockefeller Foundation as the Head of Social Impact, leading community engagement and enterprise philanthropy, including the Wells Fargo Foundation. We continue to move forward in the area of ESG with the announcement of our 2030 reduction targets for greenhouse gas emissions attributable to financing activities in the oil and gas and power sectors. As homeownership remains out of reach for too many families, we announced an effort to support new home construction, renovation, and repair of more than 450 affordable homes across the US in collaboration with Habitat for Humanity and Rebuilding Together. We also launched our special purpose credit program to help minority homeowners refinance mortgages that Wells Fargo currently services. We continue to support our small business customers through this time of uncertainty, including launching the small business resource Navigator, which connects small business owners to potential financing options and technical assistance through community development financial institutions across the country. We are also helping women entrepreneurs by doubling our support for women-owned businesses through the Connect to More program with complementary mentorship opportunities. We published our inaugural diversity, equity, and inclusion report, which highlights the meaningful positive results we've made on our DE&I initiatives. For example, in the US, our external hiring of individuals from racially or ethnically diverse populations increased by 27% in 2021 compared to 2020, and approximately one-third of all internally promoted executives last year were racially or ethnically diverse. As I've said in the past, advancing DE&I at Wells Fargo is a long-term commitment, not a project, and we continue to pursue many of the initiatives in the report and look for ways to deepen our impact. Let me just make some summary comments before turning it over to Mike. The Federal Reserve's commitment to an aggressive rate hike cycle as a means to tame high persistent inflation continues to fuel market volatility and is expected to slow the economy, which will impact our consumer and commercial customers. Despite the economic environment, I remain optimistic about our future. Credit quality remains strong, and we expect net interest income growth to continue given rising interest rates which should more than offset any further near-term pressure on non-interest income. We remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we've discussed in the past, on a run-rate basis in the second half of this year, and then we will discuss our path to 15%. This year's Federal Reserve stress test confirmed our strong capital position and our ability to support our customers and communities while also continuing to return excess capital to shareholders through dividends and common stock repurchases. As we previously announced, we expect to increase our third quarter common stock dividend by 20% to $0.30 per share, subject to approval by the company's Board of Directors at its regularly scheduled meeting later this month. I will now turn the call over to Mike.
Mike Santomassimo, CFO
Thanks, Charlie, and good morning, everyone. Net income for the quarter was $3.1 billion or $0.74 per common share, which included strong growth in net interest income as we are beginning to see the positive impact of higher interest rates. Our results included a $576 million impairment of equity securities, predominantly in our venture capital business due to the market conditions, which drove a total loss from equity securities of $615 million in the second quarter. Recall that a year ago, when the markets were strong, our results included $2.7 billion of gains on equity securities. While credit quality remains strong, our results included a $235 million increase in the allowance for credit losses due to loan growth. This follows six consecutive quarterly decreases in the allowance, including $1.1 billion in the first quarter and $1.6 billion a year ago. We highlight capital on Slide 3. Our CET1 ratio was 10.3%, down approximately 20 basis points from the first quarter as declines in AOCI and dividend payments were largely offset by our second quarter earnings. Our CET1 ratio also reflected actions we took to proactively manage our level of capital and risk-weighted assets as well as reduce our AOCI sensitivity by moving more securities to held-to-maturity and hedging securities in our available-for-sale portfolio. Additionally, we did not buy back any shares in the second quarter. But as Charlie highlighted, the recent stress test results confirmed our capacity to return excess capital to shareholders through dividends and common stock repurchases. We will continue to be prudent and consider current market conditions, including interest rate volatility, potential loan and risk-weighted asset growth, as well as any potential economic uncertainty with respect to the amount and timing of share repurchases over the coming quarters. Our 10.3% CET1 ratio remained well above our required regulatory minimum plus buffers. As a reminder, based on the recent federal stress test, our stressed capital buffer for October 1, 2022 to September 30, 2023 is expected to be 3.2%, which would increase our regulatory minimum plus buffers by 10 basis points to 9.2%. Turning to credit quality on Slide 5. Our charge-off ratio remained near historical lows and was only 15 basis points in the second quarter. As we previously discussed, losses are not expected to remain at these low levels and we are closely monitoring our commercial and consumer customers for signs of stress, and we remain very disciplined in our underwriting. Commercial credit performance remained strong across our commercial businesses with only 2 basis points of net charge-offs in the second quarter, which included net recoveries in our commercial real estate portfolio. We also had net recoveries in our consumer real estate portfolios and total consumer net charge-offs declined slightly from the first quarter to 33 basis points of average loans as lower losses in auto and other consumer loans were partially offset by higher credit card losses. Non-performing assets decreased $878 million or 13% from the first quarter. Lower levels of consumer non-accruals were driven by a decline in residential mortgage non-accrual loans due to sustained payment performance of borrowers after exiting COVID-related accommodation programs. Commercial non-accruals continued to decline, and as Charlie highlighted, we are at their lowest levels in over 10 years. Our allowance for credit losses at the end of the second quarter reflected a continued strong credit performance, with an increase that was due to loan growth. On slide 6, we highlight loans and deposits. Average loans grew 8% from a year ago and 3% for the first quarter. Period-end loans grew for the fourth consecutive quarter and were up 11% from a year ago, with increases in both our commercial and consumer portfolios. I'll highlight the specific growth areas when discussing operating segment results. Average loan yields increased 19 basis points from a year ago and 27 basis points from the first quarter, reflecting the benefit of higher rates. Average deposits increased $10 billion or 1% from a year ago, with growth in consumer banking and lending offsetting declines across our other operating segments. The decline in average deposits from the first quarter reflected the seasonality of tax payments as well as outflows from commercial and wealth clients. Our average deposit cost increased one basis point from the first quarter, driven by corporate and investment banking. As I previously highlighted, we would expect deposit betas to accelerate as rates continue to rise and customer migration from lower yielding to higher yielding deposit products would likely increase as well. Turning to net interest income on slide 7. Second quarter net interest income increased $1.4 billion or 16% from a year ago and $977 million or 11% from the first quarter. The growth from the first quarter was primarily driven by the impact of higher rates, which increased earning asset yields and reduced premium amortization from mortgage-backed securities. We also benefit from higher loan balances and one additional day in the quarter. We started the year expecting full year net interest income to grow by approximately 8% compared with 2021. Last quarter, we raised our guidance to an increase in the mid-teens. With the market now expecting not only more rate hikes but also larger ones, we currently expect net interest income in 2022 to increase approximately 20% from 2021. And as a reminder, net interest income will ultimately be driven by a variety of factors, including the magnitude and timing of Fed rate increases, deposit betas, and loan growth. On slide 8 and noninterest income. This quarter, we included highlighting noninterest income to show that the decline from both the first quarter and a year ago was primarily driven by two cyclical businesses. Mortgage banking, which has slowed in response to higher interest rates and our affiliated venture capital and private equity businesses, which a year ago generated elevated gains but recognized impairments in the second quarter of this year due to significantly different market conditions. While all other noninterest income included both positive and negative impacts, it was actually up slightly from the first quarter. The decline in all other noninterest income from a year ago was primarily driven by the impact of last year's divestitures. Turning to expenses on slide 9. Noninterest expense declined 3% from a year ago as expenses related to divestitures came out of the run rate, and we continue to make progress on our efficiency initiatives. Operating losses increased $273 million from a year ago, primarily driven by increased litigation expense, which included a recovery in the second quarter of last year, and higher customer remediation expense predominantly for a variety of historical matters. Customer remediation matters are complex and take a significant amount of time to resolve and quantify the full impact. While we've made progress, we have more to do to resolve the remaining items. We're halfway through the year. And while we've had higher operating losses than we expected, revenue-related expenses are trending lower than expected. Our results in the first half of the year also reflected the progress we're making on our efficiency initiatives with lower headcount and reductions in both professional and outside services expense and occupancy expense. We expect to continue to make progress on our efficiency initiatives. Putting all these factors together, we still expect our full year 2022 expenses to be approximately $51.5 billion, as lower revenue-related expenses are expected to offset higher operating losses. But as a reminder, we have outstanding litigation, regulatory matters, and customer remediations, and the related expenses could be significant and hard to predict, which could cause us to exceed our $51.5 billion outlook. Turning to our operating segments, starting with Consumer Banking and lending on slide 10. Consumer and Small Business Banking revenue increased 17% from a year ago, driven by the impact of higher interest rates and higher deposit balances. Our deposit pricing has been stable, but we expect deposit betas to increase over time. As Charlie highlighted, the deposit-related fees were impacted by the overdraft policy changes we started to roll out late in the first quarter, which included the elimination of fees for nonsufficient funds and overdraft protection transactions. Additional changes will be rolled out in the second half of this year, which will further reduce deposit-related fees. Home lending revenue declined 53% from a year ago and 35% from the first quarter driven by lower mortgage originations and compressed margins, given the higher rate environment and continued competitive pricing in response to excess capacity in the industry. After increasing over 150 basis points in the first quarter, mortgage rates increased over 100 basis points in the second quarter. The impact of higher rates also reduced revenue from the resecuritization of loans purchased from securitization pools. The mortgage market is expected to remain challenging in the near term, and it's possible that we have a further decline in mortgage banking revenue in the third quarter. We are making adjustments to reduce expenses in response to lower origination volumes, and we expect these adjustments will continue over the next couple of quarters. Credit card revenue was up 7%, auto revenue increased 5%, and personal lending was up 7% from a year ago, primarily due to higher loan balances. Turning to some key business drivers on slide 11. Our mortgage originations declined 10% for the first quarter, with growth in correspondent partially offsetting the decline in retail originations. Refinances as a percentage of total originations declined to 28%. Average home lending loan balances grew 2% for the first quarter, driven by the fourth consecutive quarter of growth in our nonconforming portfolio, which more than offset declines in loans purchased from securitization pools or EPBOs. Turning to auto. Origination volume declined 35% from a year ago and 26% from the first quarter due to increased pricing competition, credit tightening actions, and ongoing industry supply pressures. Turning to debit card. While debit card spend increased 3%, transactions were relatively flat from a year ago, as increases in travel and entertainment were offset by declines in apparel and home improvement. Credit card point-of-sale purchase volume was up 28% from a year ago with the largest increases in fuel travel and entertainment. The increase in point-of-sale volume and the launch of new products helped drive a 19% increase in credit card balances from a year ago, we remain disciplined in our underwriting and new credit card accounts. Turning to Commercial Banking results on slide 12. Middle Market banking revenue increased 27% from a year ago, driven by higher net interest income from the impact of higher rates and loan balances. Asset-based lending and leasing revenue increased 8% from a year ago, driven by higher loan balances. Noninterest expense increased 2% from a year ago, primarily driven by higher operating costs. Efficiency initiatives drove lower personnel expense with headcount down 9% from a year ago. Average loan balances have grown for four consecutive quarters and were up 13% from a year ago. Utilization rates continue to increase, but they are still not back to historical levels. Clients have increased borrowings to rebuild inventory and to support working capital growth, both of which have been impacted by higher inflation. We also had momentum from adding new clients in middle market banking, and similar to prior periods, loan growth was driven by the larger clients. Average deposits declined 2% from a year ago driven by actions to manage under the asset cap. Deposit pricing has been relatively stable, but we expect deposit betas will continue to increase. Turning to Corporate and Investment Banking on slide 13. Banking revenue increased 4% from a year ago, primarily driven by stronger treasury management results given the impact of higher interest rates as well as higher loan balances. Investment banking fees declined, reflecting lower market activity and a $107 million write-down on unfunded leveraged finance commitments due to the market spread widening. Average loan balances were up 20% from a year ago, with broad-based loan demand driven by a modest increase in utilization rates due to increased working capital needs given inflationary pressures. Commercial real estate revenues grew 5% from a year ago, driven by loan growth and higher interest rates. Average loan balances were up 22% from a year ago with the disruption in the capital markets increasing demand for bank financing and line utilization. Markets revenue increased 11% from a year ago, primarily due to higher foreign exchange and commodities trading revenue as clients position themselves for rising rates, quantitative tightening, and growing recessionary concerns as well as higher equities trading. Average deposits in Corporate and Investment Banking were down 14% from a year ago, driven by continued actions to manage under the asset cap. There's been more deposit pricing pressure in corporate banking than we've seen in Commercial Banking. On slide 14, Wealth and Investment Management revenue grew 5% from a year ago as the increase in net interest income due to the impact of higher rates and higher loan balances more than offset the declines in asset-based fees, driven by lower market valuations as well as lower retail brokerage transaction activity. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so second quarter results reflected market valuations as of April 1st, and third quarter results will reflect the lower market valuations as of July 1st. The S&P 500 and fixed income indices declined again in the second quarter and approximately two-thirds of our advisory assets are in equities. So, there will be another step down in our asset-based fees next quarter. Average loans increased 5% from a year ago, driven by continued momentum in securities-based lending. Average deposits declined 1% from a year ago and were down 7% from the first quarter as clients reallocate cash into higher yielding alternatives. Deposit pricing increased modestly. Slide 15 highlights our corporate results. Both revenues and expenses declined from a year ago and were impacted by the divestitures of our Corporate Trust Services business, Wells Fargo Asset Management, and the sale of our student loan portfolio. These businesses contributed $580 million of revenue in the second quarter of 2021, including the gain on the sale of our student loan portfolio, and they accounted for approximately $375 million of the decline in expenses in the second quarter compared with a year ago, including the goodwill write-down associated with the sale of our student loan portfolio. The decline in revenue in corporate was also due to lower equity gains in our affiliated venture capital and private equity businesses. In summary, while our net income in the second quarter declined driven by lower venture capital and mortgage banking results, our underlying trends reflected our improving earnings capacity with expenses declining and strong net interest income growth from rising rates and higher loan balances. As we look ahead to the second half of the year, we expect the growth in net interest income to more than offset any further pressure on non-interest income. While we expect credit losses to increase from historically low levels, our consumer and commercial customers are not showing any meaningful signs of stress. As I highlighted earlier, our expense outlook for the year is unchanged at approximately $51.5 billion subject to the risks to the outlook discussed earlier. Finally, our stress test results demonstrated our capacity to return excess capital to shareholders, including the expected 20% increase in our third quarter common stock dividend subject to board approval. We will now take your questions.
Operator, Operator
At this time, we will now begin the question-and-answer session. And our first question today will come from Ken Usdin of Jefferies. Your line is open, sir.
Ken Usdin, Analyst
Thanks. Good morning, guys. I appreciate the continuity of the expense guide and also the potential variability. Mike, I was just wondering if you could expand on that. Obviously, the operating losses are hanging higher this year than they had been. So just wondering how you start to get a sense of what those look like going forward? And then also just the underlying, as you mentioned, coming in better because of revenue, just any sense of all just how your net saves are looking underneath the surface as well. Thank you.
Mike Santomassimo, CFO
Thanks, Ken. I want to begin by discussing the efficiency program we've been focusing on for about a year and a half. It's progressing as expected. The strategy to improve efficiency across our core business lines and operating groups is on track. However, operating losses this year have been greater than we anticipated at the start. These can be somewhat unpredictable as we address our backlog. As per our accounting standards, we would account for any known issues or estimates. We're continuously monitoring our pipeline of items. Despite the rise in operating losses, they have largely been balanced by reductions in revenue-related expenses. We remain confident in the $51.5 billion target we set earlier this year and will keep addressing our pipeline. Any significant developments that arise will be highlighted moving forward.
Ken Usdin, Analyst
Yes. And as a follow-up, I know as you guys talked through the recent conference season, it's hard to get a crystal ball with so many moving parts as you think about 2023, but can you just help us try to at least start to think through some of the pushes and takes and can you continue to push us towards getting costs down next year? Thanks, guys.
Charlie Scharf, CEO
Hey, Ken, this is Charlie. Let me take that. The way we think about it is as we sit and look towards next year, we certainly know we have some increases to contend with, such as the full year impact of inflationary pressures that we see this year. And we know we’ve got some increases in FDIC insurance premiums. But as we start thinking about next year, and we really just started the budget process, our mindset going into it is that we have significant opportunities to become more efficient. We've been – and it's just more of the same in terms of what we've been talking about. And this has nothing to do with getting efficiencies out of the risk-related work it assumes that all of that investment continues. But we do go into this process with the expectation that we want to see net expense reductions. Now, just usual caveats that exclude revenue-related expenses, which could go up or some of this – the lumpiness that we've talked about, just as we think – but as we think about that core expense base, we do continue to see opportunities, and we'd like you to see it as well.
Operator, Operator
Thank you. The next question comes from John McDonald of Autonomous Research. Your line is open.
John McDonald, Analyst
Hi. Good morning, guys. I wanted to ask about capital. It looks like you're entering next quarter with over 100 basis points buffer to your pro forma reg minimums. How should we think about where you'll manage capital to and your potential buyback capacity going forward? And given that you paused for SCB partly because of SCB uncertainty. Will you get to some level of buybacks likely moving forward here? Thank you.
Charlie Scharf, CEO
Yeah. Hey, John, it's Charlie. Why don't I start and then Mike can chime in. Yeah. I mean, I think your – no question, we – clarity of SCB for us at this point does really help. As we sit here today and we look at what's happening in spreads and what's happening with the 10-year that was at 292 right now. But we do want to be a little bit just conservative in terms of how we think about managing the capital base. So just to be – I think to be clear, as we sit here today, we're very happy with the amount of capital that we have, including, as we think about that 10 basis points increase that will impact us. We certainly have capacity to buy shares back at this point. And as I think Mike alluded to, we just probably want to wait a little bit just to see what happens in terms of the volatility in spreads and rates before we start to do that. But we certainly at a point, we'll do it. We'll just see exactly when that is.
Mike Santomassimo, CFO
Yeah. Maybe I'll just add one or two things, John. I think as Charlie highlighted, we feel good about where we are. I would just point out, we are not – our G-SIB score is going to stay the same as we go into next year as well. So we don't have another uptick as we go into the beginning of next year. So that's good. And at this point, we don't feel like we need to build capital from where we are to build a bigger buffer and then we'll just be prudent on buybacks as we go through, and through the next few quarters.
John McDonald, Analyst
Okay. And Mike, maybe I can ask a follow-up on the NII revised outlook. What kind of cadence do you see between the next two quarters? It seems like you'd have a big step-up both this coming quarter and the third quarter and then again in the fourth? And then within that NII equation, if you still have this funding gap between loan growth being very strong and deposit growth slowing, is there still plenty of cash to use to fund the loan growth? Thank you.
Mike Santomassimo, CFO
I believe the progression over the next few quarters will depend on how the Federal Reserve adjusts rates. I anticipate a steady increase quarter-to-quarter without any significant fluctuations between the periods. We are likely to see some loan growth continue, though it may moderate slightly compared to the first half of the year. Additionally, the industry has experienced a slight decline in deposits, as reflected in our results. For us, there has been a small reduction in the period-end balances across all segments, with the consumer segment seeing the smallest decrease, which is a positive sign. Over the past couple of years, we have reduced much of our wholesale funding, so we have sufficient capacity to obtain the liquidity required to support our clients.
John McDonald, Analyst
So that loan growth funding is coming from your cash balances and other sources of liquidity that you have?
Mike Santomassimo, CFO
Yes. Exactly.
Operator, Operator
Thank you. The next question comes from Steven Chubak of Wolfe Research. Your line is open, sir.
Steven Chubak, Analyst
Hey, good morning. So I wanted to start off with a question just clarifying some of the NII guidance. Mike, because you noted that it's a ratable step up and it implies – the guidance implies about a $12 billion run rate, at least in the back half for NII on an FTE basis. Is it reasonable for us to assume or expect that the exit rate for the year is going to be north of $50 billion? I just want to make sure I clarify that.
Mike Santomassimo, CFO
Well, Steve, I know you're great at modeling this. So I'll leave that to you. As you mentioned, we’re anticipating increases as we progress through the next quarters, similar to what we experienced this quarter compared to last. This trend will carry into the third and fourth quarters. However, it's challenging to use one quarter as a benchmark for the entire following year. That said, the exit rate is expected to be significantly higher than our current position. We will need to assess the environment at that time to determine if it's a stable rate to build from or if other factors might interfere. Recently, there has been considerable volatility in the long-end, and we're also monitoring loan growth to see if it maintains its current pace. There are numerous factors that will affect what 2023 looks like, but as you pointed out, our exit rate is likely to be quite strong.
Steven Chubak, Analyst
Thanks. Mike, and just for one follow-up also on the NII guide. Just wanted to get a better sense as to what's being contemplated in terms of deposit paydown, the deposit paydown and repricing just came in much better than expected this quarter. You've cited the benefits of the deposit and funding optimization you've executed these past few years. Just wanted to get a sense of how you're thinking about that deposit trajectory that's underpinning some of the NII guidance.
Mike Santomassimo, CFO
We are not anticipating much growth in balances from their current levels. We'll need to monitor the situation, especially if we continue to see deposit outflows. However, our current mix of deposits positions us well, as evidenced by the results so far, showing a significant increase in consumer deposits as part of the overall portfolio compared to just a couple of years ago. Regarding beta, it has progressed as expected in all segments, with little variance from what we anticipated at this point in the rate cycle. If the Fed raises rates by 75 basis points at the next meeting, we will enter a territory not seen in the last rate hike cycle, which will likely lead to an increase in betas. The pace of this increase and whether we need to be careful on the wholesale or commercial side remains to be seen, but we are agile and can respond accordingly. So far, everything has unfolded as we predicted, and we will closely monitor it in the coming months. This quarter and into the fourth quarter should provide us with valuable data points to guide our longer-term thinking.
Steven Chubak, Analyst
Great color. Thanks for taking my questions.
Operator, Operator
Thank you. Our next question comes from Scott Siefers of Piper Sandler. Your line is open.
Scott Siefers, Analyst
Good morning guys. Thank you for taking the question. Just as it relates to revenues overall, the NII trajectory, obviously, quite strong and in a sense seems mostly self-evident for now. But I was hoping, Mike, you could discuss, please, fee trajectory in a bit more detail. I guess, we’re hovering in a $7 billion or $7.5 billion a quarter range if we exclude some of that noise from the equity marks, the securities gains, etc. In your mind, are we at a low and can we grow from that base? I know you touched on mortgage, maybe coming down and then we got wealth, but just sort of puts and takes as you see that, if you could, please?
Mike Santomassimo, CFO
Thanks, Scott. I want to walk you through some key fee lines to give you an idea of the current dynamics. On the deposit side, we experienced a decline this quarter primarily due to the adjustments we made regarding overdraft fees. We anticipate further decreases as we progress through the year, likely more pronounced in the fourth quarter than in the third, as we implement additional changes. Aside from this, there is generally a lot of stability in that line, driven by underlying activities. The performance of the investment advisory and asset-based fee line will largely depend on market conditions, particularly in equity and fixed income markets. As the market stabilizes, it will support that fee line, which is our largest source of revenue. Investment banking fees are mostly influenced by market activity, and we saw low fees this quarter, including some minor adjustments in leveraged finance. It's difficult to see those fees declining much further, but they will be contingent upon activity levels. Card spending remains strong, despite a slight slowdown in May and June, but overall, consumer spending in the card space is robust. In mortgage banking, as you pointed out, we expect a slight drop in the third quarter, though it starts from a lower base, meaning even significant percentage drops will involve smaller dollar amounts at this stage. We will also need to monitor how market trends affect equity securities. Overall, I hope we’re moving toward greater stability, but some of that will depend on market developments.
Scott Siefers, Analyst
Thank you very much. I would like to shift our discussion back to CCAR and the SCB. I may have misunderstood your comments over the past few quarters. I had the impression that you were preparing us for a potentially worse outcome regarding the SCB. Can you clarify how the CCAR and the SCB turned out relative to your expectations, especially since it hardly changed?
Charlie Scharf, CEO
Yes. We mentioned repeatedly that we believed it could increase, and it did. However, we only have limited insight into the factors that influence its rise or fall each year. While much information is publicly available, some modeling techniques can be quite complex. We were satisfied with the outcome and, like many, we invest significant effort in understanding the risk drivers of the balance sheet to position ourselves for favorable results. Ultimately, we were pleased with where things ended up.
Scott Siefers, Analyst
Okay. All right. Perfect. Thank you guys very much. I appreciate it.
Operator, Operator
Thank you. The next question comes from John Pancari of Evercore ISI. Your line is open.
John Pancari, Analyst
Good morning.
Charlie Scharf, CEO
Hey, John. Good morning.
John Pancari, Analyst
Just on the deposit front, just to go back to that. Just want to confirm. So from here your best estimate now is to overall deposit balances are relatively stable in the back half of the year. Or do you think you could see some incremental declines, just as betas are rising?
Mike Santomassimo, CFO
I think you can certainly see a little bit more decline from here potentially. I think that’s not an unreasonable expectation. Exactly timing and how that’s going to progress, I think, is hard to predict with any real degree of accuracy, just given the environment we’re in right now. But I think it’s possible they can be out a little bit more from here.
John Pancari, Analyst
Thanks, Mike. Regarding credit, I’d like to know your views on the potential for reserve builds. I understand that you increased reserves for loan growth this quarter, but from a CECL standpoint, looking at your economic scenarios, why didn’t you see the need for a significant reserve build this quarter? Additionally, as the Fed continues to tighten, what do you think is a potential target for reserves? Do you consider the levels seen during the pandemic to be excessive, and can you provide some insight into the scale?
Charlie Scharf, CEO
As we consider our process, which is quite similar to others in many respects, we are evaluating several scenarios that require careful consideration for our modeling. For several consecutive quarters, we have placed a significant emphasis on unfavorable scenarios. Some of these scenarios are quite extreme, and they vary in severity. We believe we have adequately captured all that we can assess or predict at this moment, based on the factors we need to analyze for our current reserves. It's important to note that we have not reduced all the reserves we set aside during the COVID period. When examining each of the underlying asset classes, we believe our current reserves are appropriate. In the near term, it seems unlikely that we will increase them to the levels we had during the pandemic, but this is something we will need to monitor as conditions change over the next few quarters. Nevertheless, we already have a significant focus on those downside scenarios, and our discussions each quarter are thorough to evaluate our position. At this stage, we feel that our reserves align with our projections for the duration of those loans.
Scott Siefers, Analyst
Got it. One more question about credit quickly. Regarding the $170 million write-down in unfunded leverage finance commitments, is there a risk of future write-downs? Is that mainly based on market spreads? Also, can you remind us of your total leveraged loan exposure in terms of commitments and outstanding amounts?
Mike Santomassimo, CFO
Yes, you should view these as unfunded commitments, not funded. As you consider them, remember that they are not outstanding but rather unfunded commitments. Over time, it’s important to differentiate between term loans and high yield. Although we do not disclose the exact number for high yield, it is quite small relative to the balance sheet. The term loan component, which typically offers more stability and less volatility, is the larger proportion. All these deals could experience further spread widening due to the current environment. At the close of the quarter, we made our best judgment on where we believed the deals would settle, and we will see how this unfolds in the coming months.
Scott Siefers, Analyst
Okay, great. Thanks, Mike.
Operator, Operator
Thank you. The next question comes from Erika Najarian of UBS. Your line is open.
Erika Najarian, Analyst
Hi, good morning. I just had 1 more follow-up question. And Mike, I apologize if this is the umpteenth question on NII. I appreciate all your color in terms of what's driving the NII guide of 20%. I was wondering if you could better quantify the deposit beta that you would expect by year-end on a cumulative basis. Appreciate that you said it would accelerate. But given that some of your peers have given specific guides and given how much the quality of your deposit base has changed for the better over the past several years, I'm wondering if you could give us a sense of what that beta range that you're assuming by year-end on a cumulative basis that underpins that guide?
Charlie Scharf, CEO
I find it challenging to provide an exact number at this stage in the cycle. There are many variables to consider, especially as we approach year-end and with the uncertainty surrounding interest rates and the Fed's actions. It's difficult to confidently pinpoint one specific figure. However, I do believe that as we anticipate the upcoming rate increases, we can expect to see an acceleration. Currently, the core deposit rates for the major banks haven't seen much change, but we should start to notice shifts with the next few rate raises, although the initial responses will still be relatively small. That said, the rate pickups will grow depending on the Fed's pace toward year-end. Conversely, in the corporate investment bank sector, those deposits are already showing significant increases. When assessing cumulative betas and comparing different banks, it's crucial to consider the composition of deposits. The corporate investment bank deposits constitute a smaller segment for us, but they are likely to move faster than we have projected, albeit still being a minor part of the overall mix. We'll keep monitoring the situation and provide insights as we can, but predicting cumulative betas by year-end remains difficult.
Ebrahim Poonawala, Analyst
Hey, good morning.
Operator, Operator
Good morning. Just following up on that, Mike. So I appreciate you don't want to get pinned down on deposit beta, but is it fair for us to assume just given the mix shift in deposits given how you manage the balance sheet during the pandemic, we should see your deposit beta at least track in line or maybe even lower relative to the last rate cycle?
Mike Santomassimo, CFO
I believe that when you consider each asset and type of deposit, they are performing similarly to what we experienced last cycle. However, the composition of our deposit base has changed significantly since then. If the beta remains consistent with the last cycle, the new mix would suggest a lower average deposit beta. There is still a lot to unfold as we progress through the year, particularly with each of the underlying products.
Ebrahim Poonawala, Analyst
That's fair. I just wanted to make sure we weren't missing something because there are peers who probably are expecting a higher beta than last cycle. So I just wanted to hear you talk through that. And as a follow-up, and I know these are extremely tough in terms of when you think about the market, private market valuations on your equity investments. But give us a sense of just where the markets are in terms of taking these markdowns, should we anticipate some more negative marks in a world where there's no big turnaround in equity markets over the next few quarters. I just want to make sure like expectations are level set for that line and how that impacts fees and PPNR?
Mike Santomassimo, CFO
Yes. Sure. Look, and again, it really all depends on what happens in the public equity markets, which is in part driving those declines. So if we see some stabilization, that's constructive. If we see much deeper declines, that's we'll have to evaluate how that impacts these portfolio investments. And obviously, if the market starts to rally, that's even more constructive. So I think the public equity markets and will be a good guide to how to think about whether or not we have to evaluate whether there's more reductions here or not.
Ebrahim Poonawala, Analyst
Got it. And it looks like we're tracking to a 15% drop, say, maybe by the end of the year? That was a statement. I didn't expect you to respond. Thanks for taking my questions.
Charlie Scharf, CEO
No problem. I'm glad you made it rhetorical.
Operator, Operator
Thank you. The next question comes from Gerard Cassidy of RBC Capital Markets. Your line is open.
Gerard Cassidy, Analyst
Thank you. Good morning, Charlie. Good morning, Mike. Mike, can you give us some color on you guys had some success in generating gains from your trading activities and your debt securities. Can you just share with us what drove that and what your expectations might be in the next quarter or two?
Mike Santomassimo, CFO
Yeah. I mean, on the trading side, it was really good performance in our macro fixed income businesses, commodities, FX, a little bit of rates. And I think that's all what contributed to it. And we'll see, obviously, the continued performance, there is subject to what we see happening in the markets. It's not – we're not out there taking any kind of incremental risk that we normally take. It's really helping clients facilitate the flow that they've got there, and so we'll see how that goes. And as you can see, it's a relatively smaller number for us versus maybe some others. As you think about the securities portfolio, I wouldn't assume, there'll be continued gains there. I think we did do a small, small remixing of our securities portfolio. Some of it was RWA. Some of it was RWA optimization I think selling some UMBS is buying Ginnies that where spreads were pretty tight at the time we did it. You save an RWA you don't give up much yield. And there are a few other minor optimizations we did there.
Gerard Cassidy, Analyst
Very good. And then as a follow-up question, when it comes to your professional and outside services expenses, can you frame out for us how much of that is tied to your current working with the regulators to lift the asset cap in the cease and desist order? When that day eventually arrives? Will the professional and outside services numbers really have a kind of meaningful downward move, because you've resolved that issue?
Charlie Scharf, CEO
This is Charlie. Let me take a shot at this first. Listen, I think we have the work we're doing on all of the risk and infrastructure work, which supports the regulatory matters. It's our own headcount. It's professional. It's a bunch of technology work. It really cuts across a whole series of lines. And I just don't really think it's the right time for us to start even talking about where those saves could come from. And it's just genuinely not on a radar screen in terms of what we're thinking about where it's going to go or anything like that. So I'd rather just defer the question at this point.
Gerard Cassidy, Analyst
No problem. Understood. And then, Mike, just coming back to your comment about the mix of deposits, and this is a rhetorical question as well. As we see for the first time in 15 years, consumer deposits in a higher rate environment, we'll make guys like you guys stand out maybe over some of your peers. So, good luck with that.
Charlie Scharf, CEO
Thanks, Gerard.
Operator, Operator
Thank you. The next question will come from Betsy Graseck of Morgan Stanley. Your line is open.
Betsy Graseck, Analyst
Hey, good morning.
Charlie Scharf, CEO
Hey, Betsy.
Betsy Graseck, Analyst
Charlie, I think you recently mentioned that you're in the process of strategically thinking about where mortgage fits in. And I guess I wanted to understand, what kind of framework you're assessing mortgage under. What you're thinking about that?
Charlie Scharf, CEO
Sure. That wasn't intended to be a new comment. We've been doing that since I arrived, and we have new management, including Kristy Fercho, who oversees the business. If you look back at our size in the mortgage business, we were much larger than we are now. We've continuously reassessed what makes sense for us and how large we want to be, focusing primarily on serving our customer base. If we see efficiencies, we might consider expanding, but we are not interested in being significantly larger in the mortgage business just for the sake of size. We engage in home lending because we believe it is a valuable product to discuss with our customers, and that will ultimately determine its appropriate scale. When you compare our origination volume to the size of our servicing business, the servicing side will gradually shrink, which I believe is wise for several reasons. Moving forward, we will concentrate on products that align with our financial objectives through various cycles, considering the complexities and requirements that banks must navigate, unlike others, and ensuring we achieve the right returns.
Betsy Graseck, Analyst
Yes. So is this a migration towards originate and retain and the mortgage servicing line goes away as an income statement item because it becomes non-material, or is there some middle ground that you're looking to?
Charlie Scharf, CEO
No, I would assume that a significant portion of our mortgage production will still be eligible for sale. We want to keep all options available, whether through agencies or the public market. We will continue to originate a variety of mortgages, some of which we will retain on our balance sheet when it makes sense, while others will be sold, and we will have a mortgage servicing right. If you look at our historical origination compared to what we are originating now, it will naturally decrease over time.
Betsy Graseck, Analyst
Then two other questions. One, I think you recently announced a change in your consumer head. Could you speak through rationale for that? And what the wish list is for your new head of consumer?
Charlie Scharf, CEO
Yes. Mike Weinbach, who leads our home lending businesses, implemented several initiatives. Notably, we now have a completely new management team across our card, home lending, personal lending, and auto businesses, along with new heads in other functions. Mike aimed to make significant changes in our leadership structure. We have Kleber Santos, who joined us about one and a half to two years ago, bringing experience from Capital One and McKinsey. Kleber and I have collaborated closely, and I am excited about his role. I wouldn't expect major shifts in our strategy. We are concentrating on enhancing our credit card offerings and targeting a broader customer base, improving customer service, and advancing our digital capabilities. These efforts are already in progress, and I do not foresee any substantial changes in our current trajectory, just a continuation of the trends we have discussed.
Betsy Graseck, Analyst
Great. And then just lastly on wealth. It's an important part of your offering. I'm wondering what you're doing to strategically enhance that offering to your clients, be it either through product or how you're structured integration with consumer, your IT platform and solutions. Could you just give us a couple of bullet points on what's going on there?
Charlie Scharf, CEO
Sure. Let me begin, Mike. Both Mike and I are deeply engaged in discussions with Barry and his team. If you examine our wealth business, you'll notice it's operating quite differently today compared to a few years ago. Historically, we had separate platforms for our brokerage business, two distinct private banks under different brands, a bank channel, a digital platform, and a separate platform for independent advisers. The digital platforms and the independent advisers platform received minimal investment. All these businesses were managed separately with their own product offerings and technology. Now, we have unified our products and service capabilities across all lines. We've consolidated the entire field under one leader and are enhancing our digital offerings, as well as supporting those who wish to operate independently. Our goal is to keep them here rather than looking elsewhere. We're expanding our capabilities in various areas, including investment, banking, and lending, and introducing trust services and other distribution methods that were previously unavailable. This represents a significant shift accompanied by backend changes as we transition to common platforms. We are genuinely excited about this and are just starting to see the benefits. This transformation is expected to make our firm an extremely attractive place for financial advisers, whether they prefer to be employees at Wells Fargo or operate independently while utilizing our resources.
Betsy Graseck, Analyst
And that change to moving to common platforms. What's the timing of that?
Mike Santomassimo, CFO
It's not a technology shift. What he's referring to are platforms related to our overall business operations. So, it doesn't rely on a major technology change. I also want to emphasize that Charlie mentioned Wells Fargo Premier in his remarks. This initiative is a crucial first step in offering a more distinctive and comprehensive service to our affluent clients within the consumer business, and the Wealth aspect will play a significant role in that. We currently have over 1,500 advisers in the branch system to support this. Our investment platform is already strong, and while we are in the early stages, we are focused on developing a unique service offering, which will be a major component of our wealth business moving forward.
Betsy Graseck, Analyst
Okay. And that's in conjunction with consumer business.
Charlie Scharf, CEO
Correct. Yes, I would say it's really a combination of the advisers and the products that Barry has in our wealth management business. It also includes leveraging the lending products that Clover is now responsible for, such as credit card, mortgage, and potentially auto loans among others. This integrated offering is directed toward our affluent bank customers. It's a comprehensive offering across all of our product sets, presented in a more segmented manner than ever before. We are extremely excited about it and will discuss more capabilities that we plan to roll out throughout the year.
Betsy Graseck, Analyst
Great. Thank you.
Charlie Scharf, CEO
Thanks.
Operator, Operator
Thank you. We have time for one more question today, and that will come from Vivek Juneja of JPMorgan. Your line is open.
Vivek Juneja, Analyst
Thanks for answering my questions. Charlie, I wanted to follow up on your comment about loan growth likely moderating from the first half. Can you provide any insight on that? What do you believe is driving that moderation, and which categories are affected?
Mike Santomassimo, CFO
Hey, Vivek, it's Mike. I'll take a shot at that. I just don’t think the pace we saw in the second quarter will continue. We may get pleasantly surprised and it could be a bit better than we expect. However, as we consider the uncertainty and other factors affecting clients who are currently using their lines, we anticipate some moderation moving forward. I wouldn't interpret this as a significant warning for the future. We're just being a bit prudent in how we assess that growth rate, and while there's a chance we could see some upside, it's simply reflecting what we're observing at the moment.
Vivek Juneja, Analyst
So you're not seeing any signs like sort of late in the quarter, I think, already starting to show some slowdown or some conversations with clients that are indicating that? Is that…
Mike Santomassimo, CFO
Not that I would say are super significant at this point. But when you go category-by-category and say, okay, well, spending in the card space continue to increase at the same pace given some of the uncertainty in the economic environment, we'll see maybe commercial real estate, certainly, given what we're seeing in the real estate market there, that appears like it will slow down a little bit again in the second half of the year. Somewhat driven by what we're seeing in the capital markets side of that business as well. And so with the slowdown in deals happening and rates rising, that's just as a natural slowdown there. And so I just think you go asset class by asset class, it just feels as though we'll see a little bit of moderation as we go through the rest of the year.
Vivek Juneja, Analyst
Okay. And one minor one, Mike, for you, the hung loan loss number that you gave us, was it a gross mark or is it net of fees?
Mike Santomassimo, CFO
The loan, the leveraged finance one, Vivek?
Vivek Juneja, Analyst
Yes. Yes.
Mike Santomassimo, CFO
That's after fees.
Vivek Juneja, Analyst
That's after fees. Okay. So then what's the gross mark on that?
Mike Santomassimo, CFO
I don't have the exact number in front of me. It's not materially different.
Operator, Operator
Okay. All right. Thank you.