Earnings Call Transcript
WELLS FARGO & COMPANY/MN (WFC)
Earnings Call Transcript - WFC Q3 2023
Operator, Operator
Welcome and thank you for being part of the Wells Fargo Third Quarter 2023 Earnings Conference Call. I would now like to hand it over to John Campbell, Director of Investor Relations. Please go ahead, John.
John Campbell, Director of Investor Relations
Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third 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 financials referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.
Charles Scharf, CEO
Thanks very much, John. I'll make some brief comments about our third quarter results and update you on our priorities. I'll then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start with some third quarter highlights. Our results reflected the progress we're making to improve our financial performance. Revenue, pretax provision profit, net income, diluted earnings per common share and ROTCE were all higher than a year ago. Our revenue reflected strong net interest income growth as well as higher noninterest income as we benefited from higher rates and the investments we're making in our businesses. Our expenses declined from a year ago due to lower operating losses. As expected, net charge-offs have continued to increase from historical low levels, and we increased our allowance for credit losses primarily driven by our office portfolio as well as growth in our credit card portfolio. Average commercial and consumer loans were both down from the second quarter as higher rates and a slowing economy have weakened loan demand, and we've continued to take some credit tightening actions. Average deposits also declined from the second quarter and a year ago driven by consumer spending as well as customers migrating to higher-yielding alternatives. Consumer spending remains strong with third quarter year-over-year growth rates for both credit and debit card spending increasing from the second quarter. Now let me update you on the progress we're making on our strategic priorities, starting with risk and control work, which remains our top priority. As time goes on, we continue to make the progress necessary to complete our work. I've said that we have detailed project plans which track interim deliverables, not just the date the work is to be finalized and turned over to the regulators for validation. The work is not finalized all at once. It's not as if there's a big bang conversion at the conclusion of a big body of work. It's just the opposite. Building our risk and control framework is a continuous ongoing effort. We are implementing changes throughout the life of the project, and we track effectiveness along the way. The numerous internal metrics we track show that the work is clearly improving our control environment, but we will not be satisfied until all of our work is complete. We remain focused on the work ahead even as we are making progress. But I will repeat what I've said in the past: regulatory pressure on banks with long-standing issues such as ours continues to grow. And until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions. Additionally, until our work is complete, we could find new issues that need to be remediated, and these may result in additional regulatory actions. We also continued to take steps to advance our business strategy, which includes focusing on our core business and customers. We sold approximately $2 billion of private equity investments in certain Norwest Equity Partners and Norwest Mezzanine Partners funds. We are also making a number of investments to better serve our customers. As a leader in U.S. middle-market and asset-based lending, we're focused on finding ways to support our clients with the recently announced strategic relationship with Centerbridge Partners. Our middle-market clients will have greater access to alternative sources of capital that can be used to pursue a broader set of growth and value-creation initiatives across a variety of market conditions. Branches continue to play an important role in the way we serve our customers, and we continue to optimize our network, but we also look at targeted expansions in markets where we see opportunities for our franchise. Last week, we announced we are expanding our branch network in Chicago, where we only have 7 branches today. We also continue to make enhancements to our mobile app. And in the third quarter, we launched Stock Fractions, giving Wells trade clients the ability to buy fractions of company stocks to help build a diversified portfolio regardless of stock price. Just yesterday, we announced the expanded availability of LifeSync to all consumer customers. Available on the mobile app, LifeSync is our personalized digital approach to aligning customers' goals with their money and was launched to all Wealth and Investment Management clients earlier this year. Customers' goals entered in LifeSync will be visible to bankers to enhance need-based conversations. We also expanded the capabilities of Fargo, our AI-powered virtual assistant and recently added the ability for customers to communicate with Fargo in Spanish. These enhanced capabilities are just the latest of our ongoing investments to deliver seamless and consistent experiences across all our channels. We are seeing more mobile adoption momentum, adding over 520,000 mobile active users in the third quarter, our best quarterly growth since the first quarter of 2021. We've also continued to make important hires who bring expertise to Wells Fargo and businesses we're looking to grow. Before I highlight some of our new leaders, I'd like to take this opportunity to thank Bill Daley, Vice Chairman of Public Affairs, who's retiring at the end of this year for all he has accomplished since he joined the company in 2019. Bill has been an invaluable asset to the company, and we benefited from his long experience in both the public and private sectors. During his time at Wells Fargo, he helped strengthen our relationships with communities we serve, established new programs in housing and small business, and worked to rebuild our reputation both locally and nationally. I'm pleased to have announced that Tom Nides joined Wells Fargo as Vice Chairman earlier this month. Tom will be a close adviser to the senior management team on a range of issues, and we will work alongside our business leaders as we continue to expand our relationships with clients. The breadth of Tom's experience across the public and private sectors will be an important asset to us as we continue to move the company ahead. We continue to invest in our Corporate Investment Banking business with new co-heads of equity capital markets. These new hires complement the other important hires we've been making over the past year. We also hired a new Head of Trust Services and Chief Fiduciary Officer in our Wealth and Investment Management segment and a new Head of Affluent and Premier Banking in consumer, small and business banking. We also continue to focus on better serving our communities. During the third quarter, we published 3 reports that provided an overview of the work we are doing to build a sustainable, inclusive future in the communities we serve; outline our strategic approach to managing the risks associated with climate change in deploying capital to support the transition to a low-carbon economy; and describe our methodology for aligning our financial portfolios with pathways to net-zero greenhouse gas emissions by 2050 and presenting interim emissions-based targets to track that alignment. We continue to make progress on our special-purpose credit program initiative we announced last year to help drive economic growth, sustainable homeownership and neighborhood stability in minority communities. We recently expanded our special-purpose refinance offers to prequalified Hispanic customers with Wells Fargo mortgages to refinance at a lower than market rate. The program launched last year for Black or African American customers has seen strong results, and the Hispanic offer has shown similar levels of customer engagement. We also announced that we're offering a $10,000 homebuyer access grant that will be applied towards down payments for eligible homebuyers who currently live and work purchasing homes in certain underserved communities in 8 metropolitan areas. And we now have 14 HOPE Inside centers of Wells Fargo branches, including the first focusing on serving the Navajo community. The centers help engage and empower communities to achieve their financial goals through financial education workshops and free one-on-one coaching. Looking ahead, the U.S. economy has continued to be resilient with key support from the labor and strength from the labor market and strength in consumer spending. Delinquencies have continued to deteriorate at a relatively slow consistent rate without signs of acceleration across our portfolios. Our base case remains a continued slowing of the economy, but we remain prepared for a wide range of scenarios given there is still significant uncertainty ahead. Regarding capital, the Basel III Endgame proposal included higher capital requirements as we expected. It's a complicated set of rules. But at this point, if nothing changed and we didn't take actions, we estimate that our RWA would increase by approximately 20%. There are some items that increased our capital requirements that we are hopeful will be adjusted, and we will be participating and sharing our perspectives on the proposed rules during the 120-day comment period. Additionally, we are evaluating changes we may make based on the proposed rules. Fortunately, we come into this from a strong position as our current capital levels are above the estimated regulatory minimum plus buffers. However, we still need to decide how much of an additional buffer we want to maintain and what mitigating actions we may want to take to reduce the impact of the new rules. At this point, we still see a path to concurrently increasing our level of CET1 as appropriate, increasing our dividend and repurchasing common stock. Levels of each will be influenced by CCAR, the finalization of the proposed rules and economic conditions. I'll now turn the call over to Mike.
Michael Santomassimo, CFO
Thank you, Charlie, and good morning, everyone. Net income for the third quarter was $5.8 billion or $1.48 per diluted common share, both up from the second quarter and a year ago. Our third quarter results included $349 million or $0.09 per share of discrete tax benefits related to the resolution of prior period tax matters. Turning to capital and liquidity on Slide 3. Our CET1 ratio increased to 11% in the third quarter, 2.1 percentage points above our new regulatory minimum plus buffers effective on October 1. This was up from 10.7% in the second quarter as higher earnings, the approximately 14 basis point benefit from the sale of certain private equity investments and lower risk-weighted assets were only partially offset by share repurchases and dividends. During the third quarter, we repurchased $1.5 billion in common stock. Our strong capital levels position us well for the anticipated increases related to the Basel III Endgame proposal released in the third quarter. Based on where we ended the quarter, we estimate that our CET1 ratio would be 50 basis points above the fully phased-in required minimum if the proposed rules were implemented as written after factoring the growth in RWAs and the resulting decline in our stress capital buffer as well as the impact of the new G-SIB buffer calculation changes. Importantly, this is an early estimate, subject to change and is before any actions we may take to mitigate the impact of the new rules. Looking forward, we expect to continue to have the capacity to increase our CET1 ratio, while we plan to continue to repurchase shares as we wait for the capital rules to be finalized. Turning to credit quality on Slide 5. As we expected, net loan charge-offs continue to increase, up 4 basis points from the second quarter to 36 basis points of average loans. Commercial net loan charge-offs declined modestly from the second quarter to 13 basis points of average loans as lower losses in our commercial and industrial portfolio were partially offset by $14 million of higher losses in commercial real estate. We had $32.2 billion of office loans, down 3% from the second quarter, which represented 3% of our total loans outstanding. Vacancy rates continue to be high and the office market remains weak. Our CRE teams continue to focus on monitoring and derisking the portfolio, which includes reducing exposures. As we highlighted in the past, each property situation is different and there are many variables that could determine performance, which is why we regularly review this portfolio. As expected, consumer net loan charge-offs continued to increase and were up $98 million from the second quarter to 67 basis points of average loans. Residential mortgage loans continued to have net recoveries, while our other consumer portfolios all had higher losses with the largest increase in our auto portfolio, which was up from the second quarter seasonal lows. Nonperforming assets increased 17% from the second quarter as growth in commercial real estate nonaccrual loans more than offset the decline in commercial and industrial as well as modest declines across all consumer portfolios. The decline in commercial industrial nonaccrual loans was primarily due to payoffs and paydowns, which is a good reminder that the resolution of nonperforming assets doesn't always result in charge-offs. The increase in commercial real estate nonaccrual loans was driven by a $1.3 billion increase in the office nonaccrual loan. Moving to Slide 6. Our allowance for credit losses increased $333 million in the third quarter primarily for commercial real estate office loans as well as for higher credit card loan balances, which was partially offset by a lower allowance for auto loans. Since the composition of our office portfolio is relatively consistent with what we shared with you in the past few quarters, we did not include a separate commercial real estate slide this quarter. However, we did update the table showing the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We've not seen significant increases in charge-offs in our commercial real estate office portfolio yet. However, we do expect higher losses over time, and we continue to increase the coverage ratio in our commercial real estate office portfolio from 8.8% at the end of the second quarter to 10.8% at the end of the third quarter. On Slide 7, we highlight loans and deposits. Average loans were down modestly from both the second quarter and a year ago. While we continue to have good growth in credit card loans from the second quarter, most other portfolios declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 195 basis points from a year ago and 24 basis points from the second quarter due to the higher interest rate environment. Average deposits declined 5% from a year ago predominantly driven by deposit outflows in our consumer and wealth businesses, reflecting continued consumer spending and customers reallocating cash into higher-yielding alternatives. Average deposits also declined in Commercial Banking, while they stabilized in Corporate and Investment Banking. As expected, our average deposit costs continued to increase, up 23 basis points from the second quarter of 236 basis points with higher deposit costs across all operating segments in response to rising interest rates. However, the pace of the increase has slowed, and our percentage of average noninterest-bearing deposits decreased modestly from the second quarter to 29% but remained above pre-pandemic levels. Turning to net interest income on Slide 8. Third quarter net interest income was $13.1 billion, up 8% from a year ago, as we continued to benefit from the impact of higher rates. The $58 million decline from the second quarter was due to lower average deposit balances, partially offset by one additional day in the quarter and the impact of higher interest rates. Last quarter, we increased our expectations for full year 2023 net interest income growth to approximately 14% compared with 2022, which was up from our expectation of 10% growth at the beginning of the year. We now expect full year 2023 net interest income growth to grow by approximately 16% compared with 2022 with the fourth quarter 2023 net interest income expected to be approximately $12.7 billion. The expected decline in interest income in the fourth quarter was primarily driven by our assumptions for additional deposit outflows and migration from noninterest-bearing to interest-bearing deposits as well as continued deposit repricing, including continued competitive pricing on commercial deposits. Turning to expenses on Slide 9. Noninterest expense declined from a year ago driven by lower operating losses and increased 1% from the second quarter driven by higher operating losses, severance expense and revenue-related compensation. Last quarter, we updated our expectations for full year 2023 noninterest expense excluding operating losses to approximately $51 billion. We now expect it to be approximately $51.5 billion or approximately $12.6 billion in the fourth quarter. The increase reflects additional severance and other one-time costs, revenue-related compensation and some lags in realizing efficiency savings. We've reduced head count every quarter since the third quarter of 2020, and it was down 3% in the second quarter and 5% from a year ago. We believe we still have additional opportunities to reduce head count and attrition has remained low, which will likely result in additional severance expense for actions in 2024. We are working through our efficiency plans now as part of the budget process. Additionally, if the FDIC deposit special assessment related to the events from earlier in the year was finalized in the fourth quarter, it would increase our expected fourth quarter expenses. And finally, as a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating results. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 10. Consumer, small and business banking revenue increased 7% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. Charlie highlighted the investments we were making in our Chicago branch network, and we're also making investments in refurbishing branches across our existing network. Additionally, we are bringing our digital onboarding experience to our branches, creating a fast and easy experience for our customers. At the same time, we've reduced our total number of branches by 6% from a year ago. Home lending revenue declined 14% from a year ago due to a decline in mortgage banking income driven by lower originations in servicing income, which included the impact of sales of mortgage servicing rights. We continue to reduce head count in home lending in the third quarter, down 37% from a year ago, and we expect staffing levels will continue to decline. Credit card revenue increased 2% from a year ago due to higher loan balances, partially offset by introductory promotional rates and higher credit card rewards expense. Payment rates have been relatively stable over the past year and remained above pre-pandemic levels. New account growth continued to be strong, up 22% from a year ago, reflecting the continued success of our new products and increased marketing. Importantly, the quality of the new accounts continues to be better than what we were booking historically. While the majority of new cards were to existing Wells Fargo customers, we're increasingly attracting more customers that are new to Wells Fargo. Auto revenue declined 15% from a year ago driven by continued loan spread compression and lower loan balances. Personal lending revenue is up 14% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 70% from a year ago and 18% in the second quarter. We continue to make progress on the strategic plans we announced earlier this year, including focusing on serving Wells Fargo Bank customers as well as borrowers in minority communities. We did not originate or fund any correspondent mortgages in the third quarter. The size of our auto portfolio has declined for 6 consecutive quarters, and balances were down 9% at the end of the third quarter compared to a year ago. Origination volumes declined 24% from a year ago, reflecting credit tightening actions as well as continued price competition. Our origination mix continues to shift towards higher FICO scores, reflecting the credit tightening actions we've taken over the past year. Debit card spend increased 2% from a year ago with growth in most categories offsetting declines in fuel, home improvement and travel. Credit card spending continued to be strong and was up 15% from a year ago. All categories grew from a year ago, including fuel, which rebounded after declining in the second quarter. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue increased 23% from a year ago due to the impact of higher interest rates and higher loan balances. Asset-based lending and leasing revenue increased 3% year-over-year due to higher loan balances as well as higher revenue from renewable energy investments. Loan balances were up 7% in the third quarter compared to a year ago driven by growth in Asset-Based Lending and Leasing. Average loans were down 1% in the second quarter due to declines in Middle Market Banking. After increasing the first half of the year, revolver utilization rates declined in the third quarter to levels similar to a year ago. Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 20% from a year ago driven by higher lending revenue, stronger treasury management results reflecting the impact of higher interest rates, and higher investment banking revenue reflecting increased activity across all products. As Charlie highlighted, we've continued to hire experienced bankers, helping us deliver for our clients and positioning us well when markets improve. Commercial real estate revenue grew 14% from a year ago, reflecting the impact of higher interest rates and higher revenue in our low-income housing business, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago driven by higher revenue in structured products, equities, credit products and foreign exchange. We've had strong trading results for 3 consecutive quarters as we benefited from market volatility and the investments we've made in technology and talent to grow this business. Average loans were down 5% from a year ago driven by banking, reflecting a combination of slower demand payoffs and modestly lower line utilization. Average loan balances were stable with the second quarter. On Slide 14, Wealth and Investment Management revenue increased 1% compared to a year ago driven by higher asset-based fees due to the increased market valuations. Net interest income declined from a year ago driven by lower deposit balances as customers continue to reallocate cash into higher-yielding alternatives as well as lower loan balances. While average deposits were down compared to both the second quarter and a year ago, the pace of the decline slowed in the third quarter. As a reminder, the majority of WIM, Wealth and Investment Management advisory assets were priced at the beginning of the quarter, so third quarter results reflected market valuations as of July 1, which were higher from a year ago. Asset-based fees in the fourth quarter will reflect market valuations as of October 1, which were also higher from a year ago but were lower from the third quarter pricing date. Average loans were down 4% from a year ago primarily due to a decline in securities-based lending. Slide 15 highlights our corporate results. This segment includes venture capital and private equity investments, including the investments and funds that we sold in the third quarter. The sale had a nominal impact on third quarter net income. Revenue declined $345 million from a year ago, reflecting assumption changes related to the valuation of our Visa B common stock exposure as well as lower venture capital revenue. In summary, our results in the third quarter reflect a continued improvement in our financial performance. During the first 9 months of this year, we had strong growth in revenue, pretax provision profit and diluted earnings per share compared to a year ago. As expected, our net charge-offs have continued to slowly increase from historical lows, and we increased our allowance for credit losses by over $1.9 billion this year primarily for commercial real estate office loans and higher credit card loan balances. We are closely monitoring our portfolios and taking credit tightening actions where we believe appropriate. Our capital levels have increased, and we expect to continue to return excess capital to shareholders. We will now take your questions.
Operator, Operator
And we will take our first question from John McDonald of Autonomous Research.
John McDonald, Analyst
I wanted to ask about the expenses, Mike. Obviously, improving efficiency has been a big goal of yours. You made progress even while investing in regulatory. What are the additional opportunities to improve efficiency from here as you head into 2024? I know you're probably not ready to give guidance for '24 yet, but are you going into the budget planning with a mindset that they should be roughly flattish? Any comments you can give on that would be helpful.
Michael Santomassimo, CFO
Sure. Thanks, John. First, let's keep everything in context. Almost three years ago, we initiated a program to cut around $10 billion, and I believe we are still on track with that. We have reduced our headcount by about 40,000, close to 50,000 from the peak. This shows significant progress. As Charlie and I have mentioned over the last few quarters, we still need to enhance efficiency further. Very few parts of the company can be considered optimized at this stage. Some areas have more potential than others; some require investment in automation and technology, while others do not. We approach the budget process and our quarterly operations with a disciplined mindset, focusing on what we can do to drive efficiency in every area while making necessary investments. We've highlighted some of those investments in our prepared remarks. This mindset has been consistent for the past few years, and we plan to continue it. We will provide updates on our progress in January, as we always do.
John McDonald, Analyst
Okay. Fair enough. Regarding the net interest income outlook for the fourth quarter, are you incorporating assumptions about deposit outflows and changes in deposit mix? Are these assumptions based on an expectation that conditions will worsen from here, or are they similar to what you experienced this quarter? It appears there may be a significant sequential decline. I'm curious about the specific assumptions in this regard.
Michael Santomassimo, CFO
Yes, I think, as we've discussed over the last several quarters, there's still significant uncertainty regarding the trajectory of both deposits and pricing. Factors like quantitative tightening and potential competitive responses from others come into play. We're still anticipating that these trends will emerge over time. This year has pleasantly surprised us as things haven't progressed as quickly as we expected, but eventually, they will. Hopefully, we won't see movement in pricing as fast as we've modeled, but these trends are ongoing, with shifts between noninterest-bearing and interest-bearing deposits leading to rising deposit costs. On the consumer side, there's noticeable spending occurring. The pace of these developments remains uncertain as we've modeled, but we aim to provide a base case forecast that works under various scenarios.
Operator, Operator
The next question will come from Steven Chubak of Wolfe Research.
Steven Chubak, Analyst
So wanted to start, Charlie, because you had made some comments about capital targets and those potentially evolving. The inflation RWA from Basel III Endgame that you guided to does bring your CET1 minimum to 8.5%. You alluded subtly, mind you, to the possibility of managing to a lower target. Since 150 bps management cushion does feel excessive, what are some of the factors that would compel you to maintain a larger cushion than peers and maybe continue to run at or above 10%?
Charles Scharf, CEO
Well, let me start and then I'll hand it over to Mike. I wasn't trying to suggest where we think the appropriate buffer should be. We are aiming to be very straightforward about our current situation. Once everything is settled, we will assess the right buffers and communicate those accordingly. So please don't read anything more into my comments than that.
Michael Santomassimo, CFO
Yes. Steve, while your estimate might be 150 basis points, we've previously indicated that our buffer is likely closer to 100 basis points above the appropriate minimum. This could change over time, as Charlie mentioned. Regarding Basel III, the increase in Risk-Weighted Assets is primarily due to well-known factors, particularly operational risk, which is going to be a significant contributor. We need to wait for the final rule next year, and we are optimistic about potential adjustments that could align capital requirements with risk while possibly reducing some of the operational risk increases. We'll actively engage in this process. One consideration we've discussed is that the finalization of the rules could lead to a smaller buffer than we've had previously, but we need the rules finalized first. Once we understand the changes, we will take action accordingly. We're looking at a timeline of about 9 to 12 months for a final rule, so we have some time for this to unfold.
Steven Chubak, Analyst
And for a follow-up, just on the trading business. It continues to surprise positively versus expectations. You cited some of the investments that you've made, the benefits of volatility. But with revenues running multiples above what we've seen in prior years and that $1 billion-plus bogey being reached for 3 consecutive quarters, I was hoping you could just speak to whether we should be underwriting $1 billion-plus as a new normal or if there were any cyclical benefits or anomalous benefits that maybe we shouldn't be underwriting going forward. Just trying to think about what the normalized level of trading revenue should be given some of the investments you've made scaling of that business.
Michael Santomassimo, CFO
Yes, I'll take that. We've been methodically investing in our capabilities with a focus on better supporting our core clients rather than trying to expand in ways that don't align with our identity. What you've seen in those businesses, like FX and rates, is our careful approach to adding personnel and enhancing technology. This year, we have certainly benefited from some market volatility. However, that can change quickly. Our focus remains on gradually adding more clients and increasing flows each month and quarter. Whether it levels out to $1 billion or so per quarter remains to be seen, but we are satisfied with our progress so far. There wasn't a significant one-time event this quarter that influenced our results, which is encouraging. Additionally, we aren't experiencing major growth in market risk RWA with these efforts. We aim to optimize our balance sheet and ensure we're appropriately compensated for the risks we take. We are pleased to see things coming together, but we recognize that achieving success is a long-term endeavor, and we need to keep adding capabilities and clients.
Operator, Operator
The next question will come from Scott Siefers of Piper Sandler.
Robert Siefers, Analyst
Was hoping maybe, Mike, you could spend another moment sort of discussing RWA mitigation in light of the Fed capital proposals. I guess, specifically, I was hoping for maybe a little more color. I know you touched on it in some of the earlier remarks, but the sale of the $2 billion in private equity. And then maybe if you could also discuss the new agreement with Centerbridge for direct lending, just sort of how all these factor into your thinking here.
Michael Santomassimo, CFO
Sure. When considering mitigation, we have various approaches in mind. For instance, in securities finance transactions, we implement collateral haircut floors. While I don't want to delve too deeply into technical details, there are aspects that seem illogical to us. If these measures are enforced as they are, we'll adjust our collateral requirements for client trades or reevaluate pricing. We have numerous strategies to address this, although the technicalities can become complex for each transaction. Additionally, we must assess how much tax equity we invest in renewables, as the current risk weights don’t align with return expectations. Consequently, we might reduce our investments in that area. Each portfolio nuance will require careful consideration and necessary adjustments. Fortunately, as mentioned in our prepared remarks, our capital levels are sufficient, providing us with the flexibility to navigate these challenges effectively across our businesses. Our focus is on building enduring relationships with clients, not abandoning them, but rather discovering ways to meet both their needs and our return objectives. This involves detailed discussions, some of which will include repricing, although there are several technical matters that will be addressed as regulations are finalized. Regarding our partnership with Centerbridge, we've recognized an increasing demand from clients in the middle-market sector for financing solutions that we wouldn’t typically place on our balance sheet. Instead of telling clients we cannot assist or directing them elsewhere, we established this partnership to stay involved as their advisor and help solve their challenges. We are enthusiastic about collaborating with Centerbridge, whose team has a strong track record. This initiative will enhance our capability to provide client solutions and we anticipate that it will expand over time, allowing clients to view it positively.
Robert Siefers, Analyst
Okay, perfect. As a follow-up, I would like to revisit the discussion on net interest income for a moment. I appreciate all the insights regarding the ongoing shifts in mix and the pressure on deposit pricing. However, as we approach the end of the year, do you believe there will still be downward pressure on net interest income moving forward? Or do you think there are enough opportunities for asset repricing that could lead to a stabilization sooner rather than later?
Michael Santomassimo, CFO
Yes, we'll see. I think we need to wait until we approach the end of the year and into January to provide a clearer perspective on 2024. The recent quarters have repeatedly shown that there is still much to unfold. Getting too far ahead of ourselves regarding next year would be a mistake at this moment. However, the underlying factors we have been discussing remain the same. It concerns the future of deposits, the mix, and pricing. To a lesser extent, loan growth is relevant now, but it still holds significance over a longer timeframe.
Operator, Operator
The next question comes from Matt O'Connor of Deutsche Bank.
Matthew O’Connor, Analyst
Can you just elaborate on the comment of tightening the credit box a bit? And then, I guess, specifically in credit card, thoughts there? I know you've been leaning into it and have had real good growth. And I think it's still only about 5% of your loan book, but wondering your thoughts of, is this really the right time to be leaning into credit card maybe as we're kind of later cycle.
Michael Santomassimo, CFO
Yes. I'll start with credit cards and then address the broader point. We began transforming the card business in the fourth quarter of 2019, right after Charlie started. Since then, we have nearly completely refreshed our product line, although there's still some work to be done. Part of what you're seeing in the results stems from offering strong products that people are interested in. We have experienced significant new account growth this quarter, likely our best in quite some time. This success begins with a good product and excellent service, which I believe drives what you see. On the credit side, the new accounts we're adding are of high quality compared to our existing portfolio. The majority of these new accounts are still Wells Fargo Bank customers, but we are gaining traction with non-Wells Fargo customers, bringing in first-time consumers. These first-time customers have strong credit profiles, and we feel confident about the risks involved. We will continue to monitor for areas of risk, and if necessary, we will tighten our approach. However, we are currently feeling good about our originations. More generally, over the last four or five quarters, we have been gradually tightening our credit standards on the consumer side, including in home lending, auto loans, credit cards, and personal loans. Each of these areas has seen some level of credit tightening, but these changes have been modest and incremental. I would consider this as removing the last one to three percent of originations that don't make sense in a potentially challenging economic environment. It's not a wholesale change to our strategy or guidelines, but rather a careful and gradual adjustment.
Charles Scharf, CEO
Just to be clear, it's the very basic stuff. It's simply adjusting the lower FICO boundaries and managing layered risks. As we continue to make these changes, we're just maintaining the same types of practices without making any drastic exits. It's more of a thoughtful tightening approach.
Michael Santomassimo, CFO
Yes. Outside of the consumer space, the only area where we have significantly tightened credit in recent years is commercial real estate. Aside from that, there have been some minor adjustments, but we haven't really altered our overall appetite much beyond commercial real estate.
Matthew O’Connor, Analyst
Okay. That's helpful. And then just a clarification on the severance costs. Can you give us what the absolute amount was this quarter? I think you gave us the change versus a year ago and linked quarter. But what was the absolute level this quarter?
Michael Santomassimo, CFO
Yes, there wasn't much a year ago, so it's not far off from the total. There's a small difference, but it wasn't substantial.
Matthew O’Connor, Analyst
Okay. So about $200 million?
Michael Santomassimo, CFO
Yes. And again, that will sort of evolve as we go. I mentioned that in my script as we look at next year and the attrition rates that we're seeing.
Operator, Operator
The next question comes from John Pancari of Evercore ISI.
John Pancari, Analyst
On the commercial real estate side, I understand you mentioned the increase in the office loan loss reserve in the Corporate and Investment Bank from 8.8% to 10.8%. Can you share some insights regarding the factors that contributed to this increase in the loan loss reserve? Do you foresee potential further increases? Also, could you provide some examples of the office revaluations you've observed, especially as the underlying collateral has changed hands or undergone reappraisals?
Michael Santomassimo, CFO
Yes, certainly. The current challenge in the office sector is the lack of transactions, which vary significantly across different cities. This results in limited information for price discovery in many areas. We conduct extensive evaluations of the properties to estimate their potential values under various scenarios. It seems that the appraisal market is beginning to align more closely with current realities, as we are observing more realistic and updated appraisals. These new data points inform our analysis as we review the quarter, taking into account various factors and underlying loans to estimate potential losses, which are reflected in our results. We hope to be cautious in our estimations, but there remains a possibility for differing outcomes. While we haven't yet experienced significant losses, we anticipate they will occur over time. It may take longer than expected for these situations to resolve, but we are closely monitoring all available data, including limited sales, recent appraisals, and our own analyses of the properties.
John Pancari, Analyst
Got it. All right. And then separately, also within commercial real estate, we're getting more and more questions around multifamily exposures and just how well they really are holding up given some supply issues in certain markets. Can you just comment there? Are you seeing any noteworthy stress or any changes to underlying reserve for that book?
Michael Santomassimo, CFO
Yes. Not a lot. I mean you certainly see certain markets that might appear to have some oversupply in condos in certain places. But it feels like that will work itself out over a period of time. We're not seeing real systematic stress in the portfolio at this point.
John Pancari, Analyst
Got it. If I can ask just one last one. On the head count cuts, you mentioned you look at every business pretty much. Are any head count cuts occurring yet in the risk area or anything? Or any changes with the contracts with consultants in the risk overhaul area at all?
Michael Santomassimo, CFO
Yes. No. Look, the only thing I'd say on the risk and reg work is that we're going to spend whatever we need to spend and put the resources we need against it to get it done. And we're going to continue to do that towards...
Charles Scharf, CEO
To clarify, we are not reducing our workforce in that area. In fact, it seems to be the opposite when you review recent quarters. The only fluctuations we see are related to our use of outside consultants, which can vary each quarter. However, we've committed to utilizing external resources to expedite our work if needed. As we evaluate our efficiencies, workforce reductions are not part of our current or future plans.
Operator, Operator
The next question comes from Erika Najarian of UBS.
Erika Najarian, Analyst
My first question is about revenue. Following up on Chubak's questions, it seems that not only trading numbers have improved this year, but also investment banking. I understand your points about the cyclicality of the trading business. However, could you help us understand if the industry's revenue returns to 2019 levels, do you anticipate a generally higher share of revenues in capital markets compared to 2019? Additionally, regarding the investments you've already made, are there other businesses that might exceed our expectations in terms of revenue generation, particularly those that are not fully optimized yet? Of course, many are considering card services, as well as wealth management and investment advisory revenues.
Charles Scharf, CEO
Yes. Let me address that. To answer your question about share, without going into too much detail, yes. We believe that when we assess our growth in Corporate Investment Banking share, both in trading and fee-related areas, our shares have increased. We expect the fee-based side to continue to grow, driven by our investments, particularly in expanding our capabilities through hiring. We have specific goals and targets for the new personnel we bring on, and we will monitor our progress towards these objectives. When we hire new team members, they often bring clients and new transactions with them, which we've seen benefit us in recent quarters. However, since these are relationship-driven businesses, transactions won't happen every quarter. We anticipate that our share will keep growing, without taking on extra risk overall, since we are managing the current risks based on our existing exposures. To identify growth opportunities across the company, we review each business area. In our small business banking segment, we've managed to stabilize operations after significant challenges, and we now see potential for organic growth in market share, which excites us. We're not focused on growing share in the mortgage sector, and we have outlined our direction there. In auto, it's primarily about returns, so significant growth won't occur unless industry dynamics change. Mike mentioned cards; we are really encouraged by how our brand and relationships contribute to positive selection and real growth, as evidenced by our impressive spending figures that surpass industry levels. In our wealth management sector, we’ve been making progress by attracting talent and launching new products, which gives us confidence about future prospects. In the middle market segment, we maintain a strong franchise, and we are integrating our asset-based lending services from GE with our full suite of Wells Fargo products, led by key team members. I could elaborate further, but overall, we see broad-based opportunities, primarily in fee-based growth, which arises naturally from our historical focus on net interest income. We are enthusiastic about the many possibilities we have that will unfold over time.
Erika Najarian, Analyst
Got it. And I think that excitement is clear, Charlie. And my second question is, given all of that and taking a step back, I totally think it's too early, I agree with you, to give anything on '24 expenses. But more broadly discussing, do you feel like the company is in a little bit of an inflection point? Because on one hand, Mike was saying that very few parts of the bank are optimized. On the other, I think you guys mentioned that the head count is not going the other way, and perhaps it's really some of the outside consulting fees that could go up and down. But I'm wondering if you get asked about expenses in a framework of flat, but then all of this momentum on the revenue side seems to be on the comp. And I'm wondering how you think about as you budget for the company and as you think about just getting to that 15% ROTCE. Let's just put Basel III Endgame aside in terms of the denominator, how do you balance some of the shareholders and the analysts that are asking you about expenses in the context of flat versus the revenue momentum that obviously would need expenses to keep sustaining versus that revenue momentum that you seem to be so excited about?
Charles Scharf, CEO
Let me begin. Mike, feel free to join in at the end or share your thoughts along the way. First, we view this as two distinct tasks we are working on. It’s quite timely as we’re currently engaged in the planning for next year, like many companies are. This company is not operating efficiently, period. Even with the reductions we’ve made, this is not unexpected because as we dig deeper, additional issues surface. We tackle the more obvious problems first. However, as a management team, we feel optimistic about the progress we’re making. This is particularly evident in our headcount numbers, which ultimately affect the company’s expenses. If we had told you we planned to reduce headcount significantly during this timeframe, you might have been skeptical. We mean what we say when we commit to a course of action. There remain many more efficiencies to explore, and we are dedicated to working through them. Additionally, when we discuss making investments, we consider whether these investments yield returns. For instance, in our card business, we are increasing our marketing spend compared to the past, and we are pleased with not just the volumes but also the quality relative to our expectations. We will approach this systematically as we finalize the budget, making tactical decisions based on the outcomes. We understand what shareholders are looking for and recognize that managing the expense side is crucial for investors in terms of unlocking value. We hear those concerns and we see them. When we present our guidance for next year, we will clarify how we arrived at our conclusions, which will include discussions on efficiencies and investments. We’ve aimed for clear communication and transparency up to now. If our decisions make sense, you’ll appreciate them; if not, you’ll let us know. Up to this point, we’ve managed to maintain alignment on these matters. Overall, it’s important to note that we have the potential to both reduce expenses and invest. Keeping our overall expense levels in check remains a top priority, and we must ensure there is revenue growth to support the investments we choose to make.
Operator, Operator
The next question comes from Ebrahim Poonawala of Bank of America.
Ebrahim Poonawala, Analyst
Mike, I wanted to follow up regarding credit on the commercial and industrial side. Nonaccrual charge-offs have remained relatively stable. When you assess the commercial and industrial portfolio, do your customers feel the effects of the Fed rate hikes? How is that situation developing? You mentioned that the economy is resilient. Are you noticing any areas within the commercial and industrial portfolio where bankruptcies are increasing in a specific sector or segment?
Michael Santomassimo, CFO
Yes. I believe that we're observing this in the utilization of revolvers, which remain relatively stable, and in some cases, even decreasing. This indicates that businesses are building less inventory in light of current rates. They might be reconsidering how quickly they want to invest in their operations. This is reflected in the loan growth, which makes sense from their viewpoint. While there are certain areas in the portfolio where margin compression or unique issues may still be present, overall, the credit quality remains strong.
Ebrahim Poonawala, Analyst
Got it. And do you think your customers have felt the hit from higher rates already? Or is that on the comp?
Michael Santomassimo, CFO
Well, I think they certainly felt it so far, right? I mean most of them have variable rate loans that they service, right? And obviously, the longer rates stay high, they'll maybe feel it more. But certainly, I think they've been impacted.
Ebrahim Poonawala, Analyst
Got it. I have a quick question regarding the outlook for buybacks. There has clearly been a significant decline. Given your excess capital, you likely have a view on the worst-case scenario regarding the Basel Endgame. It's quite unusual for banks to have excess capital while their stock prices are low. As you are building a tangible book, how do you approach the near-term pace of buybacks in the upcoming quarters compared to what we did this quarter, beyond the considerations of CCAR and SCB?
Michael Santomassimo, CFO
Yes. We're not going to provide specific details on pacing. We have a process we follow each quarter to assess everything that's happening. First, we consider how to support clients, the demand we're observing, and the risks that may exist. In the fourth quarter, we may face the FDIC special assessment. Each quarter presents various factors that we'll evaluate before making decisions on pacing.
Operator, Operator
Our next question comes from Gerard Cassidy of RBC.
Gerard Cassidy, Analyst
Mike, can you share with us your thoughts on the slower-than-expected trend of moving money into higher-yielding deposits? Are there specific categories within your deposit base, such as regular consumer deposits, high net worth deposits, or nonoperational commercial deposits, that are transitioning more slowly? You mentioned expecting this trend to occur, but is there any indication that it could accelerate significantly in the next six months, or is it likely to be a gradual increase?
Michael Santomassimo, CFO
Yes, Gerard, I think it's important to analyze this by the different segments. In the wealth business, we saw a quick decline in deposits, but that trend has now moderated. It’s encouraging to see that this shift has slowed down significantly compared to the previous quarters. On the consumer side, most of our deposits are in accounts with balances under $250,000, which primarily serve as operational accounts for people. A portion of those funds will likely remain in these accounts because they are essential for daily living and operations. We are currently in uncertain territory with interest rates and the recent pace of changes, including quantitative tightening. We should be ready for further changes, but the exact timing and speed remain to be seen. However, deposit pricing has not shifted in the way we anticipated a year ago.
Gerard Cassidy, Analyst
Very good. As a follow-up, since you and Charlie joined, Wells has done an excellent job of returning that excess capital. I understand the current circumstances as you described them in your comments. Can you let us know if you plan to maintain a 100 basis point buffer above the final numbers when they are released? Any insights on that would be appreciated.
Michael Santomassimo, CFO
Yes. We haven't finalized what the buffer will look like after Basel III is implemented. However, we have mentioned several times that we are targeting around 100 basis points. We have been operating above that for some time. As we gain more clarity on how these rules will develop, we will provide additional details. For now, I believe that 100 basis points is likely the lower end of the range.
Operator, Operator
And that was our final question for today. I will now turn it over to your speakers for closing remarks.
Charles Scharf, CEO
All righty. Everyone, thank you very much. We look forward to talking to you again next quarter. Take care now.
Operator, Operator
Thank you for your participation on today's conference call. At this time, all parties may disconnect.