Earnings Call Transcript
WELLS FARGO & COMPANY/MN (WFC)
Earnings Call Transcript - WFC Q2 2023
Operator, Operator
Welcome, and thank you for joining the Wells Fargo Second Quarter 2023 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 John Campbell, Director of Investor Relations. Sir, you may begin the conference.
John Campbell, Director of Investor Relations
Good morning. Thank you, everyone, 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
Thank you, John. And good morning, everyone. As usual, I'll make some brief comments about our second quarter results and then 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 had solid results in the quarter with revenue, pre-tax pre-provision profit, diluted earnings per share, and ROTCE, all higher than a year ago. The revenue growth reflected strong net interest income growth as well as higher non-interest income. While our efficiency ratio improved and we continued to make progress on our efficiency initiatives, we had modest expense growth from a year ago. Net charge-offs have continued to increase from historical low levels, but overall credit quality was strong and consumer and business balance sheets remain healthy. We increased our allowance for credit losses by $949 million, primarily driven by our office portfolio as well as growth in our credit card portfolio. While we haven't seen significant losses in our office portfolio today, our detailed loan by loan review of the portfolio has given us a sense how the next several quarters could play out. We've also considered a number of stressed scenarios, all of which informed our actions this quarter. Mike will discuss this in more detail, but I want to make the point that it is very hard to look at any one statistic and determine the risk in the portfolio. Loss content will be driven by a combination of factors, including but not limited to, property type, location, lease rates, lease renewal notice dates, loan structure and borrower behavior. Most importantly, our CRE teams remain focused on working with our clients’ portfolio surveillance and de-risking to minimize loss content. Both commercial and consumer average loans were up from a year ago, but were down from the first quarter as the economy has slowed and we've taken some credit tightening actions. Credit card spending remained strong, but the rate of growth has slowed from the outsized growth rates we saw throughout 2022. Debit card spending was flat from a year ago with growth in discretionary spend offset by declines in non-discretionary spend. Average deposits were down from the first quarter, driven by lower consumer deposits, while the decline in commercial deposits slowed. Now let me update you on progress we've made on our strategic priorities, starting with our risk and control work. Regulatory pressure on banks with long-standing issues such as ours continues to grow and as such our continued intensive effort to complete the build-out of an appropriate risk and control framework for a company of our size and complexity is critical. I've continued to emphasize that this is our top priority and will remain so and that while we have implemented substantial portions of the work required, we have more implementation to do as well as work to make sure the changes operate effectively over time. As I've said before, we remain at risk of further regulatory actions until the work is complete. While we're devoting all necessary resources to our risk and control work, we're also continuing to invest in our business to better serve our customers and help drive growth. Our consumer customers have continued to increase their use of our mobile app. We added over 1 million mobile active customers over the past year and mobile logins increased 9% from a year ago. Fargo, our new AI-powered virtual assistant, is now live on our mobile app for all consumer customers. Since launching at the end of April, our customers have interacted with Fargo over 4 million times. We've continued to make important hires, bringing new expertise to Wells Fargo in businesses we are looking to grow. We named Barry Simmons as the new Head of National Sales in Wealth & Investment Management. He will be critical in our efforts to better serve clients and help advisors grow their business. We also continued to attract veteran bankers in Corporate and Investment Banking, hiring new managing directors in our banking division in priority growth areas, including a Co-Head of Global Mergers and Acquisitions, Co-Head of Financial Institutions and new heads of Financial Sponsors, Equity Capital Markets, Healthcare and Technology, Media and Telecom. We also continue to focus on better serving our communities. We announced a 10-year strategic partnership with T.D. Jakes Group that could result in up to $1 billion in capital and financing for Wells Fargo to drive economic vitality and inclusivity in communities across America. The Wells Fargo Foundation awarded $7.5 million to Habitat for Humanity to build and repair more than 360 homes nationwide. We've worked with Habitat for Humanity for nearly three decades and donated more than $129 million since 2010. Wells Fargo signed on as the first anchor funder of UnidosUS HOME initiative to create 4 million new Latino homeowners by 2030. We provided the initial grant to start a fund launched by FinTech Hello Alice to improve access to credit and capital for small business owners who are members of underserved groups, including women. We continue to open HOPE Inside centers in Wells Fargo branches, including six during the first half of 2023 with plans to reach 20 markets by the end of this year. The centers help empower community members to achieve their financial goals through financial education workshops and free one-on-one coaching. We published our 2023 diversity, equity, and inclusion report which highlights the progress we've made in our DE&I strategy and initiatives, both inside our company and the communities where we live and work. However, we have more work to do to achieve enduring results that will require long-term commitments. Looking ahead, the US economy continues to perform better than many expected and although there will likely be continued economic slowing and uncertainty remains, it is quite possible the range of scenarios will narrow over the next few quarters. This year's Federal Reserve stress test affirmed that we remain in a strong capital position, reflecting the value of our franchise and benefits of our operating model. This capital strength allows us to serve our customers' financial needs while continuing to prudently return excess capital to our shareholders. As we previously announced, we expect to increase our third quarter common stock dividend by 17% to $0.35 per share, subject to approval by the company's Board of Directors at its regularly scheduled meeting later this month. We've repurchased $8 billion of common stock during the first half of this year and the stress test results demonstrated that we have the capacity to continue to repurchase common stock. Regulators have signaled that the Basel III Endgame proposal, which could be out as soon as this summer, will include higher capital requirements that will be skewed to the country's largest banks. While there's some speculation that capital requirements could increase by 20%, we don't know what the impact will be to Wells Fargo. However, we do expect our capital requirements will increase. While any changes to regulatory capital requirements are expected to be phased in gradually over several years, we are considering the potential impacts in contemplating the amounts of our future repurchases. Our balance sheet is strong. We've increased and remained focused on increasing our earnings capacity and continue to like our competitive position. We remain prepared for a variety of scenarios and our steadfast commitment to our risk and control build-out, coupled with our continued focus on financial and credit risk management, allows us to support our customers throughout economic cycles. I will now turn the call over to Mike.
Mike Santomassimo, CFO
Thank you, Charlie. Good morning everyone. In the second quarter, our net income was $4.9 billion, or $1.25 per diluted share, both up from the previous year, indicating our progress in enhancing performance, which I will discuss during the call. Starting with capital and liquidity, our CET1 ratio was 10.7%, a slight decrease of about 10 basis points from the first quarter. During the second quarter, we repurchased $4 billion in common stock and, pending Board approval, we anticipate raising our common stock dividend in the third quarter. Our CET1 ratio stands 1.5 percentage points above our current regulatory minimum and 1.8 percentage points above our expected new regulatory minimum starting in the fourth quarter. While we plan to repurchase more common stock this year, we believe it is wise to maintain significant excess capital until there is more clarity on the new capital requirements. Our liquidity position remained robust in the second quarter, with our liquidity coverage ratio approximately 23 percentage points above the regulatory minimum. Regarding credit quality, overall credit quality remains strong; however, as anticipated, net loan charge-offs have risen from historically low levels to 32 basis points of average loans in the second quarter. Commercial net loan charge-offs rose by $137 million from the first quarter, reaching 15 basis points of average loans. Half of this increase was driven by borrower-specific losses in commercial banking, with minimal indications of systemic weakness in the portfolio. The remainder of the rise came from higher losses in commercial real estate, especially in the office sector. I will provide more details about our office exposure later. Consumer net loan charge-offs increased modestly, up $23 million from the first quarter to 58 basis points of average loans. This increase was mainly attributed to credit cards, while residential mortgage loans saw net recoveries and auto losses decreased. Although consumer credit performance remains solid, we anticipate a gradual increase in consumer net loan charge-offs. Non-performing assets rose 14% from the first quarter as lower non-accrual loans in the consumer portfolios were offset by higher commercial non-accrual loans, notably in commercial real estate. Our allowance for credit losses grew by $949 million in the second quarter, mainly due to commercial real estate office loans and higher credit card balances. Our commercial real estate portfolio totaled $154.3 billion in loans at the end of the second quarter, with office loans at $33.1 billion, slightly down from the first quarter, representing 3% of our total loans. The office market remains weak, and our office portfolio composition continues to align with what we disclosed in the first quarter. Our CRE teams are focused on surveillance and risk management, which includes reducing exposures and closely monitoring at-risk loans. We have added a table to this slide that details our CRE office disclosure within the context of our broader CRE portfolio. As shown, our office loans at the end of the second quarter were primarily from corporate investment banking, where we also had the most non-accrual loans and the highest level of allowance for credit losses. Last quarter, we first disclosed the allowance for credit losses coverage ratio for the office portfolio in corporate investment banking, which rose from 5.7% at the end of the first quarter to 8.8% at the end of the second quarter. This quarter, our allowance for credit losses for the entire CRE office portfolio was 6.6% at the end of the second quarter, up from 4.4% in the first quarter. We present this data for greater insight into the portfolio; however, each property's situation is unique, with various factors influencing performance, which is why we consistently review this portfolio on a loan-by-loan basis. For instance, some properties are seeing increased vacancies where borrowers are opting to inject equity and upgrade the properties, even in challenging markets. Others are well-leased and performing, but borrowers require assistance with refinancing. In such cases, we work with borrowers to restructure, which often involves some paydown. Occasionally, this leads to the sale or workout of the asset. We will maintain close oversight of this portfolio, understanding that as in previous cycles, these situations will likely unfold over a protracted period as we actively aid borrowers in resolving their challenges. Regarding loans and deposits, average loans remained relatively stable from the first quarter and increased by 2% from a year ago, boosted by higher commercial and industrial loans in commercial banking and credit card loans. Average loan yields climbed 247 basis points from a year ago and 30 basis points from the first quarter due to the elevated interest rate environment. Average deposits fell 7% year over year, mainly from outflows in our consumer and wealth divisions as consumer spending persists and cash is allocated to higher yielding alternatives. While average commercial deposits decreased, they remained relatively stable in the first quarter, with growth in corporate and investment banking. As expected, our average deposit costs rose by 30 basis points from the first quarter to 113 basis points, reflecting higher costs across all operating segments due to rising interest rates. The share of non-interest bearing deposits dropped from 32% in the first quarter to 30% in the second quarter, though it stayed above pre-pandemic levels. On net interest income, the second quarter's net interest income was $13.2 billion, up 29% from the previous year, as we continued to benefit from increased rates. The $173 million decrease from the first quarter was mainly due to lower deposit balances, partially offset by one additional day in the quarter. Initially, we estimated a full-year net interest income growth of about 10% compared to 2022. We now expect a growth of approximately 14%. We have considered various factors for our projections for the remainder of the year, including moderate loan growth, potential deposit outflows, migration from non-interest bearing to interest bearing deposits, and continued deposit repricing, especially competitive pricing for commercial deposits. Looking at expenses, non-interest expense rose by $125 million or 1% compared to a year ago. We previously expected the full-year 2023 non-interest expense, excluding operational losses, to be about $50.2 billion; we now anticipate it to be around $51 billion. This increase is linked to greater severance expenses due to actions taken and planned for 2023, as attrition has been slower than anticipated. Notably, we have reduced headcount each quarter since the third quarter of 2020, with a 1% decrease from the first quarter and a 4% drop from a year ago. We also have pending litigation, regulatory, and customer remediation matters that may affect operational losses. In Consumer Banking and Lending, consumer small business banking revenue rose 19% from a year ago, with higher net interest income from increased interest rates partially offset by lower deposit-related fees due to changes in our overdraft policy last year. We are actively working to cut underlying costs as customers shift to digital banking, resulting in a 4% reduction in our branches and a 10% decrease in branch staffing from a year ago. Home lending revenue decreased 13% from a year ago, primarily due to lower net interest income stemming from loan spread compression and reduced mortgage originations. We also continued to lower headcount in the second quarter, down 37% from last year, and expect further reductions in staffing in the latter half of the year. Credit card revenue grew by 1% from a year ago due to higher loan balances. Although payment rates have decreased from last year, they remain stable over the past three quarters above pre-pandemic levels. New account growth was strong, increasing by 17% year over year, and importantly, the quality of these new accounts is better than historically. Auto revenue fell 13% from a year ago, driven by loan spread compression and decreased loan balances. Personal lending revenue increased 17% from a year ago due to higher loan balances. In key business drivers, mortgage originations dropped 77% from last year but were up 18% from the previous quarter, influenced by seasonal trends. We funded our last corresponding loan in the second quarter, now focusing on serving our bank customers and minority community borrowers. Our auto portfolio has seen declines for the past five quarters, down 7% compared to last year. Origination volume fell 11% from the previous year due to credit tightening and price competition. Debit card spending remained flat in the second quarter compared to last year, with the largest declines in fuel spending due to lower gas prices, home improvement, and travel. In contrast, credit card spending stayed robust, up 13% year over year, with stable growth rates throughout the second quarter. In Commercial Banking, middle market banking revenue rose 51% year over year due to higher interest rates and loan balances. Asset-based lending and leasing revenue grew by 13% year over year, mainly from higher loan volumes. Average loan balances in the second quarter increased by 12% compared to the previous year, attributed to new customer acquisition and higher line utilization, although the growth pace has slowed. Average loan balances saw a modest increase of 1% from the first quarter, with growth in asset-based lending and leasing prompted by seasonal higher inventory levels, while middle market loans remained flat. In Corporate Investment Banking, banking revenue increased by 37% year over year, driven by stronger treasury management results due to higher interest rates and increased lending revenue. The rise in investment banking fees was influenced by write-downs from the second quarter of 2022 on unfunded leveraged finance commitments. Revenue from commercial real estate grew by 26% year over year, supported by higher interest rates and loan balances. Markets revenue rose by 29% from a year ago, underpinned by improved trading results across most asset classes. Our strong trading outcomes in the first half of the year were bolstered by favorable market conditions and benefitted from our investments in technology and talent that helped broaden our operations and generate increased trading flows. Average loans decreased by 2% from last year and by 1% from the first quarter, driven by banking due to slow demand and slightly lower loan utilization. In Wealth and Investment Management, revenue fell 2% year over year, driven by reduced asset-based fees from lower market valuations. The increase in net interest income from last year was due to higher rates, partially tempered by lower deposit balances as customers continued to shift cash into higher yielding alternatives. However, cash alternative outflows slowed in the second quarter. The majority of WIM advisory assets are priced at the beginning of the quarter, meaning the second quarter results reflected market valuations as of April 1, which were down from last year. Asset-based fees in the third quarter will reflect higher market valuations from July 1. Average loans were down 3% from last year, mainly due to declines in securities-based lending. In summary, our second quarter results demonstrate a continued improvement in our earnings capacity. We achieved revenue growth and significant increases in pre-tax provision profit. As expected, net charge-offs are gradually rising from historical lows, and our allowance for credit losses has increased. We are closely monitoring our portfolios and implementing credit-tightening measures where necessary. Our capital levels remain solid, and we continue to repurchase common stock. We will now take your questions.
Operator, Operator
Thank you. Our first question will come from Ken Usdin of Jefferies. Your line is open, sir. Mr. Usdin, please check the mute button on your phone.
Charlie Scharf, CEO
Why don’t we take another one and then we'll come back to Ken.
Operator, Operator
Certainly. The next question will come from Scott Siefers of Piper Sandler. Your line is open.
Scott Siefers, Analyst
Good morning, everyone. Thank you for taking the question. It was great to see the higher net interest income guidance and performance this quarter. That said, it seems likely that dollars of net interest income will come down from here. I guess just broadly speaking, are you able to chat about what factors might be most important in sort of your ability to arrest a downward move in net interest income? In other words, kind of, when and why would it end up flattening out if we're ideally getting close to the end of a Fed tightening cycle?
Mike Santomassimo, CFO
Thank you, Scott. It's Mike. I'll address that and Charlie can chime in if needed. When considering the assumptions behind this, which I mentioned in my remarks, I’ll recap them. We expect modest loan growth, but that's not a significant factor in what we're observing. It seems others are experiencing similar trends, with less demand for loans compared to about a year ago. We're also anticipating some additional outflows, especially in the consumer sector, as spending continues. Additionally, we expect more movement from non-interest bearing to interest bearing deposits. Over time, deposit pricing will evolve. The competition remains strong in the commercial sector, which will likely persist in the consumer space as well. It's important to consider this combination of factors and make assumptions about when stabilization might occur. We believe that the trends we’ve seen over the past few quarters will continue at least through the end of the year.
Scott Siefers, Analyst
Okay. Perfect. And maybe if we could drill down into one of those in particular, just the migration from non-interest bearing to interest bearing. They've come down but are still above pre-pandemic levels, I believe. Do you have a sense for where and why those would start to settle out?
Mike Santomassimo, CFO
Yeah, I mean there's a few factors underneath that. As you pointed out, we're about 30% at the end of the quarter, down from about 32%, I think the prior quarter. And if you go back pre-COVID, they were in kind of the mid-20s, mid to upper-20s depending on when exactly when you look at it. And we've been trending downward. Part of that is excess deposits on the commercial side. As people use up their earnings credits for the fees they're paying, you're seeing some migration there. That stabilizes. And then you've seen again on the consumer side, people spending from their primary checking accounts. So those are the factors that I'd look at on when that starts to slow down and stabilize, but it's been pretty consistent at least for the last quarter or two.
Scott Siefers, Analyst
Yeah. Okay. All right. Thank you very much, Mike.
Operator, Operator
Thank you. The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir.
Ebrahim Poonawala, Analyst
Hey, good morning. So, Mike, thanks for the details on the CRE book. I think Charlie mentioned that you've gone through loan by loan in identifying and I appreciate the idiosyncratic nature of every sort of CRE loan. But given the reserve you've taken this quarter, give us a sense of your visibility around how well reserved the bank is today, knowing what we know in terms of the macro outlook? And also if you can comment on just the rest of the CRE book, particularly as it relates to San Francisco or California and your level of comfort around just apartments, etc., within that market? Thank you.
Mike Santomassimo, CFO
Thank you. It's Mike. To start, I want to discuss the overall situation in commercial real estate and then I will focus on the office sector. We've examined the multifamily portfolio in detail, and regarding the broader portfolio, including multifamily, it is performing well. Although there has been a slowdown in rent growth rates, they are not declining in most areas. Many new construction projects are experiencing strong occupancy rates, which is promising for multifamily developments. This positive trend is also reflected in the rest of the portfolio. However, we are seeing weakness in the office sector. As for the reserves we have set aside, we have made specific estimates on borrower loans and what we anticipate over the next few quarters, which are included in our reserves. We have also evaluated various stress scenarios for the rest of the office portfolio and believe we have sufficient reserves to navigate different potential outcomes as they evolve over time.
Ebrahim Poonawala, Analyst
Got it. And I guess just a separate question. You obviously have ample capital. Just Charlie, from your standpoint, how impactful is the asset cap today given the squeeze on the rest of the industry, I would think Wells would actually be gaining market share. But is the asset cap and all the regulatory issues, I'm not going to ask you to give us a timeline, but is that still a meaningful challenge in terms of your ability to take market share?
Charlie Scharf, CEO
Well, I mean you can look at the size of our balance sheet and see where it is relative to the asset cap, which is $1.952 trillion, I think? That's the actual cap, remember, which is a daily average over a couple of quarters. So relative to where we are operating today, we feel like we still have plenty of balance sheet to serve our customers and it's not standing in the way of that. Hasn't always been the case, but I think that's where we are today. But putting just the pure economics of the asset cap aside, it is something that, when we look at the work we have to get done, the fact that it's there is a statement of the reality that we still have more work to do. And so it's critical that we continue on our road to complete that work. And so that's the way we're thinking about it today.
Mike Santomassimo, CFO
I'll add one more point. As we consider the growth opportunities ahead, Charlie mentioned our new hires in investment banking. We already have access to our client base, so the focus is on bringing in the right talent to pursue fee opportunities without increasing our balance sheet significantly. The same applies to wealth management, where we see potential for growth. In the card sector, our updated product line is performing well, and we have more developments planned. I believe we have ample capacity to support our growth opportunities without needing to increase our exposure.
Ebrahim Poonawala, Analyst
Good color. Thank you.
Operator, Operator
Thank you. The next question will come from Steven Chubak of Wolfe Research. Your line is open, sir.
Steven Chubak, Analyst
Hi, good morning.
Charlie Scharf, CEO
Good morning.
Steven Chubak, Analyst
So wanted to start off with a question just on the net interest income outlook. Certainly encouraging to see the guidance increase. But you noted, Mike, that it does contemplate a modest level of loan growth. And just parsing some of your other comments where you alluded to credit tightening, signs of slowdown in the broader economy, what gives you confidence around some inflection in lending activity, especially given the flattish loan growth that we've seen this quarter?
Mike Santomassimo, CFO
We are definitely experiencing growth in card services and expect that trend to continue. Additionally, there is some growth in the asset-based lending and leasing business in the commercial bank, while the middle market remains relatively flat for this quarter. We anticipate some growth as we move into the second quarter. However, we aim to provide guidance that doesn’t rely on every assumption going in our favor. The main uncertainties regarding net interest income for the remainder of the year continue to revolve around deposits and deposit pricing. Loan activity will play a role, but it won't have the same impact.
Steven Chubak, Analyst
No, it's helpful color. And just a follow-up on expense, you cited the headcount reductions and higher severance cost driving some upward pressure this year. But just wanted to better understand how we should be thinking about the exit rate on expense. Once the headcount actions that you cited are fully captured in the run rate and whether there's any plans maybe to redeploy some of the NII windfall to reinvest back in the business as we think about some of the potential benefits in the higher NII guidance you cited?
Mike Santomassimo, CFO
Our focus on expenses has remained consistent over the past quarter or two. As we've mentioned previously, we are committed to being disciplined regarding our expense base. We are focused on executing and achieving the efficiencies we've discussed. As we approach the year-end and finalize our budget for next year, we will review the fluctuations as we typically do and provide you with some insights. However, our overall approach has not changed.
Charlie Scharf, CEO
Let me just add, Steve, if that’s okay. When we shared our expense guidance, there were questions about how we perceive variability and whether our results would influence that number. As we evaluate our performance, it wouldn’t be challenging for us to make decisions to meet an expense target. However, our results have been fairly strong, and we're taking various actions. I don't consider this as one-time expenses; rather, we have quite a bit of discretionary spending related to business development, product improvements, and similar areas, and we can assess our performance each year and quarter to decide our spending levels. As we move forward, we will wait and see during our budgeting process and explore different scenarios for next year before making final decisions. As Mike mentioned, we acknowledge ongoing opportunities to enhance efficiency throughout the company. We will maintain focus on this aspect, which is distinct from how much we choose to spend outside of it, and we will provide more updates on that as the year concludes.
Steven Chubak, Analyst
Helpful color. Thanks so much for taking my questions.
Operator, Operator
Thank you. The next question will come from John Pancari of Evercore ISI. Your line is open, sir.
John Pancari, Analyst
Good morning. I would like to get your updated thoughts on buybacks. With a CET1 ratio of 10.7% and the $4 billion buyback planned for Q2, I'm curious about the continuation of buybacks moving forward. Of course, the Basel III Endgame is a consideration, and I understand you're considering buybacks as you look ahead. Could you clarify what this might mean for the pace of repurchases? Thank you.
Mike Santomassimo, CFO
I think that's as much clarity as we want to provide at this time. We have substantial excess capital above the regulatory requirements and buffers we discussed. This seems sensible considering that capital requirements are likely to increase. In terms of timing, from what we've seen, we expect to learn more about the proposals later this month or early next month. This information will help us determine how much capacity we have for buybacks. In most scenarios we anticipate, there seems to be room to continue the buyback program prudently while still building the required capital levels and maintaining our desired buffers. There are several variables at play, so it doesn’t make sense to provide more specific figures until we see those proposals.
John Pancari, Analyst
Thank you for the helpful information. Regarding net interest income, I appreciate the updated guidance for 2023 at 14%. Can you discuss the implications of the forward curve for net interest income as we look towards 2024? If we reach a Fed funds rate of around 4% as indicated by the forward curve, what impact could that have on net interest income? Additionally, could you provide some insight into the near-term deposit trends? I know you mentioned a continued decline, so any framing or sizing of that would be appreciated. Thank you.
Mike Santomassimo, CFO
I'm not going to provide much clarity on 2024. However, you should consider that on the commercial side, rate betas are quite high both when rates are rising and when they are falling. The consumer side hasn't changed much yet. As you approach your modeling, it's important to evaluate each component differently. As we and many others have mentioned, once rates peak, there's likely to be a lag with continued repricing for a while afterward, which should be factored into your model. As I mentioned earlier, we've seen consistent performance across deposits in the last few quarters and no significant changes in behavior at this time. We'll see how things develop in the coming quarters, but there's still a lot of uncertainty in your assumptions. You will need to use your best judgment about what might happen. As we near the end of the rate cycle, much of the mix shift and repricing may have already occurred. We'll see how that plays out.
Charlie Scharf, CEO
And can I just add?
John Pancari, Analyst
Thank you. Yeah.
Charlie Scharf, CEO
We are not providing specific guidance for 2024 at this time. However, we have been outpacing expectations in net interest income and remain focused on achieving our 15% ROTCE targets in a more normalized environment. Looking ahead, we anticipate growth in fees across various business segments, including wealth management, cards, corporate investment banking, and middle market. We believe these efforts will yield positive results. We're also committed to managing expenses effectively. Additionally, regarding charge-offs and CECL, we take a forward-looking approach. The recent increases in our reserves, which have impacted the company's EPS, reflect a cautious assessment of the current environment versus future expectations. It's essential to consider all these factors, not just net interest income alone. Next question, operator.
Operator, Operator
Certainly, we'll move on to Betsy Graseck of Morgan Stanley. Your line is open.
Betsy Graseck, Analyst
Hi, good morning.
Charlie Scharf, CEO
Hey, Betsy.
Betsy Graseck, Analyst
Just two follow-ups. One on the reserve build in commercial real estate, and I know you discussed a bit already. I just wanted to understand how much of that was coming from really California, we all know there was a property that traded on California Street that sold at discount. So I'm just wondering how much of it is California office versus anything more broader based beyond that? Thanks.
Mike Santomassimo, CFO
Yeah, Betsy, it's not isolated to California. I mean I think you see weakness in a lot of cities these days and it really comes down to property specific stuff. And even in California, we've got as many examples where clients are actually reinvesting in buildings, even if lease rates are low or even empty in some cases as they are going into a workout. So I think it really depends on the building, borrower and all the things we sort of talked about in the script and it's less focused on just California.
Charlie Scharf, CEO
I want to highlight what Mike mentioned and what we discussed in the prepared remarks. We have dedicated significant time to thoroughly reviewing the office portfolio. Recently, we examined a range of factors that we are observing. It's important to clarify that it's a mistake to assess loss content solely based on the location of the property. We have examples in struggling cities where the structure of our loan is favorable, and the underlying property enjoys high lease rates for an extended period. Conversely, we might find a loan in a robust market, yet that property may face specific issues, including several potential termination dates in the near term. This meticulous approach has informed our assessment of the appropriate level of reserves. We have worked diligently to stress the scenarios we anticipate. When evaluating our position and complying with CECL reserving requirements, that's what we aim to achieve.
Betsy Graseck, Analyst
So, I think we all understand that most commercial real estate loans are structured in a certain way, where the stress arises at maturity. I'm curious if the current reserve adequately reflects the full commercial real estate portfolio in terms of interest rate risk, or if this is projected over a two-year period. The reason I'm asking is to gauge how much risk remains for potential increases in reserves related to commercial real estate.
Charlie Scharf, CEO
Mike, I'll start and then you can join in with your thoughts. We've considered all the risks, including refinance risk, while evaluating the portfolios in light of the current rate environment and cap rate expectations. It's possible that we may need to adjust things in the future as we gather more information over time. We're approaching this by taking a comprehensive view of the portfolio based on everything we know. In discussions with the team managing the real estate business and the risk analysts, there are differing opinions. Some believe it's difficult to accept the prospect of losing this amount of money based on their individual interpretations of the underlying assumptions. Others suggest that we should stress test the scenario because it is a possibility, and we need to account for that. This is how we arrive at our conclusions. Ultimately, we're trying to be forward-looking and consider all existing risks. Displaying that additional information we shared helps illustrate the issues in relation to the overall office portfolio and the broader commercial real estate landscape, highlighting the substantial level of reserves we currently have.
Betsy Graseck, Analyst
Got it. I understand. Thank you.
Operator, Operator
Thank you. The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.
Gerard Cassidy, Analyst
Thank you. Good morning, everyone. Mike, could you share your thoughts on your balance sheet and treasury functions regarding your assets and liabilities? Specifically, how do you plan to manage that in the second half of the year and into next year, and how does that differ from how you positioned the balance sheet last year?
Mike Santomassimo, CFO
Yeah, George. Sure. It's not that different, right? On the margin, you may be making decisions to add a little duration here or there, but I'd say it's marginal at this point and we really haven't changed substantially how the balance sheet is positioned.
Gerard Cassidy, Analyst
Very good. And then just to follow-up, I know you guys have given some good details here on working through the commercial real estate portfolio. And Mike, I think you said in your prepared remarks, in some cases, you've been able to get additional payments or equity investments from your borrowers to cure, maybe, a potential problem. Can you share with us some of the other workout solutions you're using so you can get through this period of adjustment that we're seeing in commercial real estate?
Mike Santomassimo, CFO
Yeah, I mean, sure. There's plenty of little structural enhancements you can make to feel better about it. And then there are also, in a lot of cases, getting some partial paydowns. And then you look at and you're trading those for refinancing terms. And I think you give people a bit more time to work through these sets of issues. I think we try really hard not to punt issues down the road. And so if there are real issues that we need to deal with, we try to deal with them in the moment. But there are a number of structural enhancements that we sort of work on with borrowers to get ourselves comfortable that we're setting the loan up for success.
Gerard Cassidy, Analyst
Very good. Thank you.
Operator, Operator
Thank you. The next question will come from Erika Najarian of UBS. Your line is open.
Erika Najarian, Analyst
Hi, thank you for taking my question. I wanted to ask about your interpretation of the joint statement from the OCC and Fed released on June 29, which encourages lenders to provide short-term or temporary loan accommodations for borrowers. Is this message something new, or is it just a reiteration of standard practices? Could this guidance help you find solutions to work with your borrowers and possibly postpone any negative classifications or designations?
Mike Santomassimo, CFO
Yeah, it's Mike. I'll take that. TDR doesn't exist anymore, but the guidance is very similar to what was issued originally back in 2009. It hasn't really changed much and doesn't alter the way we've been interacting with our borrowers. We have been proactive in working with them to find solutions to help navigate difficult circumstances. There is no leeway in how we classify criticized loans or other classifications. The intent is really to ensure that people continue to work with borrowers to find solutions, which is what we consistently do.
Erika Najarian, Analyst
Got it. And just a follow-up question here. Thank you for the disclosure again on Slide 6. With $22 billion of your loans in CIB, I think investors are wondering what is the average loan size there?
Mike Santomassimo, CFO
I don't think that's something we provide, and there's a wide range. Averages can often be misleading. What really matters is not the loan size, but all the variables Charlie mentioned earlier regarding what's happening with that property. I think that’s where the focus should be.
Erika Najarian, Analyst
Got it. And just squeezing in one more question. And before I ask this expense question, Charlie, I think your investors very much appreciate it that you're not just doing whatever you can to hit an expense number and you're reinvesting back into the company. So to that and I'm wondering if have you disclosed how much of the $800 million increase in the outlook for this year has to do with severance?
Mike Santomassimo, CFO
We didn't provide a specific number, but that is by far the largest component. There are also some exit costs for properties as we exit some lease space and other things. However, the severance is definitely the largest part.
Erika Najarian, Analyst
Got it. Thank you.
Charlie Scharf, CEO
Thank you.
Operator, Operator
Thank you. The next question comes from Matt O’Connor of Deutsche Bank. Your line is open.
Matt O’Connor, Analyst
Good morning. I want to follow-up Charlie on some of your prepared remarks. You talked about there's still some things that you're implementing to address regulatory issues and wondering if you can give a couple of examples of what still needs to be done in terms of implementation and when you expect that to be completed?
Charlie Scharf, CEO
I believe there's still a significant amount of work ahead of us, requiring several years to complete. While we have made substantial progress, there is more that remains to be addressed. I want to clarify that I'm referring to all of our consent orders and the necessary improvements to our control environment, not just the asset cap consent order. A lot is being accomplished, but what ultimately counts is successfully completing these tasks on time and meeting the quality standards expected by regulators and ourselves. We have been cautious about setting timelines because we need to finish our work first, after which regulators will evaluate it to determine if it meets their satisfaction. We aim to avoid rushing this process while continuing to make progress.
Matt O’Connor, Analyst
And I understand that you can't speak for them signing off on what you've done, but in terms of you accomplishing what you want to accomplish, where are you on that kind of process, like whether you want to frame it from an innings perspective or percent basis? Anyway to frame that, acknowledging there's a lot to do and that you've done a lot. But how far along are you in terms of what you can control on implementing these things?
Charlie Scharf, CEO
I appreciate your interest in having me address those questions. However, what truly matters is not our perspective on completing the work, but rather that our regulators review it and determine it meets their standards. Therefore, I believe it is not beneficial to delve deeper into this topic at this time. Nonetheless, I understand and value your inquiry.
Matt O’Connor, Analyst
Understood and fair enough. Thank you.
Operator, Operator
Thank you. The next question will come from Vivek Juneja of JPMorgan. Your line is open.
Vivek Juneja, Analyst
Hi, thanks. A quick one. Mike or Charlie, can you give us the maturity schedule? What percentage or amount of your office CRE loans are maturing in the second half and into 2024?
Mike Santomassimo, CFO
Not specifically, Vivek, we don't disclose that. But you should assume these are standard course loans in the commercial real estate space, which are generally three to five-year loans.
Vivek Juneja, Analyst
Okay. And you haven't really been originating much in the last couple of years. So I guess we could go back to looking at, when did you slowdown the origination of new office CRE, Mike? Was it two years ago? Was it three? Any color on that?
Mike Santomassimo, CFO
I think it's important to note that we've been refinancing our existing facilities during this period. If you examine the portfolio and consider a basic average life as I've mentioned, you should be able to get a good understanding of the approximate maturity schedule.
Vivek Juneja, Analyst
Okay. And how about multifamily? What's the average life of those loans and their maturities? I understand that those are in a much better position given all the factors you've already mentioned.
Mike Santomassimo, CFO
Slightly longer, a few years longer than office.
Vivek Juneja, Analyst
Okay, all right. Thank you.
Operator, Operator
And our final question for today's call will come from Charles Peabody of Portales Partners. Your line is open, sir.
Charles Peabody, Analyst
Good morning. Most of my questions were already asked and answered, but just I want to follow-up on the consent order issues. If I call correctly and please correct me if I'm wrong, there's six consent orders remaining and three of them, if I remember, deal somewhat with the mortgage banking operation. And I know starting last fall, you started the planning effort to simplify and downsize that and you've been executing on that this year. Can you give us a sense of what it is you need to do in mortgage banking related to those consent orders?
Mike Santomassimo, CFO
Yeah, sure. It’s Mike. So first of all, there are nine public consent orders out there that are all there. So you can see those. When you look at the mortgage ones, I think that each of the consent orders is actually quite clear in terms of what needs to happen to satisfy those. So I would just point you back to the documents themselves, which can give you a pretty good sense of what it is and each one is a little bit different.
Charles Peabody, Analyst
Follow-up, and do you talk to the regulators about the progress you're making in mortgage banking on a monthly basis, quarterly basis, semi-annual or do you present something at the end? How does the interaction with the regulators go?
Mike Santomassimo, CFO
We talk to our regulators all the time, at all parts of the company, at all levels of the company. And so you should assume we're actively engaged consistently with our regulators all the time.
Charlie Scharf, CEO
But the only thing I would add to that is, but again, they're here, they're on-site, we talk to them literally all the time.
Charles Peabody, Analyst
Right. No, I understand that, but specifically related to the progress you're making…
Charlie Scharf, CEO
Just give me a second. We talk to them about everything. And given the importance of the consent orders, you can assume it's about the work that's going on in the underlying consent order. But having said all of that, what matters is the work that they do at the end of the consent order after we submit it to them. And so they can be up to speed on what we're doing. They can know how we feel about the progress that we're making. But when we submit a consent order to them, they come in and do their holistic review. And so that's really where their determination is made about whether or not it's done to their satisfaction. So again, that just gets to the reason why I want to be very careful about not drawing any conclusions from our view on our work or any interim comments we might get from them. What really matters is the holistic review that they do and the process that they go through internally in the regulatory organizations.
Charles Peabody, Analyst
So that was part of my first question is have you submitted anything yet on mortgage banking?
Charlie Scharf, CEO
We're not going to talk about that. I said that over and over and over again.
Charles Peabody, Analyst
All right. Thank you.
Charlie Scharf, CEO
Thank you very much everyone. We appreciate the time and we'll talk to you all soon.
Operator, Operator
Thank you all for your participation on today's conference call. At this time, all parties may disconnect.