Earnings Call Transcript
WELLS FARGO & COMPANY/MN (WFC)
Earnings Call Transcript - WFC Q4 2024
Operator, Operator
Welcome, and thank you for joining the Wells Fargo Fourth Quarter 2024 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.
John Campbell, Director of Investor Relations
Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement, and presentation 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 material. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.
Charlie Scharf, CEO
Thanks, John. Let me start by acknowledging the unbelievable devastation from the Los Angeles wildfires. Our hearts go out to everyone who has been affected and we're committed to helping rebuild their lives, businesses, and communities. I also want to thank our employees, who are working hard to support our customers, many of whom have been impacted themselves. Turning to Wells Fargo's performance. I'll make some brief comments about our results and update you on our priorities. I'll then turn the call over to Mike to review fourth quarter results as well as our net interest income and expense expectations for 2025 before we take your questions. Let me start with some general comments. Our solid performance this quarter taps a year of significant progress for Wells Fargo across multiple areas. Our earnings profile continues to improve. We are seeing the benefits from investments we're making to increase growth and improve how we serve our customers and communities. We maintained a strong balance sheet, we returned $25 billion of capital to shareholders, and we made significant progress on our risk and control work. We grew net income and our diluted earnings per share was up 11% from a year ago. After I arrived, we reviewed our businesses and sold or scaled back several which reduced revenues in the shorter term and increased investments in others. We also made a conscious effort to diversify revenues and reduce our reliance on net interest income. In 2024, our strong fee-based revenue growth, up 15% from a year ago, largely offset the expected decline in net interest income, reflecting these efforts. Our disciplined approach to managing expense levels has been consistent and an important part of our success. We increased investments in areas that are important for our future and generated efficiencies to help fund those opportunities. Overall, expenses declined from a year ago, benefiting from lower FDIC and severance expenses as well as the impact of our efficiency initiatives, which have helped drive headcount reductions every quarter since the third quarter of 2020. We maintained our strong credit discipline and credit performance was relatively stable throughout the year and consistent with our expectations. Average loans declined throughout the year, as growth in credit card balances was offset by declines in most other asset classes, reflecting weak loan demand as well as credit tightening actions. Average deposits grew from the fourth quarter of 2023, with growth in our deposit gathering businesses, enabling us to reduce higher cost CDs issued by corporate treasury. We've been actively returning excess capital over the past five years, and that has resulted in average common shares outstanding decreasing by 21% since the fourth quarter of 2019. This year, we increased our common stock dividend per share by 15% and repurchased approximately $20 billion of common stock, up 64% from a year ago. Regarding our strategic priorities, I'm very proud of the progress we've made on our risk and control work, and it remains our top priority; closing consent orders is an important sign of progress. Early last year, the OCC terminated a consent order it issued in 2016 regarding sales practices. The closure of this order was an important milestone and is a confirmation that we operate much differently today. This was the sixth consent order terminated by our regulators since I joined Wells Fargo in 2019. Our operational risk and compliance infrastructure is greatly different from when I arrived, and while we are not done, I'm confident that we will successfully complete the work required in our consent orders and embed an operational risk and compliance mindset into our culture. Our results also show our progress on the other strategic priorities that we have. Improving our credit card platform is an important strategic objective and our progress here is clear. Since 2021, we have rolled out a total of 11 new cards, including four new consumer cards and a new small business card in 2024. Our new product offerings continue to be well received by both existing customers and customers new to Wells Fargo with over 2.4 million new credit card accounts opened in 2024. We've done this while maintaining our credit standards. The momentum in this business is also demonstrated by strong credit card spend, up over $17 billion from a year ago. In our auto business, we announced a multi-year co-branded agreement where we will be the preferred purchase finance provider for Volkswagen and Audi brands in the United States, starting in the first half of this year. We continue to reposition our home lending business as we execute on the strategic direction we announced in early 2023. We've reduced headcount by 47% and the amount of third-party mortgage loan service by 28% since the announcement as we continue to streamline this business. The business is more profitable today and opportunities remain to improve. After several years of little to no growth, as we focused on satisfying the requirements of our consent orders, we are starting to generate growth and increase customer engagement in our consumer, small and business banking segment. We had more meaningful growth in net checking accounts in 2024. Importantly, most of that growth came in the form of more valuable primary checking accounts. We had over 10 billion debit card transactions last year, up 2% from a year ago, the highest annual volume in our history. We accelerated our efforts to refurbish our branches, completing 730 in 2024. We continue to make enhancements to our mobile app, including making it significantly easier to open accounts, and in the fourth quarter, over 40% of consumer check accounts were opened digitally. We grew mobile active customers by 1.5 million in 2024, up 5% from a year ago. Our customers are also increasingly using Zelle, and we had over $1 billion in sales transactions in 2024, up 22% from a year ago. We introduced Wells Fargo Premier to better serve our affluent clients, and we're starting to see some early benefits from the enhancements we've made. We increased the number of premier bankers by 8% and branch-based financial advisers by 5% from a year ago, with a focus on increasing the number of bankers and advisers in top locations. We have enhanced our customer relationship management capabilities for our bankers and advisers. This has increased collaboration, driving $23 billion in net asset inflows into Wealth and Investment Management Premier channel last year. Deposit and investment balances for Premier clients grew steadily throughout the year and increased approximately 10% from a year ago. This remains a significant area of opportunity for us. Turning to our commercial business. In the commercial bank, we're focused on adding relationship managers and business development officers in underpenetrated and growth markets to drive new client acquisition and future revenue growth, and we expect to hire even more in 2025. We created a strategic partnership with Centerbridge Partners and introduced overland advisers to better service our commercial bank customers with the direct lending product. We have targeted our investment banking capabilities towards our commercial banking clients. We're still early in these efforts, but we're starting to see results, including our investment banking market share with our commercial banking clients increasing by approximately 150 basis points in 2024, which includes helping some clients access capital markets for the first time. Additionally, we've been working closely with our clients to support their M&A activity, driving higher M&A-related revenue. The opportunity remains significant. We continue to make investments in talent and technology to strengthen corporate investment banking. More than 75 new hires joined CIB since 2019, with many of these in key convergent product groups within trading and banking. Our revenue and share in many important areas has increased, including in our markets business, where we've grown our U.S. market share, including credit trading, commodities, and our equity cash and derivatives business. We also continue to make steady progress in growing our FX business with strong growth in both our institutional client base and volumes in 2024. We also grew our U.S. market share in investment banking with share gains in debt and equity capital markets and increased revenue in our advisory business in 2024. We entered 2025 with a solid pipeline in both Capital Markets and Advisory. While market conditions can always change, I feel great about our progress and continue to believe we're just beginning to see the benefits of our investments. We've also continued to exit or sell businesses that are not in sync with our strategic priorities. Last year, we entered into a definitive agreement to sell the non-agency third-party servicing segment of our commercial mortgage servicing business. More broadly, the U.S. economy has performed very well and remains strong. Lower inflation and unemployment position the economy well into 2025. We are predominantly a U.S. bank. We succeed when the country succeeds. The incoming administration's support of U.S. businesses and consumers gives us optimism as we look forward. Additionally, the incoming administration has signaled a more business-friendly approach to policies and regulation, which should benefit the economy and our clients. Mike will talk more about our expectations for 2025. As we start the new year, I'm enthusiastic about the opportunities we have to drive higher returns across our businesses by growing revenue and managing expenses. I'm proud of the progress we made in 2024. I want to conclude by thanking everyone who works at Wells Fargo for their hard work and dedication in supporting our customers, clients, and communities. I'm excited about the momentum we're building and all that we can accomplish together in 2025. I will now turn the call over to Mike.
Mike Santomassimo, CFO
Thank you, Charlie, and good morning, everyone. We had solid results in the fourth quarter, including net income of $5.1 billion or $1.43 per diluted common share. Underlying business performance was strong compared to a year ago. We grew fee income across most categories, maintained our expense and credit discipline, and grew customer accounts and activity levels as we benefited from the investments that Charlie highlighted. We also grew net interest income from the third quarter. Our fourth quarter results included $863 million or $0.26 per share of discrete tax benefits related to resolution of prior period matters. This benefit was largely offset by $647 million or $0.15 per share of severance expense and $448 million or $0.10 per share of net losses on the sale of debt securities as we took the opportunity to further reposition a portion of the investment portfolio. This included the sale of approximately $8 million of securities, which we reinvested into higher-yielding securities. The estimated payback period for this repositioning is approximately 2.5 years. Turning to Slide 4. Net interest income grew $146 million or 1% from the third quarter, the first linked-quarter increase since the fourth quarter of 2022. The increase was driven by higher customer deposit balances, which enabled us to continue to reduce higher cost market funding. Moving to Slide 5. Average loans were down from both the third quarter and a year ago, with period-end balances growing $3 billion from the third quarter with growth in commercial and industrial loans and credit card loans more than offsetting declines in most other categories. Average deposits increased both from the third quarter and a year ago with growth in our customer deposits, enabling us to reduce higher-cost corporate treasury deposits. Average deposit cost declined 18 basis points from the third quarter as deposit costs stabilized or declined across all of our deposit-gathering businesses. In response to the Federal Reserve rate cuts, we have reduced standard pricing for commercial clients as well as pricing for promotional deposit offers and CDs in our consumer businesses. Lower deposit costs also reflected the slowdown of customer migration to higher yielding deposits. Additionally, lower cost consumer deposit balances in checking and saving accounts have continued to stabilize. Turning to Slide 6. We had strong growth in noninterest income, up 11% from a year ago, benefiting from the investments we've been making in our businesses as well as market conditions. This growth was diversified with each of our operating segments generating growth from a year ago. I'll highlight the specific drivers of noninterest income in discussing our operating segment results. Turning to expenses on Slide 7. Noninterest expense declined 12% from a year ago, driven by the lower FDIC special assessment. Excluding this assessment, expenses were relatively stable as lower severance expense and the impact of our efficiency initiatives was largely offset by higher revenue-related compensation predominantly in Wealth and Investment Management as well as higher technology and equipment expense. Turning to credit quality on Slide 8. Credit performance has been relatively stable with our net loan charge-off ratio the same as a year ago and up 4 basis points from the third quarter. Commercial net loan charge-offs increased $80 million from the third quarter to 30 basis points of average loans, driven by the commercial real estate office portfolio. Commercial real estate office fundamentals have not changed and remain weak. We still expect commercial real estate office losses to be lumpy as we continue to actively work with our clients. Consumer net loan charge-offs increased $20 million from the third quarter to 85 basis points of average loans, driven by higher losses in the credit card portfolio, which was consistent with our expectations. Nonperforming assets declined 5% from the third quarter, driven by a $390 million decline in commercial real estate office nonaccrual loans, which includes paydowns and net loan charge-offs. Moving to Slide 9. Our allowance for credit losses for loans was down $103 million from the third quarter, with modest declines across most asset classes partially offset by the increase in allowance for credit card loans driven by higher loan balances. Our allowance coverage for total loans has been relatively stable over the past five quarters as credit trends have remained fairly consistent. Our allowance coverage for our corporate and investment banking and commercial real estate office portfolio increased 12% as loan balances continued to decline and allowance levels were relatively stable. Turning to capital and liquidity on Slide 10. Our capital position remains strong, and our CET1 ratio of 11.1% continues to be well above our CET1 regulatory minimum plus buffers of 9.8%. We repurchased $4 million of common stock in the fourth quarter and approximately $20 million for the year, reducing common shares outstanding by 9% from a year ago. Turning to our operating segments, starting with Consumer Banking lending on Slide 11. Consumer Small and Business Banking revenue declined 7% from a year ago, driven by lower net interest income, reflecting the impact of customers migrating to higher yield and deposit products. However, the pace of the migration continues to slow. Home lending revenue grew 2% from a year ago, driven by higher mortgage banking fees. Credit card revenue grew 3% from a year ago as loan balances increased and card fees grew from a higher point of sale volume. We continue to be pleased with the performance of new products that we launched over the last 3.5 years, with credit performing as expected and strong growth in new accounts and usage. Auto revenue decreased 21% from a year ago, driven by lower loan balances, reflecting previous credit tightening actions and continued loan spread compression. The decline in personal lending revenue from a year ago is also driven by lower loan balances and loan spread compression. Turning to some key business drivers on Slide 12. Retail mortgage originations increased 31% from a year ago with higher purchase volume as well as stronger refinance volume early in the quarter when interest rates were lower. Debit card spending was strong in the fourth quarter and increased $4.9 billion or 4% from a year ago, and credit card spending was up 9% from a year ago, with growth in all categories except fuel. Turning to Commercial Banking results on Slide 13. Middle Market Banking revenue was down 2% from a year ago, driven by lower net interest income, reflecting higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 12% from a year ago, driven by lower net interest income and lease income, partially offset by improved results from our equity investments. Average loan balances in the fourth quarter were down 1% compared with a year ago as growth in middle market banking was more than offset by lower balances in asset-based lending. While our commercial clients are generally more optimistic, we did not see a meaningful change in loan demand in the fourth quarter as many clients remain cautious. Turning to Corporate and Investment Banking on Slide 14. Banking revenue was down 4% from a year ago, driven by higher deposit costs and lower loan balances. This decline was partially offset by higher investment banking revenue from increased activity in equity and debt capital markets as well as higher advisory fees. Commercial real estate revenue decreased 1% from a year ago, reflecting the impact of lower loan balances, partially offset by higher capital markets revenue from higher volumes in commercial mortgage-backed securities, real estate loan syndications, and multifamily capital as market sentiment improves. Markets revenue was down 5% from a year ago, driven by lower revenues in equities and municipals, partially offset by stronger performance in most other products, fixed income products. Our fourth quarter results reflected the implementation of a change to incorporate funding valuation adjustments for our derivatives which resulted in a loss of $85 million. The decline from the third quarter was also driven by seasonally lower trading activity across most asset classes. Average loans declined 6% from a year ago, driven by continued reductions in our commercial real estate portfolio driven by office as well as lower loan balances in banking as clients continued to access capital markets for funding. On Slide 15, Wealth and Investment Management revenue increased 8% compared with a year ago due to higher asset-based fees driven by increased market valuations. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first quarter results will reflect market valuations as of January 1, which were up from both a year ago and from October 1. Average deposits increased by 16% and average loans grew by 2% from a year ago, which have both benefited from product enhancements and pricing improvements that provide value to our clients. The growth in deposits also reflected the slowdown in migration to cash alternatives with balances in those products lower than a year ago. Slide 16 highlights our corporate results. Revenue increased from a year ago, driven by improved results from our venture capital investments. After having impairments on these investments for the past two years, we had net gains every quarter in 2024 with improved performance in the second half of the year. Now turning to our outlook on Slide 17. I'll go into more detail on our 2025 expectations for net interest income and noninterest expense in the next few slides, but first, I want to highlight the progress we've made on improving our returns. When we first started discussing the outlook for our returns in the fourth quarter of 2020, we had an 8% ROTCE. Over the past four years, we have been successfully executing on our efficiency initiatives, diversifying our sources of revenue by investing in our businesses to better serve our customers and drive growth and returning excess capital to shareholders. These actions helped to improve our ROTCE to 13.4% in 2024. We still believe we have an achievable path to a sustainable ROTCE of 15% as we continue to make progress on transforming the Company, including the priorities highlighted earlier on the call. On Slide 18, we provide our expectations for net interest income for 2025. We had $47.7 billion of net interest income in 2024, which was within the expected range we provided at the start of last year. Net interest income declined sequentially for the first three quarters of the year before growing modestly in the fourth quarter. Our fourth quarter annualized net interest income is $47 billion or approximately $700 million lower than full year 2024. Our current expectation is that full year 2025 net interest income will be approximately 1% to 3% higher than full year 2024 or approximately 3% to 5% higher than the annualized fourth quarter 2024 net interest income. We expect net interest income will be relatively stable in the first half of 2025, which includes the impact from two fewer days in the first quarter with more growth in the second half of the year. Underpinning our expectations are a series of key assumptions, including using the recent forward rate curve, which includes between 1 and 2 Federal Reserve rate cuts, given our modestly asset-sensitive position; this will be a slight headwind to net interest income. Average loans are expected to grow modestly from fourth quarter of 2024 to fourth quarter of 2025 driven by anticipated growth in the Corporate Investment Bank markets group and CIB banking as well as anticipated growth in our auto and credit card portfolios. Deposits in all our deposit-gathering businesses are expected to grow modestly, which would allow us to further reduce higher-cost market funding. Reinvestment of lower-yielding securities into higher yielding assets, our expectation also reflects the benefits from the actions we took in the second half of 2024 to reposition the investment portfolio. Trading-related net interest income is expected to be higher due to lower interest rates, which would largely be offset by lower trading-related noninterest income. As we've done in prior years, for the purposes of estimating net interest income, we are also assuming the asset capital remained in place throughout the year. Ultimately, the amount of net interest income we earned in 2025 will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the curve, deposit balances, mix and pricing, and loan demand. Now turning to our 2025 expense expectations on Slide 19. Following the waterfall on the slide from left to right, we reported $54.6 billion of noninterest expense in 2024, which includes $647 million of severance expense in the fourth quarter that was not contemplated in our guidance. Our 2025 expense expectation includes operating losses of approximately $1.1 billion, which is approximately $700 million lower than operating losses in 2024. Looking at the next bar, we expect severance expense to be approximately $500 million lower in 2025 given the expense pool we took in the fourth quarter of 2024. We expect Wealth and Investment Management revenue-related expenses to increase by approximately $600 million in 2025. As a reminder, this is a good thing as these higher expenses were more offset by higher noninterest income. Actual revenue-related expenses will be a function of market levels with the biggest driver being the equity markets. Our outlook assumes the S&P 500 will be up modestly from current levels, but clearly, the ultimate performance of the markets is uncertain. We expect all other expenses to be up approximately $200 million with the impact of efficiency initiatives more than offset by higher investments in other expenses. We expect approximately $2.4 billion of gross expense reductions in 2025 due to efficiency initiatives. We've successfully delivered on more than $12 billion of gross expense saves since we started focusing on efficiency initiatives four years ago, and we continue to believe we have opportunities to get more efficient across the Company. Keep in mind, however, that the resources needed to address our risk and control work are separate from our efficiency initiatives. There are three primary areas where we expect to invest. First, we expect approximately $900 million of incremental technology expense, including investments in infrastructure and business capabilities. Second, we expect approximately $900 million of incremental other investments, including the specific areas we highlighted on the next slide. Finally, we expect other expenses to increase by approximately $800 million, including expected merit increases in performance-based discretionary compensation. As a reminder, the first quarter has seasonally higher personnel expenses, which are expected to be $650 million to $700 million. Putting this all together, we expect 2025 noninterest expense to be approximately $54.2 billion. On Slide 20, we provide some examples of our areas of focus for the investments, which are critical to better serving our customers and generating growth. Let me highlight a few. Building the right risk and control infrastructure remains our top priority, and we will continue to invest in this important work. We continue to invest in technology and digital platforms to transform how we serve both our consumer and commercial customers. This includes continuing the transition of our applications to the cloud, migrating into new data centers, and investing in data platforms to drive more insights. We are continuing to upgrade our core lending capabilities, including improvements to our fulfillment and servicing systems, enhancing private decisioning and strengthening fraud capabilities. To drive customer growth in the consumer businesses, we plan to continue scaling our marketing efforts, modernizing our branch footprint, and increasing the number of premier bankers and financial advisers. We are also focused on onboarding more independent advisers as we continue building out our independent brokerage channel. In addition, we continue to improve our digital capabilities for our customers, specifically our mobile account opening and onboarding as well as Zelle. We plan to continue hiring priority sectors to help drive growth in investment banking and capital markets. We also plan to continue hiring relationship bankers within commercial banking to build out coverage in underpenetrated markets in key industries. In summary, our results in 2024 demonstrated the continued progress we've been making to improve our financial performance. We generated strong fee-based revenue growth, reduced our expenses, maintained strong credit discipline, increased capital returns to shareholders, and retained our strong capital position. I'm very pleased with the progress we've made so far and excited about the additional opportunities we have to continue to improve performance. We will now take your questions.
Operator, Operator
At this time, we will begin the question-and-answer session. Our first question comes from John McDonald of Truist Securities. Your line is open.
John McDonald, Analyst
Mike, I was hoping you could unpack the deposit expectations embedded in Slide 18 and the NII outlook. You talked about stabilization of retail volumes and mix. Just kind of wanted to get a little more detail about what you're assuming for retail deposit growth, mix and how that plays into the paydown of higher cost borrowings throughout the year in your plan?
Mike Santomassimo, CFO
Yes, sure. Thanks, John, and welcome back and welcome to your new seat. Look, I think as we've sort of talked about now, I guess, for the last three or four quarters, we've been seeing less and less migration out of noninterest-bearing to interest-bearing. You got to look through some of the product consolidations we did in the third quarter. So, there's some noise that we talked about last quarter. But so, we've seen continued sort of stabilization of the mix between noninterest-bearing and interest-bearing. And so that's sort of helpful as you go into this year, and we expect that to continue as we look forward and then start to see absolute growth across the consumer franchise. As you know, in the interest-bearing products in the consumer side, pricing hasn't really moved much through the cycle. And so, you're not seeing standard pricing change much, but you are seeing the promotional savings and CD rates continue to come down over the last 90, 120 days as rates have started to move. And so, we would expect that mix to stabilize. We expect some absolute growth, and we don't expect pricing pressure to come through on the consumer side.
John McDonald, Analyst
Okay. Got it. And then just wanted to shift gears and ask about credit card profitability. When you're in growth mode, credit card experience is a drag from accounting on the upfront acquisition costs and provision. Where are you on card profitability now? Is that an upside driver to ROE? Is more of the balances roll off teasers and some of that upfront expense wanes.
Mike Santomassimo, CFO
Yes, certainly is. I think as you look backwards a little bit, we started launching the new products 3.5 years ago. So, the first of the vintages started coming on in July, August, a few years ago. And so, we're just starting to kind of see those earliest vintages mature and become more profitable. So, we're still at early days in terms of seeing that profitability really come through in the P&L. I'd say, obviously, the factors you got to think about as you sort of look through that are the credit box and the credit performance. That's all behaving right on top of what we would have modeled. So, we're not seeing any concerns flow through from what we modeled across all of the different new products. And we're seeing, as Charlie highlighted in his script, we're seeing good new account growth continue across the different products there. So, it's just a matter of time for that to really more meaningfully come into the P&L. It really hasn't contributed much at all yet as you sort of look at it, but it will start to come through over the next year or two.
Charlie Scharf, CEO
And John, this is Charlie. The only thing I would add, I mentioned this in my prepared remarks, but the two places that we think of as where we've already taken actions and assistance execution now, which will improve profitability. One is card, as you pointed out. And the second I referenced is we're still not at the level of profitability where we should be in home lending, just given as we continue to wind down that servicing book. And so, we think those two things will be helpful for us as we look forward.
Operator, Operator
The next question will come from Ebrahim Poonawala of Bank of America. Your line is open.
Ebrahim Poonawala, Analyst
I guess I just wanted to go back, maybe, Charlie, to something you talked about back in December on the back of lifting the OCC consent order. As we think about just the ROE trajectory for the bank, it will be useful if you can maybe give some tangible examples of things that you've been able to do post the lifting of the consent order in terms of incenting branch employees and where in the balance sheet or in the P&L we should expect that to show up maybe as early as 2025.
Mike Santomassimo, CFO
Yes, Ebrahim, it's Mike. I'll begin and Charlie can add if he has anything to say. I think what you're referring to is the sales practices consent order that was lifted last February. When that happened, we had to scale back many of the incentive plans and sales goals in the branch system to rebuild the control framework and ensure that past issues don't happen again. Now that the consent order is no longer in place, we've been able to fully implement a standard incentive framework across the branches. We have been testing this in a small group of branches, and as expected, those pilot branches have shown improved performance in areas like new checking growth and credit card accounts. We're still in the early stages of seeing the benefits of this system, which will be rolled out throughout 2024, and we anticipate seeing more significant results in the near and medium term.
Charlie Scharf, CEO
Maybe just a little more color to what Mike said. I think again, if you think back, it was hugely important that we satisfied the obligations that existed in that consent order and that we were comfortable with the control environment that existed. So, we took away, as Mike said, a whole series of things. It's not just one thing. It was compensation. It's recording goals, just the whole way we manage the system, as we were building out everything that would make us and our regulators comfortable as we managed the system in the future, similar to the way other people manage their system that if someone were to be doing something that wasn't appropriate, that we had the right controls and reporting in place to catch it. So, it took a long time to build that out. But to have the confidence that we could add back a lot of these management mechanisms that you have in place. No one individual thing is earth-shattering. But when you take compensation, when you take reporting, when you take management routines, when you take all those things and put them together, at the same time, you're monitoring all the controls that you've built. That's what gives us the confidence to go forward with the system that we think can attract more customers and do more with our existing customers, but within a very tightly controlled framework that we feel comfortable relative to how we manage the risk that's there.
Mike Santomassimo, CFO
Ebrahim, actually, Charlie and a lot of other folks here have seen this before, and we're confident we're going to get the results we think out of it.
Ebrahim Poonawala, Analyst
That's helpful information. I appreciate Mike for outlining the expense investment priorities. Regarding the severance charge in the fourth quarter and the ability to find additional efficiencies related to the $54.2 billion expense target, how should we approach the situation? Are we at a stage where most of the easy cost-saving opportunities have been exhausted, and we should expect expenses to generally rise due to investments, while still anticipating positive operating leverage moving forward? Or do you believe there are still significant opportunities to cut costs and improve efficiency, particularly in the consumer bank?
Mike Santomassimo, CFO
Yes. I think, Ebrahim, as we sort of look at what you see there and what we're doing in 2025, the thinking is no different than it's been now for the last four or five years that we've both been here. I think as you look at the Company, we still feel like there's a significant amount of opportunity to drive efficiency, and that's what you see in 2025. I know we've used this analogy a lot, but it is just like peeling an onion. And as you sort of look at the next layer down, you find more efficiency, you bring better technology, you bring better automation, which saves us money, but also in a lot of cases, improves the client experience for our customers. As we come in every day, we still think about it the same way that we've been thinking about for a while, and that's what you see in the expectations for this year.
Operator, Operator
The next question comes from John Pancari of Evercore. Your line is open.
John Pancari, Analyst
Good morning. Regarding the net interest income outlook, you mentioned a modest expectation for loan growth in 2025. Could you provide more details on how we should view that in terms of its level and trajectory? Should we align it with GDP growth, or is there another perspective? Additionally, along with the main drivers, could you share some insights on the anticipated pace of incremental balance runoff as you assess the growth outlook?
Mike Santomassimo, CFO
Yes. So, maybe I'll start on the loan side. As I said in my commentary, we're expecting to see a little bit more of it as we get to the middle and second half of next year. So, we may see a little bit in the first half, but it’s not be more meaningful as we go later in the year. I would think of it as low to mid-single digits depending on the category of loans. But obviously, some of that will be dependent upon the overall backdrop that we're in. As you look at the consumer side of the picture, mortgages will likely continue to decline a little bit given sort of the rate environment we're in. We did see a little bit of incremental refinance activity in the fourth quarter. But now with rates back up, that seems to be back down again. We should see some card growth as we go through the year, and we should start to see some growth in the auto portfolio as well. On the commercial side, some of it will be new account new client growth as we go through the year. We've been adding bankers across different categories. We do expect to see some growth in the markets business as well to drive some loan growth. It should come from a lot of different areas across the population, but I would expect to see that a little bit more as we go into the middle and second half of the year.
John Pancari, Analyst
Great. And then separately on capital, 11.1% CET1 pretty solid and you still bought back about $4 billion this quarter. How should we think about the buyback appetite as you look at 2025, assuming that you do see some improvement in organic growth opportunities, how could that influence your pace of buyback?
Mike Santomassimo, CFO
Yes. I mean, look, it's the standard sort of waterfall of decision-making that goes into it. If we've got good organic growth opportunities across loans and other categories, we're going to serve customers, that's always first. We still have the asset cap in place. So, there are some limits to that. We'll look at all the different risks that are out there across the different categories of items that we have to be concerned about. Buybacks will kind of be the rest. Given we've got the asset cap and given we've got limited organic growth, depending on the quarter you're in, I think you'll see us continue to return capital back to shareholders like we've done now for the last number of years. At this point, we don't believe we need to be higher than where we are from a CET1 percentage. We'll manage that based on those opportunities and those decisions that we talked about.
Operator, Operator
The next question comes from Erika Najarian of UBS. Your line is open.
Erika Najarian, Analyst
Clearly, the way the stock has reacted, the message from your shareholders has been an embrace of Wells Fargo as more than a remediation story. Thinking about the return improvement even beyond the asset cap resolution and the consent order. To that end, Charlie and Mike, you have a medium-term ROE target of 15%. In 2024, you generated almost 13.5%. By your own commentary, you still have places like Card and Home Lending where your profitability should improve from here. You're carrying excess capital. You're under the asset cap. You're making great efforts in CIB in terms of really using your balance sheet to generate even more fees off of your relationships. As we think about that 15%, especially in the context of you have one money center that has to hold more capital than you that has a 17% target and another money center that has to hold even more capital to go than that 15% target. I'm wondering if your shareholders are thinking about Wells beyond the remediation story, what is the true natural return of this business?
Charlie Scharf, CEO
Yes. Thank you, Eric. What we want to emphasize is that we evaluate each of our businesses individually and benchmark them against the top performers in terms of both returns and growth. Besides our home lending and auto businesses, we expect our other operations to grow at rates aligning with some of the best in the industry, while also achieving strong returns. When making comparisons, it is important to consider the mix and size of our various businesses in relation to others. Our aspirations are informed by where competitors stand and how our business mix aligns with our goals and timelines. We need to take it step by step and avoid rushing. We aim for a 15% target and are nearing it, but we still have some constraints to overcome. There will be a time when we can discuss our trajectory beyond that 15%, but for now, we'll remain focused on our current targets.
Operator, Operator
The next question comes from Betsy Graseck of Morgan Stanley. Your line is open.
Betsy Graseck, Analyst
So, two questions. One, just to follow up on the last question that Eric asked on the drivers. We're in the last mile. So, congratulations we're in the last mile to the 15%. Are you thinking about that last mile as being driven by revenue growth happening faster in the businesses that have the higher returns? Or are there still expenses to be cut out such that the expense ratio and the expense focus is what's going to drive that?
Mike Santomassimo, CFO
Betsy, it's Mike. I'll begin by referring back to something we discussed last year. There are various paths to achieving our goals depending on the circumstances that arise. As mentioned earlier in the call, we have our credit card business and home lending business. As both of these sectors reach more mature return profiles in the card business, and we see the profitability improvements we aim for in home lending, they could get us quite close to our objectives. Additionally, we should consider the growth we are experiencing in our investment bank, capital markets, and wealth management. There are numerous combinations that can lead us to our target, which is why we are confident in reaching that 15%. Reasonable people may have different views on what will lead us there first, but there are many ways to achieve it.
Charlie Scharf, CEO
Betsy, for a second, if I can. If you look at what we've said for next year, we've given you an expense number in terms of what our expectations are, which are pretty close to what they are this year. We've given you our NII guidance, which is also up from the prior year to make your own assumptions on credit and fee income and you'll get a sense for what those dynamics look like. The one thing I just do want to say, when we think about returns, we feel really great about the prospects here. But as I said, we don't want to get ahead of ourselves. We're careful to make sure that we've got the latitude to spend on all of the risk and operational things. That's still the case. Even though we feel great about the progress and I've tried to give an indication of how we feel about that. We must maintain that flexibility because that is the gating factor and the top priority. We've been careful not to provide multi-year guidance for expenses because as we continue to peel back, we find opportunities. We tried to also lay out in the presentation the point that we're not just reducing expenses and funding inflationary increases. We're increasing the level of investment in technology and other things. We want the ability to make those decisions at each point in time. Yes, if we didn't increase the level of investment or if we capped that out, you could sit here and say, yes, margins would continue to expand, returns would expand, you could get to significant numbers. But we're building the Company for the future. As long as we see the payoffs there, we want the latitude to do that. We're very conscious of what our investors expect from us. We're conscious of what we think the franchise can produce, but we intend to build both a higher returning and higher growth franchise, and you're just starting to see that.
Betsy Graseck, Analyst
Totally get it, and it does feel like there's a bit of a shift at the margin to revenue-led profitability growth, in my opinion, which is great, as a lot of low-hanging fruits have already been cut out on the expense side. Lastly, on credit card. I understand more maturity. There was the announcement during the quarter, I believe, that Ray Fischer is stepping down. Could you help us understand what drove that decision? And new management, which I assume will have the same goals and everything, but if we could just have a few thoughts on that whole situation? Thank you.
Charlie Scharf, CEO
Yes, I've known Ray for a long time and we've collaborated for many years. When I joined Wells, on my very first or second day, I learned that the head of the card business had already accepted a job elsewhere. That was not influenced by me; it was a pre-existing decision. I invited Ray to join us and he has done an outstanding job. I'm not certain of his exact age, but I want to say...
Mike Santomassimo, CFO
We can give away his exact age, but he's old enough to deserve to retire. Very well, thank you, Mike.
Charlie Scharf, CEO
Very well put. He's done a great job. This is a very natural progression and something that we've talked about relative to his timing and what his expectations are. We've got a great team in place that he's built out. We've recruited a great leader from outside the Company, Ed Olebe, who joins us in February. The strategy is the same, nothing is going to change. We've had lots of conversations about what we're doing and what the opportunities are. I'm super excited about both what we've done and continuing to execute along the lines that we've laid out for you all.
Betsy Graseck, Analyst
Okay. And you'll announce the new head when the time is appropriate, right?
Mike Santomassimo, CFO
We have already discussed that John will send you the press release.
Charlie Scharf, CEO
I think we sent it out. To be fair, we sent it out internally, and there was an article this past week pointing it out.
Operator, Operator
The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.
Matt O’Connor, Analyst
Obviously, rate volatility is quite high here. So, how do we think about the rate sensitivity to your net interest income, if rates end up being a little bit higher? It seems like it is structurally good, but help frame some of the sensitivity to the guidance you put out there from changes in rates? Thanks.
Mike Santomassimo, CFO
Yes, Matt. Obviously, we'll update the sensitivity in the Q or the K when you get it. But we're still marginally asset-sensitive, as I said in my script. The balance sheet has sort of naturally gotten less sensitive over the last number of quarters. Rates coming down, as I said in the guidance, is a slight headwind to our estimates. If they hold a little bit higher than what was in the forward, then I think that will be a slight positive. We've become less rate sensitive over the last number of quarters, but it's still a little bit asset sensitive.
Matt O'Connor, Analyst
Okay. That's helpful. And then just on trading, obviously, you guys have been executing really well for a few years now. I don't want to make too much of just one quarter. But even if we strip out the fair value adjustment, trading was still down year-over-year. Obviously, the peers are kind of implying up, I don't know, 15%, 20% plus, just maybe talk a bit about was there anything unusual this quarter that made trading weaker? I appreciate that last year was a strong quarter, but it did jump out.
Mike Santomassimo, CFO
Yes. It was really about last year being a strong quarter than this year being a weak quarter. Nothing's changed. There's nothing abnormal underneath the surface. Nothing's changed in our approach there. The businesses are quite different when you look at peers. So, I do think you have to look through the results a little bit, given the global nature and maybe the risk that some of the others take.
Matt O'Connor, Analyst
Okay. Actually, just on that last point. Obviously, we know you're more domestic, but your comment that others might take more risks. How do you think you're being more conservative in trading?
Mike Santomassimo, CFO
You need to consider the risks involved. I'm not implying that anyone is taking on more risk than others. In our business, we have maintained a disciplined approach to our risk appetite across trading operations. Our focus has largely been on areas that are friendly to our balance sheet, such as foreign exchange, due to the asset cap and other considerations.
Charlie Scharf, CEO
What we're saying is just that the size of our business is materially smaller than the biggest folks out there. The complexity of the products is very different, both because of the global nature but also some of the things we do. It's just that we have a smaller, less complex business.
Operator, Operator
The next question comes from David Long of Raymond James. Your line is open.
David Long, Analyst
As it relates to auto, just seems like a bit of a strategic shift after three years of seeing that portfolio decline. What are you seeing in that business that is increasing your appetite to grow it here forward?
Mike Santomassimo, CFO
Yes. I wouldn't position it as a strategic shift. A couple of years ago now, we took some tightening actions based on credit tightening. There were two things going on. We took some credit tightening actions based on what we were seeing happening in the market, and that had an impact on originations. We also saw some pretty significant spread compression at different points over the last couple of years. Our focus is not to be big; our focus is to have a good returning, profitable business there. We backed away in certain areas. I think over time, that starts to evolve and change and spreads are a little bit better than they were a couple of years ago in some pockets. That’s part of it. Second, Charlie highlighted it as well. We are continuing to invest in the auto business. We've been continuing to build out better capabilities to be a little bit more of a full-spectrum lender across different pockets. That's a very small piece of what you're seeing in there. The deal we signed with Volkswagen and Audi hasn't had any impact at this point. That will start to have a small impact as we get later in the year. It’s still relatively small growth in the originations. We're only talking a couple of billion year-on-year. So, we'll see as it progresses throughout the year.
David Long, Analyst
Got it. And then the second question I had relates to the investment securities portfolio repositioning. Do you have certain internal payback maximum that you're willing to look at? Or do you need to have a gain elsewhere in the bank before you look to take a loss in making some adjustments? What is the thought process that you go through to make the decision to actually act?
Mike Santomassimo, CFO
Yes. Look, I think we've acted twice. We're in the third and the fourth quarter as we've sort of looked at different opportunities. We've been pretty disciplined about payback periods so far in total, it’s roughly a 2- to 2.5-year payback period across both of the repositionings we've done. Could we do something that has a longer payback period? Maybe, but it's something we'll continue to evaluate based on what we're seeing in the market. We've been pretty disciplined about when we do it.
Operator, Operator
The next question comes from Vivek Juneja of JPMorgan. Your line is open.
Vivek Juneja, Analyst
Mike, a follow-up for you on your guide for NII of plus 1% to plus 3% for 2025 full year. Can you give us the guide for NII ex-markets for 2025?
Mike Santomassimo, CFO
Yes, Vivek, we have not typically provided that information. Considering the size of our markets business and its contributions, it is highly sensitive to the direction of short rates. There is an improvement included in the guidance for trading-related net interest income, which is also very sensitive to rate movements. Therefore, we will not disaggregate that information at this time.
Operator, Operator
The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.
Gerard Cassidy, Analyst
Charlie, can you provide us with updates on geopolitical risks? Many investors are already aware of those. Can you identify the risks you discuss beyond geopolitical issues when managing your business? What potential challenges could arise, considering the optimism shared by you and your peers for the upcoming year in banking?
Charlie Scharf, CEO
The biggest risk we have that we spend the most time talking about is cyber at this point, just away from the normal talking around credit, interest rate, operational risk, and all the types of things you would talk about. We feel optimistic about where we're going into 2025, both because of where the economy is and the strength that has existed as well as the business-friendly approach from the incoming administration. Bad things can happen, though. It could be related to conflict or a surprise in the market. Those things are out there. We're prepared for them as we think about just the way we run the Company, but there's no one risk that sticks out relative to just the things you would do relative to how you run the business. The strength of the U.S. economy will drive the levels of success for our customers, both on the consumer and wholesale side. We follow their success. Anything that risks that is a risk for us.
Gerard Cassidy, Analyst
Thank you for your insights. I appreciate your clarity. As a follow-up, I want to address the progress you've made in resolving regulatory issues, particularly with the OCC lifting the cease-and-desist order from last year. Looking ahead, everyone is discussing the asset cap and the Federal Reserve’s cease-and-desist order. Can you share your strategic planning once these challenges are behind you? Given that you have excess capital, are you considering acquisitions? I’m particularly curious about how you see this in relation to your market share, which was over 10% pre-pandemic and pre-asset cap. With the industry's deposit growth and your current flat position below 10%, is there any potential for growth through acquisitions of depositories or investment banks once these issues are resolved? How are you viewing this opportunity?
Mike Santomassimo, CFO
Gerard, it's Mike. Look, we're 100% focused on all of the organic growth opportunities we have across each of the businesses. The plan we've been executing post asset cap is the same as it has been. We're focused on basic execution across all the priorities, whether it's in card, wealth, IB, capital markets, etc. I think there's a tremendous amount of opportunity to build off our positions in each of these businesses across the country.
Operator, Operator
And the last question for today's call will come from Saul Martinez of HSBC. Your line is open.
Saul Martinez, Analyst
You addressed changes in the incentive framework across the branches in response to an earlier question. There is a debate about how quickly removing the asset cap would stimulate balance sheet growth. However, I'm curious if you believe there are still operational or cultural constraints that need to be tackled to fully leverage the growth opportunities in your businesses following the sales scandal. You modified the compensation structure at the branches and implemented safeguards to prevent abuses. There may also be a cultural tendency to adopt a more risk-averse stance. Do you think these are factors you still need to focus on to eliminate barriers and create incentives that foster growth as you shift towards a growth mindset? Could you elaborate on these points?
Charlie Scharf, CEO
Yes. Let me take a shot at it. We are, and we've been this way since I got here, which is very deliberate about how we go about business expansion. Whether it's an area like the card business where we started five years ago or CIB, whether it's in trading or banking or the private credit space that we're offering something in the direct lending world for our commercial. We're very focused on doing all of these in a controlled way, with the right risk framework and with all the right processes in place. I said in my remarks, we're not done yet with all the things we have to deliver. But we are a very different company relative to the types of controls today versus then. Having those controls in place and testing them ensures they're effective, gives us confidence to grow. When we talk about the opportunities we have and the things we're doing, it’s because we have confidence in these systems. When you talk about the shackles being off and where we go, no one is saying the shackles are off; we’re very disciplined about how we are managing growth and risks.
Operator, Operator
Well, listen, everyone, thank you very much. We appreciate it, and we'll talk to you next quarter. Take care.