Wells Fargo & Company (WFC) Q2 2025 Earnings Report, Transcript and Summary

Welcome, and thank you for joining the Wells Fargo & Company Second Quarter 2025 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. If you would like to withdraw your question, press star two. Please note that today's call is being recorded. I would now like to turn the call over to your host, Ms. John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, will discuss second quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second quarter earnings 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-Ks 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.

Thanks, John. Good morning, everyone. 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 second quarter results in more detail before we take your questions. Let me start with some second quarter highlights. Our second quarter results reflect the progress we're making to consistently produce stronger financial results with net income, diluted earnings per share, and our return on tangible common equity all up from both the first quarter and a year ago. We continue to invest in our businesses, which has driven higher fee-based income. This growth was diversified with each of our business segments increasing during the first half of the year. While we've been investing, we've also continued to take a disciplined approach to expenses and we have now reduced headcount for twenty consecutive quarters, resulting in a twenty-three percent decline from five years ago. We maintained our strong credit discipline and credit performance continued to improve in the second quarter with lower net loan charge-offs from both the year ago and the first quarter. Losses in both our consumer and commercial portfolios improved from a year ago. The big news during the quarter was having the asset cap removed. The lifting of the asset cap marks a pivotal milestone in our transformation, along with the termination of thirteen orders since 2019, including seven this year alone. We are a far stronger company today because of the work we've done. In addition, we've also changed and simplified our business mix, transformed the management team and how we run the company, and have been methodically investing in the company's future while improving our financial results and profile. I know this call is for investors, but I want to once again thank the over two hundred and twelve thousand employees at Wells Fargo & Company who all contributed in one way or another to this milestone. Though we have tremendous opportunities, this has been a demanding place to work. We have recognized the contributions of many here by increasing compensation, improving benefits, investing in more employee learning and development programs, and by giving those employees making below eighty-five thousand dollars in total compensation special year-end cash awards for the past two years. With the lifting of the asset cap, we wanted to do something special for everyone who invested so much of themselves into the company in recent years. As a demonstration of our appreciation from what we've accomplished, we give a special award to all employees so they could own part of Wells Fargo & Company and hopefully benefit from our future success. So everyone has been asking, what does the lifting of the asset cap mean? First, we will continue to move forward with our risk and control agenda and embed the disciplines we have built deep into the culture of the company. But we are certainly in a different position with the asset cap and the many orders lifted. It is hard to convey the amount of time and effort the senior team has devoted to this work. So much of this work completed, we can allocate our time differently and spend more time focusing on growth and the future. While we have not ignored this, the additional time we now have proved meaningful. As you know, though we have generated substantial amounts of capital in the years since the asset cap was imposed, we've been limited in how much we've been able to deploy to support our customers and communities. While shareholders benefited from increased stock buybacks, we would have preferred to allocate more capital to grow our businesses and the overall balance sheet. We now have the flexibility to proactively grow deposits, and to allocate capital to grow loans and our corporate investment bank. Since I arrived, we've had to make difficult choices where to allocate our balance sheet given our inability to increase total assets. As we pointed out, we have turned away deposits from corporate clients. And while we have not turned away consumer deposits, we've been careful not to aggressively grow consumer deposits given the limitations we were subject to. We've also had to be cautious about loan commitments, especially given the potential for significant drawdowns of committed facilities as we saw during the early days of COVID. We have also pointed out that we have constrained our markets-related balance sheet to allow for activity elsewhere in the company. As we look forward, we are now able to move forward more aggressively to serve consumers, businesses, and communities to support US economic growth. We expect to be more aggressive in our pursuit of consumer and corporate deposits and we will selectively look to grow loans. Though we will be cautious during periods of economic uncertainty. We also see opportunities to allocate more balance sheet to our markets business, to drive increased profitability. Our goal is to increase customer trading flow and financing activity without significantly increasing our risk profile. We also have the opportunity to think more broadly about using our balance sheet as we evaluate additional opportunities. In addition to the lifting of the asset cap, we expect that changes in both the regulatory and supervisory environment will allow us to compete more effectively. We announced earlier this month that our expected stress capital buffer will decrease by one hundred and twenty basis points starting in the fourth quarter. Which would reduce our required CET1 regulatory minimum plus buffers back to eight and a half percent. We are also encouraged by the Federal Reserve's intention to provide more details supporting the CCAR process. And that detail along with the finalization of the broader set of capital rules will help us determine the appropriate level of capital we should hold going forward. We are also very supportive of the review the different regulatory agencies are conducting regarding rules and supervisory constraints that go beyond safety and soundness and do not allow us to effectively serve our customers and communities. We are committed to continuing to maintain a strong capital position and are excited about using our excess capital and additional capital generation to reinvest in our franchise as well as continuing to return excess capital to shareholders. As a reminder, we have returned a significant amount of capital to shareholders over the past five years, including reducing our average common shares outstanding by twenty-three percent since 2019. As we previously announced, we expect to increase our third quarter common stock dividend by twelve point five percent to $0.45 per share subject to approval by the company's Board of Directors at its regularly scheduled meeting later this month. We've repurchased over six billion dollars of common stock during the first half of this year, and during the second quarter, our Board of Directors authorized an additional common stock repurchase program of up to forty billion dollars. We continue to make significant investments in our core business which are helping to improve our returns. We continue to invest in our credit card business, not only by launching new products, but also enhancing the overall customer experience. Our commitment to delivering a seamless, secure, and user-friendly digital experience to our card members was recently recognized by J. D. Power which ranked Wells Fargo & Company number two in both mobile app and online credit card satisfaction. Enhancements like these have spurred new account growth and higher balances and spending from a year ago. In our auto business, we completed the launch of our multiyear co-branded agreement as a preferred purchase financing provider from Volkswagen and Audi vehicles in the US. We had strong auto originations in the second quarter and ending balances in our auto portfolio grew for the first time in over three years. In consumer small and business banking, we have continued to see momentum in the primary checking accounts benefiting from our investments in marketing offers and enhancements to both the digital and branch experience. We are on track to have over half of our branch network refurbished by the end of this year, and to complete a refresh of the entire network by the end of 2028. We continue to optimize and better position our network, including expanding in certain locations, including Chicago, New York City, and Nashville. We continue to enhance our digital experience, and consumer checking accounts opened digitally continued to increase and active mobile users now exceed thirty-two million, up four percent from a year ago. We also continue to see good momentum from Wells Fargo Premier, our offering for affluent clients. Let me highlight a few areas that demonstrate our growth. We are investing in more bankers to serve these clients and have increased branch-based financial advisors by over ten percent from a year ago. The improved collaboration between our bankers and advisors has helped to drive over sixteen billion dollars of net asset flows into the wealth and investment management premier channel during the first half of the year, up over sixty percent from a year ago. Deposit and investment balances from Premier clients have also been steadily increasing and were up approximately ten percent from a year ago. Turning to our commercial businesses. The investments we have been making in corporate investment banking have continued to help drive growth with investment banking fees up sixteen percent during the first half of the year. We've also made steady progress increasing our US investment banking market share with our share up each of the last two years and again in the first half of 2025 driven by gains in leveraged finance and M&A. We're continuing to invest in top talent to strengthen and expand our commercial banking business. For example, in our technology banking group, we have grown our team of bankers by over twenty-five percent over the past year. We expect to continue to add bankers to this priority sector and in a number of additional markets and sectors where we have room to grow. In addition to driving growth in our core business, our strategy also includes simplifying our businesses and focusing on the products and services that matter most to our clients. As part of the strategic focus, in the second quarter, we entered into an agreement to sell the assets of our rail equipment leasing business. This transaction is expected to close in the first quarter of next year. As we look ahead, what we see regarding the health of our clients and customers has not changed. Consumers and businesses remain strong, as unemployment remains low and inflation remains in check. Credit card spending growth softened very slightly in the second quarter, but is still up year over year and remains strong overall. Debit card spending growth has remained strong and consistent with what we saw in prior quarters. Consumer delinquencies continued to improve from a year ago. And commercial credit performance continued to be relatively strong. Deposit flows for both our consumer and commercial clients were in line with seasonal trends. I've had the opportunity to meet with many of our commercial banking clients this past quarter and many have conveyed optimism that the administration is working to level the trade playing field. They would like certainty but prioritize a good outcome for US trade above short-term certainty. Many have found ways to avoid passing the ten percent tariffs onto their customers. At the same time, they are preparing for the downside and are not growing inventories or hiring aggressively and developing contingency plans if the downside scenario occurs. As I've said before, we are hopeful, the results of the current negotiations will make our clients more competitive and help drive stronger economic growth in the US but there is uncertainty we should recognize there is risk to the downside as the market seems to have priced in successful outcomes. As I highlighted, now that the asset cap has been lifted, we are more committed than ever to serving our customers, supporting businesses and communities, and contributing to economic growth in the US. I continue to believe we have one of the most enviable financial services franchises in the world. I'm excited to continue to move forward with plans to produce industry-leading sustainable growth and returns. I'll now turn the call over to Mike.

Thank you, Charlie, and good morning, everyone. The second quarter, we had net income of $5.5 billion or $1.60 per diluted common share, up from both the first quarter and a year ago. These improved results reflect our continued focus on our strategic priorities, through our ongoing investments in our businesses, expense focus, strong credit discipline, and continued capital return, we have steadily increased profitability and returns. Our second quarter results included $253 million or six cents per share from the gain associated with our acquisition of the remaining interest in our merchant services joint venture. Turning to slide four, net interest income increased $213 million or two percent from the first quarter driven by lower deposit costs, one additional day in the second quarter, higher securities yield, and higher loan balances. I'll update you on our expectations for full-year net interest income later in the call. Moving to slide five. Both average and period-end loans grew from the first quarter. Period-end balances were up $10.6 billion from a year ago, driven by growth in commercial and industrial loans, predominantly in the corporate investment banking business as well as slightly higher auto, other consumer, and credit card loans, while residential mortgage and commercial real estate loans continued to decline. Average deposits in our businesses increased four percent from a year ago. We reduced higher cross-corporate treasury deposits by fifty-eight percent from last total average deposits to decline one percent. Total average deposits also declined one percent from the first quarter as a small increase in consumer deposits was more than offset by lower commercial and corporate treasury deposits. Average deposit costs continued to decline and were down six basis points from the first quarter. Turning to slide six. Non-interest income increased $348 million or four percent from a year ago. Results in the second quarter benefited from the gain associated with our merchant services joint venture transaction. I would note that the increase in card fees versus the first quarter reflected a change in where we recognized merchant services revenue resulting from this transaction. Revenue is now included in card fees whereas previously our share of the net earnings in the joint venture were included in other non-interest income. We continue to have growth in many of the businesses where we have been investing, including a nine percent increase in investment banking fees from a year ago. The growth in non-interest income more than offset lower net interest income resulting in modest revenue growth from a year ago. Turning to expenses on slide seven. Non-interest expense increased $86 million or one percent from a year ago, driven by an increase in revenue-related compensation predominantly in wealth and investment management. Our other expenses were relatively stable as the investments we were making in our businesses including the increased spending in technology and advertising, were offset by lower operating losses and the impact of efficiency initiatives. The four percent decline in non-interest expense from the first quarter was driven by seasonally higher first-quarter personnel expense. Turning to credit quality on slide eight. Credit performance continued to improve and remain strong. Our net loan charge-off ratio declined thirteen basis points from a year ago and one basis point from the first quarter. Commercial net loan charge-offs increased $36 million from the first quarter to eighteen basis points on average loans. The losses in our commercial and industrial loan portfolio were borrower-specific with little signs of systematic weakness across the portfolio. Commercial real estate losses decreased during the first quarter. As we have said, it will take time for the office fundamentals to recover. Valuations appear to be stabilizing, and although we expect additional losses, they should be well within our expectations. In consumer net loan charge-offs declined $48 million from the first quarter to eighty-one basis points of average loans with improvement across all of our non-real estate portfolios, the residential mortgage portfolio continued to have net recoveries. Non-performing assets declined three percent from the first quarter driven by lower commercial real estate non-accrual loans predominantly in the office portfolio. Moving to slide nine. Our allowance for credit losses for loans increased modestly from the first quarter. Our allowance coverage ratio for total loans has been relatively stable for the past five quarters as credit trends have remained fairly consistent even amid macroeconomic uncertainty. Our allowance coverage for our corporate investment banking, commercial real estate office portfolio has also been relatively stable over the past year and was eleven point one percent. Turning to capital and liquidity on slide ten. We maintained our strong capital position with our CET1 ratio at eleven point one percent, well above our current CET1 regulatory minimum plus buffers of nine point seven percent. Starting in the fourth quarter of this year, our new CET1 regulatory minimum plus buffers is expected to decline to eight point five percent. As you know, the Federal Reserve has a pending notice proposed rulemaking that would include averaging stress test results from the previous two years to determine the stress capital buffer. If that is finalized as proposed, the effective date may move to January first and our expected new CET1 regulatory minimum plus buffers would be eight point six percent. We repurchased three billion of common stock in the second quarter and have also, as Charlie highlighted, we expect to increase our common stock dividend to $0.45 per share in the third quarter subject to board approval. Moving to our operating segment, starting with consumer banking and lending on slide eleven. In consumer small and business banking revenue increased three percent from a year ago driven by lower deposit costs and higher deposit balances. For the second consecutive quarter, deposit balance grew from a year ago even with higher outflows for tax payments and second quarter of this year compared with last year. Debit card spending remained strong, up four percent from a year ago consistent with prior two quarters. Home lending revenue was stable from a year ago. Mortgage loan originations increased forty percent from a year ago as we focused on servicing Wells Fargo & Company customers. This higher volume also reflected a stronger mortgage market from a year ago. However, the mortgage market continued to be weak compared with historical levels due to the high rate environment. We continue to reduce headcount, which has declined forty-nine percent since the end of 2022. We have simplified the business and reduced the amount of third-party mortgage loan service for others by thirty-three percent since the end of 2022. Credit card revenue grew nine percent from a year ago as loan balances increased and spending slowed slightly but remained strong. Auto revenue decreased fifteen percent from a year ago driven by lower loan balances and loan spread compression from previous credit tightening actions. While these actions have reduced revenue, they have improved credit performance. Auto revenue increased two percent from the first quarter, the first linked quarter increase since fourth quarter 2021. The decline in personal lending revenue from a year ago was driven by lower loan balances. Turning to commercial banking results on slide twelve. Revenue was down six percent from a year ago as lower net interest income due to the impact of lower interest rates was partially offset by growth in non-interest income driven by higher revenue from tax credit investments, an increase in treasury management fees. Average loan balances in the second quarter increased one percent from both a year ago and the first quarter as clients have largely remained cautious while waiting for more clarity on the economic environment. Turning to corporate investment banking on slide thirteen. Banking revenue was down seven percent from a year ago, driven by the impact of lower interest rates. This decline was partially offset by lower deposit pricing and higher investment banking revenue, including higher advisory fees. Commercial real estate revenue declined six percent from a year ago due to lower loan balances, the impact of lower interest rates, as well as reduced mortgage banking income after the sale of our commercial knowledge third-party servicing business in the first quarter. Markets revenue declined one percent from a year ago as higher revenue in foreign exchange and rates products was offset by declines in equities. We had a hundred and twenty-two million dollars gain related to an exchange of shares for Visa v common stock that benefited equities a year ago. Average loans grew four percent from a year ago and three percent from the first quarter. The increase from the first quarter was broad-based with higher balances in markets, banking, and commercial real estate. On slide fourteen, wealth and investment management revenue increased one percent from a year ago, as growth in asset-based fees driven by higher market valuations was partially offset by lower net interest income due to the impact of lower rates. A reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so third-quarter results will reflect higher July for the higher July first market valuations. Slide fifteen highlights corporate results. Revenue increased from a year ago, driven by the gain associated with our merchant service joint venture transaction. Turning to our 2025 outlook on slide sixteen. Starting with net interest income, we currently expect net interest income for 2025 to be roughly in line with full-year 2024 net interest income of $47.7 billion. While there are several moving pieces of why we currently expect net interest income to be a little lower than we've discussed in April, the largest driver is that we have dedicated more balance sheet to our markets business than we originally assumed, including supporting stronger client activity in products like commodities and rates, which can have low or non-earning assets. The cost of funding this activity results in lower net interest income, while most of the revenue generated is recognized in non-interest income. Our updated expectation still assumes net interest income grows sequentially in both the third and fourth quarter of this year. We are only halfway through the year and several key variables including net interest income remain uncertain. We will closely monitor how these assumptions evolve over the remaining of the year. We still expect 2025 non-interest expense to be approximately $54.2 billion. In summary, our second-quarter results reflected the consistent progress we've been making to improve our financial performance. Compared with a year ago, we had double-digit growth in net income and diluted earnings per share grew revenue including fee-based growth across many of our businesses maintained our expense discipline, improved our credit performance, and reduced common shares outstanding. Now that the asset cap is lifted, the management team has more time to focus on our growth initiatives and we will also have the flexibility to allocate more capital to growing our balance sheet, including deposits, loans, and trading assets. We will now take your questions.

At this time, we will now begin the question and answer session. If you would like to ask a question, please first unmute your phone and then press star one. Please record your name at the prompt. If you would like to withdraw your question, you may press star two to remove yourself from the queue. Once again, please press star one and record your name if you would like to ask a question at this time. Please stand by for our first question. Your line is open, sir.

Hi. Good morning. Mike, thanks for the explanation. You know, on the NII outlook is helpful. The markets piece of it, just on the non-markets NII, could you talk about what kind of loan growth assumption you kind of built into the NII outlook for the back half of the year and how that connects to what you saw in terms of loan growth in the second quarter?

Yeah. Sure, John. Thanks for the question. You know, when you break apart the portfolio, on the consumer side, we're not, you know, on the mortgage portfolio, we expect that'll likely just, you know, continue to come down just a little bit in the second half. I think you should see a little bit of growth in card. Some of that seasonality in terms of, you know, what happens as you go third and fourth quarter spending. And then we started to see some growth in auto, small, but started to see that turn. So, hopefully, that will continue to grow in the second half of the year. But relatively modest in the overall balance sheet. On the commercial side, we do expect to see some, you know, modest growth as we go into the rest of the year. I think it likely comes from the same places, at least in, you know, at least as we come into the third quarter, you know, mostly in the corporate investment bank. Hopefully, we'll start to see some of the commercial bank customers borrow a little bit more as well. But I'd say overall, still relatively modest. But as you get to the end of the year, you know, hopefully, you know, if things play out, we'll start to see a little bit more activity more broadly.

Okay. And then maybe you could just give us your thoughts in terms of total revenue. I know you don't give total revenue guidance, but just maybe when you look at your own internal projections and budgeting, how is the revenue outlook for this year shaping up? What are the puts and takes relevant to your expectations if we think about the year so far?

Yeah. No. It's a, you know, as you sort of break apart, like, the pieces, you know, we talked a bit about where NII is coming out at this point. I think when you look at the fee side, you know, the biggest, you know, go through the biggest line items. You know, and you look at, you know, the investment advisory fees, you know, the market's been very supportive, you know, as you look at, you know, the rest of the year. And so you can easily sort of model what the third quarter looks like based on where the markets ended, you know, already given most of the fees are already sort of certain. And then as long as the market sort of holds up or grows a little potentially as you go into the fourth quarter, that should be constructive. You know, you start breaking down, you know, deposit fees, card fees, you know, all that stuff, you know, plays into some of the seasonal activity that we'll see in the third and fourth quarter. And I'd say largely those things are kind of playing out pretty close to what we modeled, you know, depending on the month or quarter, maybe a little bit better, but they're playing out largely as we expected, you know, across most of those. And then it's really sort of trading line. And that'll be driven by, you know, what kind of activity and volatility we see in the market. But I think, you know, we've had a pretty constructive environment now for a couple quarters. Hope that continues. And then I think lastly, just, you know, we'll see how the year comes out on the equity securities gains that we saw. We did see some modest gains in this quarter. You know, big improvement relative to what we saw last quarter. You know, as the market, you know, remains constructive that, you know, hopefully, that will continue as well.

Okay. And I guess just to clarify, Mike, you mentioned you used to previously say that your NII guide assumes the asset cap remains in place. Now we relax that assumption. The outlook's a little worse. Is it just this counterintuitive mix shift that you're gonna grow the capital markets balance sheet, but it's gonna come in fees?

Yeah. I would, well, I'll remind you first that it's been off for, what, six weeks now? Five and a half weeks, six weeks? And so I do think it has been off for a very short amount of time. And, you know, I think what's happened, you know, as we sort of looked at and some of this started in the, you know, towards the end of the first quarter, early second quarter, and we sort of talked about it in some other public, you know, forums. You know, we've seen some increase in the activity, and that's what's causing it. You know, that's by far the largest driver of what's causing it to move down a little bit. From the low end of the range that we talked about in April. And as we said, like, you know, that's largely offset in fees, you know, on those because you get paid in fees for some of those for some of that activity.

Yeah. And let me just add a little hey, John. It's Charlie. Let me just add just one thing here, which is as we look forward to the end of the year, we have so far assumed I would describe it as a very small increase in the overall size of the balance sheet. So we do assume it grows above what used to be the cap, but not in any really meaningful way. And when we look at where that growth is coming from, you know, part of it is the loan growth that Mike spoke about earlier. But we had been and assumed that we dedicate, you know, balance sheet to our market's business. And as we think about that, we're not focused on maximizing net interest income. We're focused on maximizing returns, how much money we make overall. And so we'll try and, you know, do as good a job as we can going forward giving some more clarity on how we intend to use that balance sheet, how it can affect the different pieces. But that is, you know, it's a little bit of what we saw during this past quarter, and it's the way we're thinking about the rest of the year.

That's really helpful. Thank you.

The next question will come from Scott Siefers of Piper Sandler. Your line is open.

Good morning, guys. Thanks for taking the question. Was hoping, Mike, maybe we could approach the NII question maybe, I guess, a little differently. I guess, what are if loan growth in the second half will only be kinda modest, what are the other factors that will allow NII to grow? Because I think you'll still need to average a few percent higher in the second half than you just did in the second quarter. So just trying to understand what the major puts and takes are within there.

Yeah. Scott, it's a little bit of a lot of things, right, that will sort of add up to some growth each quarter. We do expect deposit costs to continue to come down. We do expect to see some loan growth, you know, come through. We do expect, which will be a driver. We do expect, you know, to see, you know, further repricing of the securities, you know, portfolio. So it really is, you know, a little bit of a little bit of a lot of things plus some, you know, deposit growth as we go into the end of the year. And so I think all of that sort of adds up to, you know, seeing it grow sequentially each quarter.

Okay. Perfect. Thank you for that. And then, Charlie, maybe just sort of a top-level thing with the asset cap now off. I guess one of the questions that I get pretty to revisit medium-term return targets. Do you have any broad sense for sort of where you are in thinking about that kind of dynamic?

Sure. I guess a couple of things on that. I think, you know, you didn't directly ask the question, but let me just maybe talk for a second about capital levels. Because capital levels obviously, you know, dictate, you know, returns to a certain extent. And so, you know, with what's happened, you know, we've certainly seen a lot of change, you know, over the past quarter or so. You know, obviously, we've got the ability to rethink how we use balance sheet with the asset cap. And I do just wanna remind people that, like I had said, very consistently over and over and over again, when the asset cap is lifted, it's not like this light switch is gonna go off and all of a sudden, things are gonna dramatically change. We didn't know exactly when the cap was gonna be lifted. We didn't wanna get ahead of ourselves. And so we're very carefully thinking through how we use the additional capacity to help grow the company. And so we expect that to happen over time. We, you know, we never wanted to lead people to believe that there'd be any major change in the next week, the next month, the next quarter. But it certainly does open options for us to grow and increase returns beyond what we've seen in the past. And so now that it's off, we're gonna be thoughtful about it. And as we go to our planning for next year, like, this is the perfect time, we will, you know, do our best to talk more about it and provide more clarity broadly to everyone. So we can create a level of understanding there. We have the lower SCB. Which, you know, is it's, you know, it is a huge decrease. You know, after a significant increase from the year before. Which we commented in the year before, we didn't understand why we saw the increase. As we think about how that impacts where we should be running our capital levels, we wanna take a little bit of time to let the Fed go through its process, both on CCAR and on the work they're doing on capital requirements. So we can try and get an understanding of what the right long-term level of capital is. So they've said that they're gonna provide more transparency on CCAR. Whether it's the underlying assumptions, the models, things like that. That'll be extremely helpful for us so that we're not constantly, you know, readjusting capital targets on a yearly basis in any material way in our view we haven't materially changed the risk of the company. So, you know, that'll be forthcoming, hopefully, over the next couple of months as you know, the work they're doing on capital. So, you know, that'll allow us to come back with a more definitive point of view on where we should be running capital. But, certainly, all these things are, you know, lower levels where we had been running it because of the increases that we saw. So, you know, that allows us to, you know, deploy excess capital either organically or through buybacks. And so we do expect to get there. And then just, you know, more specifically to your question, we've also said very, you know, very clearly fifteen percent is a, you know, is not the it's an interim target. It's not the final target. Once we get there, it's a good time to revisit where we go. So both through hopefully some, you know, increased returns that we're seeing in terms of how we run the business, you know, running at some point with lower capital returns, we believe we'll be consistently at that fifteen percent. And then we'll provide more information on, you know, where we go from there, you know, which obviously be, you know, a higher number, not a lower number.

Alright. That's perfect. Thank you both very much.

The next question comes from Ken Usdin of Autonomous Research. Your line is open.

Hi. Thanks. Good morning, guys. Just one more question on capital. You know, given what all you just said, Charlie, and that we still have now really big amount of capital. The buyback in the second quarter was a little smaller than the first, and loan growth, as you said, looks like it's getting better, but not that quickly. So should we can we expect that you might do more in terms of the buyback in advance of kinda getting that final zone of where you wanna live given that you just have it seems like you have enough capacity to do kind of all things you would wanna do in terms of growing the balance sheet and also returning more?

Yeah. Listen. I don't think we wanna, you know, don't think we wanna give a specific forecast on how much we intend to do, but to your point, we have more capacity, not less capacity. You know, the price of the stock does matter. And so we'll be thinking about that. And I think we'll go from there. But, you know, I think, you know, the, you know, we how I describe it. I would guess I would say we don't on the one hand, we don't feel like we need to deploy all of this capital immediately because we do wanna have the opportunity to use the balance sheet to grow and do interesting things. But I've also said that we don't intend to, you know, to do anything dramatic. And so that does create more opportunity to buy stock back. But, again, the way we're thinking about it is we wanna first use the capital that we have to grow the company organically. That's what allows us to, you know, produce the right kind of returns. It allows us to create the ability to increase the dividend and, you know, buying stock back is kinda what we're left with. So I, you know, what we hope the answer is and what, you know, what certainly seems like is we'll have the ability to do all of those things to a greater extent than we've been able to do in the past, and we'll just be very hopefully, be very thoughtful about the timing.

Got it. And on one of you you've laid out all the organic potentials in the past, but the one I wanted to ask you specific about is on retail deposits. Where there's it's obviously a strong competitive landscape and a lot of banks still building branches in other territories. You've talked about how that that consent order coming off last year has helped you kinda just go to market in a in a broader sense. But, like, how how will that manifest itself in terms of just retail deposits growth? Can you see do you expect an acceleration there in either, you know, net new checking or just overall deposit growth taking on the retail side? Thank you.

Sure. Yeah. I mean, the yeah. I mean, I think the answer is as I said, I think if you just, you know, a little bit of you go back for a second is, you know, when we had the sales practices consent order, it was specifically, you know, driven by, you know, some of the, you know, the things that happened in those businesses. And so we had to be very, very careful about what we did. We scaled back an awful lot of stuff. Which stood in the way of our ability to grow. And then even as that order came off, recognizing we had a deposit cap, well, I'm sorry, an asset cap, which effectively can be a deposit cap, we were even though we were adding back some of the things that would actually help us grow quicker, you know, we were, you know, very careful about not doing too much too quickly because you have a constraint, you just don't wanna bump up against that constraint. So, you know, the activities that we've kinda reinstated inside the consumer business have to do with reporting. They have to do with the way we manage the business. They have to do with the way we pay people. And so you're starting to see increased net checking account growth. We're focused on, you know, primary check account growth. That should and we believe will lead to higher deposits. That you're, you know, what you'll see is you're gonna see more marketing, you're gonna see more aggressive marketing, you're gonna see more merchandising in our branches. You're gonna see more local advertising as well as national advertising, as well as just, you know, expansion of footprint in areas, you know, where we think we have room to grow. And so those are all things that we've been, you know, have been very, very cautious about doing up till now. And with the value proposition that we have for our customers in strength of the brand and the great quality of the people here, we think we'll be able to compete very effectively. I remind people, we're not competing with a small number of banks. We're competing with a lot of banks out there. That we believe we have a better value proposition for.

Got it. Great. Thank you, Charlie.

The next question will come from Ebrahim Poonawala of Bank of America. Your line is open.

Hey, good morning. I just wanted to follow-up, Charlie, on what you said in terms of in one of your responses around nothing's gonna change dramatically. Fifteen percent raw c was, like, step number one, which you were at two q again. Just one quarter. Appreciate that. But I think we are half full way of to look at this you mentioned the word grow aggressively many, many times on the call. And I think the concern from an investor standpoint is a lot of this growth may come from a cost of ROTCEA, I don't think that's what you're saying, but just give us a sense of the lens with which you're looking at these growth, beat on consumer deposits, commercial deposits, could it be that we could see a near-term hit in terms of profitability before things pick up and you gain more wallet share? Just how should we think about the impact on the next six, twelve, eighteen months of returns? And are they offsetting fact on the expense side or productivity side that could mitigate things that you do to pursue growth? Thanks.

Yeah. No. Thank you for the question. I mean, we don't mean to imply at all that we will sacrifice returns for growth. As we do all of our planning and we think about the opportunities, we think the things that we're gonna do to grow the company will actually be very focused on continuing to increase returns that we have. So please don't take anything that we've said as anything under that other than we continue to be very focused on those two things. You do raise the question about expenses. We, you know, we do point out in the remarks that we made that, you know, we've continued to be very, very focused on using the expense resource that we have as wisely as we can. And so that means that we are still focused on continuing to drive efficiencies in the company. And, you know, as we've done up till now, hope to be able to use this, you know, material part of the efficiencies that we continue to drive in the company as a way to pay for a lot of the investments that, you know, we intend to make. But that is very consistent with what we've done. So even as we've increased marketing spend, we've, you know, increased the number of hires that we have in the corporate investment bank. We've increased the hires in the commercial bank. We've increased the number of bankers that we've had in the consumer business. We've increased the number of financial advisors that we have. We haven't stood up and said that those things are dilutive to returns. It's, you know, it's just the opposite. We've been able to do those things because we're driving efficiency elsewhere in the company, and those things will drive, you know, increased revenue over a period of time and ultimately higher returns. And so we're continuing to think about those things, you know, the exact same way we've been thinking about them. And I would just say that we, as I've said, every quarter, including, I think we said it on the last quarter, we continue to feel like there are significant opportunities to drive efficiencies in the company. Both traditionally and through technology, including AI. The only thing I'll just make sure we're clear on is yes, we had fifteen percent RO two c in the quarter. But we also recognized that we had to gain in the in our merchant services business. So we don't really think about that as ongoing. So, you know, we would say it's, you know, it's a little, you know, still a little bit lower. Even though we were running capital levels set, you know, before the SCB adjustment, was put in place.

Got it. So thanks for walking through that. And maybe a separate question Mike, for you on in terms of NII, the market's view on what the Fed might do keeps changing. I appreciate that. But remind us in terms of asset sensitivity as we put into context, like the sequential growth in NII in the back half and maybe into next year. But how should we think about what three or four rate cuts would do to the balance sheet and the ability to maybe offset that given the growth outlook that you have so Thanks.

Yeah. Look. I mean, we're, you know, we look at, you know, the implied forwards and with the market's pricing in on cuts obviously. And so that's all sort of embedded in sort of the view of where NII is sort of trending as we look into the, you know, latter part of the year. Obviously, you're, you know, even with that, you're still gonna see, you know, you're gonna see pricing come down on the positive side and the commercial, you know, businesses. You're gonna see, you know, continued repricing on the fixed, you know, for on the fixed assets, you know, components of the balance sheet. And then you're gonna see, you know, hopefully, start to see some more growth come out of it. That will also help from an NII perspective. And so all those things will, you know, should be constructive as you look forward despite what could be, you know, rates coming down a little.

No. Thank you.

The next question will come from Matt O'Connor of Deutsche Bank. Your line is open.

Good morning. I was hoping you could just provide some clarity on the net interest income ex markets this quarter. Having a hard time finding that. And then maybe just give the guidance or comments on kind of the four-year guide on the IX markets. Just to clarify?

Yeah. We don't break out the components in total, you know, across markets versus non-markets. That's not something we've historically done. I think when you look under what's happening, you know, in the NIIX, markets. There's lots of puts and takes, you know, across the balance sheet. I think if you know, look at the kind of rates in general, are sort of about kind of what we expected plus or minus a little bit. Like, so that's, you know, the change in rates that we've seen throughout the year is not, you know, not impacting sort of our guides really in any significant way. You've seen slightly higher payment rates in places like credit cards, so that's probably muting balances there just a little bit and, you know, as well as some other, you know, factors there. And so loan growth, you know, depending on the, you know, outside of card, has been a little bit slower, you know, to deposits are sort of mostly behaving the way we thought. We're not seeing any significant or we're seeing really the trends of any cash rebalance into higher yields. It's sort of been stable now for a bit. For a number of quarters. And so we're not seeing that change in any significant way. And so I'd say overall, the trends are, you know, ex markets are pretty stable to what we've seen over the last couple quarters and largely consistent with what we've expected to see, you know, with a few puts and takes across, you know, the different portfolios.

Okay. That's helpful. And I'm sure you guys have heard it before, but just as you grow in the trading business, I think the clarity on the trading that I over time would be helpful. And then just separately want to ask about the lower tax rate this quarter. And somewhat related just the impact of the new legislation reducing clean energy tax credits. I think there's some kind of puts and takes there as you think about some stuff going away and some stuff that you might be able to do that you're not doing now. So just a broader tax this quarter and going forward. Thanks.

Yeah. On the last piece, on the tax credits, you know, that'll be a few years out before you see anything, any real impact that in terms of new projects that will come on. So it'll be a little bit it'll be a while before you start to see that matter much. The broader bill doesn't, you know, have a lot of direct impacts relative to the taxes other than the tax credit piece. Few small things. You know, I think just more broadly on the tax line, there's always puts and takes on tax line, you know, given how big we are. Yeah. There's a few things in the quarter that probably brought the tax line a little bit, you know, the tax rate down a little bit lower than, you know, what you see, you know, over a longer time period, including, you know, a California tax change that sort of changed the way they do revenue attribution, a few other sort of wonky items that sort of, you know, change it. And so our view on the tax rate over a longer period of time is still, you know, high kinda high teens. You know, tax rate is sort of, you know, the probably the right place given what we see, you know, over a longer period of time. But there always seems to be a, you know, stuff in the each quarter sort of changes out a little bit.

Okay. Thank you very much.

The next question will come from Erika Najarian of UBS.

Hi. Good morning. I wanted to ask another question about capital Charlie. You know, everyone appreciates that the regulatory reform is in flux. You know, you mentioned earlier, you know, an eight point six percent minimum on CET one. And your current CET one level implies a hundred forty basis point minimum to that nine point seven. I'm just wondering, you know, as we think about where you should operate going forward, are you saying that you wanna take the time to make sure that that eight and a half percent is something that, you know, is a little bit sustainable when, you know, when if we get GSEB reform, if we get more comprehensive stress test reform, and if that's the case, is a hundred forty basis points still an appropriate buffer, you know, which would imply that your sort of minimum would buffer would be about ten percent.

So listen, I think what I tried to answer this before. I think the way we're in a period so we're in a period of time where we have seen over, you know, a thirteen-month period, we've seen our capital requirement go up, like, a hundred and I'm sure it go up. It went up ninety days. Hundred and ninety days. Ninety. Ninety basis points. And then we saw it come down a hundred and twenty basis points. The Fed has said that we're gonna give you more information which would be super helpful to us so that we can understand the future volatility looks like. One would presume that with this administration and the types of things that they're saying, that, you know, the lower level is probably more indicative of what the future would look like rather than the higher level. We just don't think it makes a whole lot of sense to come and say, well, here's how we're gonna here's a number that we're gonna run with capital until we avail ourselves of the information that they tell us they're gonna give us. So trying to, you know, directionally, you know, lower is the direction we're going, but we don't want it to be moving target every quarter where we tell you something different. We don't think that's, like, the right way to provide, you know, the kind of information to you that we should be providing. So we just wanna take that time to understand what the right level is, and we will also be thinking about, you know, with other changes that they're making and any other changes to these moving pieces, what the right buffer will be. But directionally, you know, lower is certainly, you know, where things are going. But we don't know enough to actually tell you what that number should be yet. And the good news is, right, we have a ton of excess capital. We have more flexibility to deploy it to help support clients and, you know, the broader, you know, economy here. Right? And so that should give us more opportunity to use it. And then yeah. We'll bring it down. What and I think we've shown over the last, you know, five years that, you know, we are not shy about returning capital back to shareholders. You know, through buybacks when, you know, when we feel that's what that's appropriate. And so, hopefully, we can get that come through over the quarters. We live in, like, a really I mean, for us, like, this is an incredibly interesting and fun time. I mean, you know, we're sitting here where even with the constraints that we've had, I think we've, like, you know, started to show that the things that we're doing have the ability to drive, you know, higher revenues across the company, regardless of what's happened in the NII cycle. So we spent a lot of time talking about the things that we've been doing to, you know, to focus on growing non-interest revenues, which have been which we've been doing because they're strategic opportunities not just because of the balance sheet. Those strategic opportunities haven't changed, and those will continue to be there for us. So we're still incredibly focused on increasing the non-interest revenues of the company as we've seen we've been able to do. We're starting to see some loan growth. Yes. The loan growth hasn't turned out this year to be as much as we otherwise would have hoped. When we first set our targets. Our guidance. But, you know, overall, where we sit today and the types of things that we're seeing is, you know, certainly marginally better. Than what we had seen in terms of what we're seeing. We're starting to see deposit flows as we've talked about. We've got new account growth. We've got expenses in check. Credit is performing well. We've got more capital than, you know, we had the last time we had the conversation. We have fewer constraints. So, you know, for us, as we sit here, even though, you know, there's a lot of work for us to do and we've got a lot to prove, we understand that. Those things all line up to, you know, be pretty exciting for the management team here.

Agree with that. Thanks so much.

The next question will come from Betsy Graseck of Morgan Stanley. Your line is open.

Hi. Good morning. Good evening. Charlie, I had a question about just how you're thinking about the arc of expenses over the next period of time, call it a year or two. With the asset cap removal, underlying question is, are there efficiencies that can be generated from investments you had to make that were unique to the asset cap period? And if so, with those efficiencies, is there reinvesting in everything you just mentioned on, you know, headcount to drive revenues, or is there a technology angle to some of this reinvestment that we should be expecting? And how are you positioned for generating efficiencies from AI? Thanks.

Sure. Let me start, Mike, and then you pick up because I've been getting all the questions here. So first of all, on the question of expenses related directly to the asset cap, we would the way so first of all, it's important to point out that the consent order that had the asset cap is still in place. And just as a reminder for those that haven't followed as closely as we do, asset cap gets lifted when we adopt and implement the series of things. And then the full order gets listed when the regulators view it as effective and sustainable. We obviously feel really good about the progress that we're making. We feel very comfortable that we're getting there. But until that order is lifted, gotta be very, very careful about just changing anything because of the plans that we put in place and the way we and the regulators go back validation. So we're not assuming that there are and that anything materially changes up to this point, you know, until that happens, even then we'll be very, very careful. As we think about the opportunities to drive efficiency, when we talk about the fact that there's still substantial opportunities away from our ability to just do things more efficiently from a risk and control perspective. And so we're continuing to focus on driving those things across the company, what you've seen kinda quarter on quarter on quarter is, you know, where headcount has come down using attrition much as we can as our friend to create those efficiencies. And, yes, technology will be able to help that trajectory continue even more. We wanna be careful about giving any long-term guidance beyond this year on expenses, which is why we've stopped because as we said very consistently, we really like the idea of going through the planning cycle being able to take a look at what we want to invest in, what we think we can drive in terms of efficiencies, and then give a number. But I would say the same thing that we said is similar to the question that Ebrahim was asking before. We're very, very conscious of the fact that the expenses are an important lever for us. For us to be able to increase the returns for the company. And so hopeful we'll be able to create the right kind of balance by increasing the level of investments while we're keeping expenses in check-in. Focus on not just driving more growth, but driving higher returns in the shorter and medium term as we've tried to do it till now. And Betsy, I have to say from an AI perspective, it's very early to see any impact of any significance from AI, but we've got, you know, capabilities and pilots, you know, in our branch system, in our op system, in our call centers, you know, really across anywhere where you've got anything manual and a lot of people. And those things are starting to mature a little bit very early, but you're starting to see, you know, some of the benefit you thought you'd see in terms of efficiency start to come through in some of the early use cases, but it's super, super early. And I think the impact will build over time there.

Okay. Thanks. And I know you said that you would address the Roth's target when you hit the fifteen percent, which you did this quarter. So can you give us a sense of the timing when we should expect that you would be revisiting that target?

But just as a reminder, the fifteen percent that we've got reported this quarter did include the merchant services gain. So, again, we try and be, you know, as transparent as we can and look through that and some stuff you saw in taxes. So we don't we're not declaring victory on getting to the fifteen percent yet. And then some maybe as we get towards the end of the year and we talk about next year, we'll talk a little bit more about the timing on those things and recognize that people wanna understand a little bit more about how we're thinking about the future.

Super. Thank you. So maybe the January call post the strategy deck.

You just won't stop. I mean, we'll see. We'll see.

Okay. No. Thanks. Yeah. I we hear you, though. Thanks.

The next question will come from John Pancari of Evercore ISI. Your line is open.

Good morning. Just wanted to see if you can give us a little bit more color on the loan yields this quarter. It looks like they were relatively flat. I guess, overall, would have expected an increase given some of the front book back book dynamics. Could you maybe talk us through some of the puts and takes and your expectation as you look out given the rate environment in the curve outlook as well?

Yeah. I mean, when you look at, you know, spreads that are, you know, particularly on the commercial side, John, it's still very competitive. And so, you know, there's been a couple spots where you see a little bit of widening of spreads, but not a lot. In most cases, it's, you know, what's holding spreads to be as tight as they are is really the competition we're seeing across the space, particularly in the middle market commercial banking side of things. And so that's what's driving it when you look at that side of the house.

And is that did that competition intensified to a greater degree than you may have thought? But it seems like, you know, a higher loan yield expectation would have been imperative soon.

No. It's been pretty consistent now for a number of quarters. Right? It ebbs and flows a little bit depending on which part of the country or which segment you may be talking about. But it's been the competition's been pretty intense there for a while. And so you're just not seeing sort of the widening that you might if in sort of a slowing, you know, economic environment, that's just not materializing that way.

Okay. And then my follow-up would be related to that too. Like, where are you seeing that competitive pressure come from? Is it private credit? Is it other types of non-banks? We've heard some setting, you know, insurance players stepping up again in certain parts of real estate. Are there areas that you'd flag? And then has that impacted anything around loan growth expectations? Thanks.

Yeah. Actually, it's still the primary competitor, particularly when you're talking about the middle market, you know, commercial bank or other banks. You certainly see, you know, other non-bank players that, you know, at times in certain pieces of it, but the primary competitor still is other banks, you know, and they vary depending on part of the country you're in, obviously. But I think that's what's driving it mostly.

Okay. Thank you.

The next question will come from Gerard Cassidy of RBC Capital Markets. Please go ahead.

Hi, Mike. Hi, Charlie. Mike, you talked about the growth in the commercial and industrial loans in the quarter. It was for on the into where you saw that in that segment of the commercial and industrial loan portfolio growth?

Yeah. Sure. It's a little it's across the board in a bunch of sectors, you know, Gerard. But, you know, I'd say we're seeing growth in places like fund finance, which are capital call facilities with big private equity firms. We're seeing, you know, we saw a little bit of growth in probably three or four sectors across, you know, the large corporate space, including TMT and industrials, health care. So a little bit, you know, a little bit across the board. You're also seeing some more asset-backed loan growth coming out of our markets business. Across, you know, whether it's mortgages or other types of, you know, collateral. A tiny bit of, you know, growth in prime brokerage. So it really is sort of across, you know, across the board in terms of a number of different areas within the corporate investment bank.

Very good. And you guys have talked a lot about improving and efficiencies and improving profitability with the asset gap being lifted. Kind of a pivoting question. You talked about exiting the rail equipment leasing business and you've exited other businesses over the years. Are there any other businesses left that are not meeting your internal profitability targets possibly that could enhance the longer-term profitability, like, of the company? Or is this essentially at for divesting of different segments?

Yeah. The rail portfolio was really the last thing of any size. I mean, we, you know, we looked at the businesses, you know, a few years ago now and sort of the what's methodically sort of worked our way through, you know, each of them. And really the rail portfolio is sort of the last of those.

Very good. Thank you.

And the last question for today will come from Chris McGratty of KBW. Your line is open.

Oh, great. Thanks for squeezing me in. On operating leverage a little bit more broadly, the markets feel better today and more optimism in markets, but certainly, we know that's fluid. I know you touched briefly on it, but just maybe unpacking the degree of confidence in the operating leverage over the medium term and then I guess, both sides of it, the revenue and the expenses. Thanks.

Yeah. I, you know, look, I just come back to what we talked about a little bit earlier in the call. I think on the we feel, you know, as confident as we can be that there's a lot more to do on the and over the last, you know, four or five years, we've taken out twelve billion already seen headcount come down by, you know, twenty consecutive quarters in a row. And so, you know, we're gonna continue to focus on that, and it's how we start all of our conversations with the business leaders and our budgeting. Each quarter, we go through it. And so I think there's more to do there really across almost every part of the company, and I think we'll continue to drive that the same way we've done that the last number of years. And look, I think on the revenue side, you know, I just come back to the broader, you know, opportunity that we have to grow across each of the businesses. You know, how that manifests itself in any given quarter, you know, is a little out of your control. Some degree. And so given how markets can be but I do think, you know, across every single one of our businesses, there's a tremendous amount of opportunity to grow. And so I think those two things together should, you know, provide growth and profitability and returns, you know, over the long run.

Great. Thank you.

And we have no more questions at this time.

Great. We appreciate the time and look forward to talking to you next quarter. Thank you.

Thank you all for your participation on today's conference call. At this time, all participants may disconnect.