Hey, good morning, everybody. So welcome to day two of the UBS Financial Services Conference. Up here with me, we have Wells Fargo CFO Mike Santomassimo. Welcome.
Great. Thanks for having me.
Absolutely. We were actually just out there while getting Mike talking about the first 22 days of the new administration. Maybe talk to us about, have you seen a notable shift in business sentiment, and has that translated at all into activity?
I think, you know, as you look at, you know, the election, you know, right after the election and sort of into where we are now, I think there's certainly this optimism that, you know, the administration's gonna be much more pro-growth, pro-business, remove a lot of the obstacles that may get in the way of, you know, growing, you know, the economy, you know, merging businesses, a whole bunch of different activity. I think that optimism is still there. I think you've seen it, you know, in the engagement with clients, you've seen it in the dialogue, you've seen it in a lot of clients now considering doing things that just a year ago they probably wouldn't have done.
Mm-hmm.
And so I think that's really, really good. As you said, we're 22 days into it. And I think there's still some uncertainty in terms of where a lot of the policy may go, across, you know, in the near term. And so I think that is putting a little bit of, you know, caution into, you know, actually pulling the trigger in terms of doing a deal or some of the activity that's there. You know, but I think you sort of have to look a little bit past the first couple days, couple weeks. And we still expect to see that momentum, you know, build throughout the year. You know, the pipelines that we have across many of the businesses, very strong. The dialogue, like I said, is very strong.
And then I think importantly, we come into this environment with many, most customers really in really good shape. So they're positioned to do things that they, you know, a couple years ago they would've had to think twice about. And so, you know, on the consumer and the commercial side, you know, everything feels like it's set up to really see that translate into more activity. But I think it's gonna take a little time for that to really translate into people actually doing things. And you know, others are saying this too. You know, it takes just time to, if you're gonna do an M&A transaction, you don't think about it on Friday and announce it on Tuesday, right? These things take time to kinda get through in a reasonable way.
I think, you know, but I think we do expect to see that come, as we go throughout the year.
So let me double-click on, you know, your comments about the capital markets pipeline. And let's just talk more broadly about capital markets at Wells. I think, it's not a surprise for the folks that know you with your big book of corporate, customers that you have, you know, really honed in on this business. I think it's caught sort of, maybe some generalists off guard that think of you as old Wells. So maybe talk a little bit about your efforts in terms of building out the investment banking and markets business. And what are the mile markers that you look at, whether it's league tables or anything else, in terms of where you want to be in a few years' time?
Yeah. Well, look, we've had a corporate investment bank for a very long time, you know, across the business. But we never really talked about it until about four years ago where, you know, we changed our segment reporting. We've, you know, internally and externally, we, you know, recognized the opportunity that we had to really grow that business and started to, you know, invest in it like we were doing across many of the other business. And we're very happy and really proud of what the team's done so far, in a relatively short amount of time. As you look at, you know, the span of some of these businesses, you know, in the investment banking business, you know, we hired new leaders a few years ago, to grow that.
We've added dozens of people across different coverage verticals and sectors. We've continued to invest in the product capabilities across, you know, equity and Debt Capital Markets, as well as sort of the M&A expertise that we need to really help, you know, help drive some of the deal activity that's there. The good news is we're getting people from really everywhere. You know, we've been very happy with our ability to recruit really good people. It just takes some time for them to, you know, get in seat and then become more productive, and so I think that's just a matter of time as you sort of begin to see more activity across the, you know, industry.
And we, you know, we have a new leader there across the corporate investment bank too, Fernando Rivas, who's also helping drive some of that activity there. And I think what you'll start to see, you know, come out of that business is just very methodical growth and market share. It's not something where you double your market share in a quarter or two, right? It just takes some time to go through that. And we've added, you know, dozens and dozens of senior people across, you know, the different areas, you know, over the last few years. And we're gonna continue to invest. And it's really important that we do that in the right way. We've seen, you know, over time, lots of people try to, you know, grow these businesses, and it not always work out so well.
And so we've been very, you know, thoughtful about the type of people. They have to fit into the culture, the risk appetite that we have. And I think we're happy with what we've seen so far, and I think that'll continue. On the market side, it's somewhat similar. You know, we've had, you know, many of these businesses for a very long time. But again, they didn't really get the right focus. And so we've just been investing in people, a lot of upgrades, some ads, and then investing in a lot of the technology across the different asset classes. And it's just been this slow sort of, you know, growth across many of them. And pretty much every single asset class, we've grown share over the last, you know, two or three years.
I like to use FX as sort of a good example 'cause it's just an easy one to illustrate things. You know, that, you know, five, six years ago, we generally only did FX for corporate payment buy flows that came out of our commercial or corporate investment banking clients. You know, and then we had to buy liquidity from other providers across the street. So we've built the capability to add institutional flow into the mix. And then we've just been methodically adding clients. And now we're at the point where, you know, that's a bit of a hockey stick in terms of adding the clients on and onboarding them. And we should see years of growth, you know, from that business. And it's balance sheet friendly. You know, it's not super intensive from a financial resource point of view.
And so all that stuff makes sense. And each of the other product areas are similar. And then when you put a big wrapper around it, you know, one of the things that, you know, the company five, ten years ago was very proud of is you had all these, like, individual businesses that were trying to optimize themselves. So we said, "Okay, look, we really have to get leverage out of all of the lending we provide and all of the other things we do for these customers." And so we've had this focus on, and particularly in the corporate investment bank, we've had this focus to, you know, make sure if we're lending in the commercial real estate business, we're getting markets business, or we're in the investment banking flow.
I think you're starting to really see that come through where many of our biggest customers just wouldn't have thought about us that way, you know, three, four, five years ago. You're seeing that build momentum, as we go. Then the last piece is really the commercial bank, you know, where it just wasn't a focus for the company to do the markets business, FX rates and that type of thing, or the investment banking business for, you know, the commercial banking customers. We have a really great share. We've got a really great, really strong commercial banking business. So we've just been putting that focus there. I think we're starting to see some growth there, as well as you look across, you know, that client base.
And so I think as we go, it'll be more of the same, you know, for the next number of years as we just systematically add people, systematically sort of, you know, continue to invest in some of the underlying technology. And I think you'll start to see, you know, the share grow in a disciplined way over time.
So bringing it back to the nearer term, how has investment banking and markets activity trended so far in the first quarter?
Yeah. I mean, everybody can see the same data week in, week out in terms of the industry, right? So, you know, I think if you look at areas like M&A announced volume, that's down a little. If you look at equity capital markets, it's down a little. You know, and then debt capital, you know, and some of the investment grade side, you know, it's up a little. And on the high yield side or leveraged loan side, it's a little bit of a mixed bag. And so, you know, I would just keep in mind it's five weeks, six weeks, five and a half weeks, whatever it is. Like, it's, you know, I think it takes some time for the activity to build throughout the year.
I think, you know, going back to where we started, you know, I think there, you know, we still, you know, this sense of optimism and this wanting to kinda continue to invest and create more activity, I think will come. It just may take a little bit of time as we go throughout the year.
So, Mike, I just wanted to shift maybe our conversation on the consumer. So you, your efforts and card are newer, clearly versus incumbents. It's a little bit harder to read into your spend trends, right? 'Cause your base is different. So you saw a seasonal bump in the fourth quarter, but similar year-over-year trends in the fourth quarter as in third quarter. And I guess the question here is, and by the way, I'm asking that question 'cause your peers saw an acceleration in spend in the fourth quarter. Have you noticed animal spirits, so to speak, filter into consumer spend at Wells?
Yeah. You know, I'll start with the last part and then come back to the broader points on the card business. But, you know, when you, each of the peer businesses are just different. So they're hard to compare. You know, some are more travel oriented, some just different customer segments. So you gotta be a little careful to compare like a short amount of time and look at that and draw any real conclusions from it. You know, I think, you know, overall the consumer has been, you know, quite strong still, and that activity that we're seeing across the CardS pace or debit spend has actually been very consistent. You know, we're not seeing it sort of accelerate one way or decelerate, you know, categories move around or year-on-year growth rates change a little bit depending on sort of what's happening.
But it's been, it's been quite resilient, quite consistent. And I think that's been, been the story now for a number, a number of quarters. But when you look more broadly about the card business, you know, again, we've been in the card business for a really long time. It just wasn't a very good business, you know, five, seven years ago. And so one of the first area, this is one of the first areas when, when Charlie got here, one of the first areas that he focused on, right, which was we needed a, we needed a new team. We, we didn't have competitive products. The service wasn't where it should be. And so we've again systematically gone through that business. Every product has been refreshed. We started launching the new products about three and a half years ago with our Active Cash Card.
The cash back, you know, piece of the market's the largest piece of the CardS pace. That product has actually been performing really well. We've seen good uptake on it. It's a very simple value proposition, and the credit performance has been quite good. The majority of those customers are still our in-house customers, not new to the bank customers. That has continued as we've sort of looked over the last couple quarters. Then we've launched, you know, a number of products including a small business card just a couple quarters ago, and you know, we've continued to invest in the service, the credit decisioning, the fraud capabilities. And so all of that actually is performing quite well so far.
I think you'll see us continue to do that. I think it shows you when you have really good products, really simple value proposition, and you know, continue to do marketing in the right way, then I think you get good uptake from it. So I think you'll continue to see that.
So you mentioned something in your remarks. You said that most of your customers are not new to the bank. And if we think about the marketing dollars that, you know, the big incumbents spend, J.P. Morgan, Capital One, and they're gonna spend more after they close Discover, American Express. Could you remind us sort of, you know, what lane you, you're sort of planning to sort of stay in in terms of your card business? Do you plan to, you know, continue to sell deeper into your, you know, current depositors and, you know, small business clients? Is that really the strategy here?
That's certainly part of the strategy. You know, and again, it's hard to compare, you know, absolute dollars of spend just given the differences in the books. But I think, you know, when you look at the penetration that we have across our consumer business in the CardS pace, we still have a lot more to do. It's not where it should be in terms of really making sure that we've got that done well. Then I think we'll continue to do more marketing. And as we've done that more and more now over the last, you know, three years where we get confidence in our ability to continue to grow using sort of, you know, digital channels or other ways. And I think we'll continue to do more and more of that.
I think, you know, what I think importantly though, when you look at what we're doing in that space, we're not trying to do it by going down the credit spectrum. You know, I think the credit box has been pretty disciplined and pretty tight across really all of the products there. Overall, the credit profile of the new accounts is better than what the back book looked like. So that's another part of it, that you know, we gotta be careful about. You know, you can get more growth by taking a lot more risk. That's not the strategy. I think, you know, we've been really happy to see that.
Again, you go back to really good product and you get good, good positive selection, when you do that.
Let's talk about wealth for a second. It's a segment that your peers without scale are really trying hard to build out. And just as a reminder for everyone, you have $2 trillion or $2.3 trillion in client assets and about 12,000 advisors. Now, Barry Sommers joined from J.P. Morgan in 2020. Of course, this is the business that's particularly vulnerable to reputational issues. So maybe update us on where Wells is in terms of putting that behind it in terms of the reputational issue specifically in this business. And how do you think about wealth becoming more of a growth contributor, beyond market performance?
Yeah. Well, you know, the opportunity there is big, and I think I'll walk you through some of the ways we're going after it, but you're right. It was one of the businesses impacted most from some of the reputational issues that we had years ago, and we saw that through attrition of advisors that happened. You know, you fast forward to where we are today, you know, five years ago we had leading attrition, like so high, very high attrition. Now we have, you know, industry-leading retention, right? So industry-leading low, the lowest attrition we think, across the board, and that's really, you know, changed quite a bit. Some of that was putting some of the reputational issues behind us.
You know, we had the sales practice consent order, you know, go away earlier last year and a whole bunch of other things. And then a lot of it was focus that Barry and his team put on ensuring that, you know, we've got the right platform, the right products, and the right capabilities for our advisors to be successful with their clients. On the opportunity side, there really, you know, there's three or four sort of channels that we're focused on. You know, first is that core advisor, you know, market, which has been, you know, the hallmark for a lot of the big, including UBS, a lot of folks, over time. That's an area that we, you know, when we look at our recruiting there, it's been really good.
You know, we feel like we're in front of any big team that moves across the industry now. We've been quite successful bringing on some of those over the last couple years, and I think, you know, you'll continue to see us look to make that channel more productive, more banking products, more lending products, more alternatives, and continue to, you know, see that go up. We also have an opportunity to do a better job servicing the affluent customers that we have in our consumer business. We've got a couple thousand advisors sitting in our bank branches, and you know, we're just in the very early days to see some of the early, you know, benefits of focusing on that.
These are customers that have, you know, roughly $250,000 and above, you know, and if we can do a better job advising them on their investment side, it generally brings a lot more banking business with it too, either deposits or lending. So I think that'll be a, you know, an area that you'll see more and more, you know, growth come out of. And again, we're in early days in terms of the benefits, but you're starting to see that really, you know, pick up in a more meaningful way. The other piece, which I think is a bit unique to us, is the independent advisor channel. Again, we've had this business for a while. It was always a bit of an outlet for our advisors that were in the, in kinda that core advisor channel.
And now we're starting to recruit into that channel. It's the fastest growing piece of the wealth management business, you know, in terms of, you know, advisors being independent now. It leverages most of the, really all of the platform that we build for the other channels. And so the marginal cost is pretty small. And so you're able to, you know, keep the folks that are moving out of our channel, and put 'em in there. And then you're able to recruit others coming in from other firms. And I think that'll be an area that we'll continue to focus on. And we're just seeing some of those early recruits that we've added, you know, get onto the platform. And I think you'll see that grow in a much more meaningful way.
The last piece is sort of the digital channels, which is sort of a little bit less of a primary focus for us, but I will complement some of the other things we do across those advisor-led channels.
I just wanted to follow up there. The independent channel does tend to be very attractive to advisors that are a little bit more, you know, in the spectrum of affluent to the low end of high net worth, right? In terms of the core advisor channel or the traditional wirehouse channel, given, you know, the access to capital, access to alternatives, and the more of a ability to sell the whole bank, will you be looking to recruit more heavily on the traditional wirehouse side as well? Seems like the independent side is self-recruiting is a strong word, but it seems like there's a lot of momentum without a lot of significant investment.
Yeah. No, I think on the core advisor channel, yeah. I mean, that's a huge focus for us from a recruiting perspective, and I think, you know, all of our managers across the country, across the hundreds of offices that we have, you know, that's a big part of how they're evaluated every year in terms of the recruiting that we can do across those channels. And, you know, again, we're seeing really good traction over the last couple years. And I think that should hopefully continue. And I think we're off to a decent start so far this year.
So it's been almost 20 minutes, and we're just touching on risk and controls, I think, which is a good sign. So on this topic, excuse me, I know it's difficult for you to communicate with investors where your progress stands with regulatory deliverables. So that said, what public data points can you steer investors towards that could help measure progress? And are there any anecdotes that you can share to help us sort of shape where you are from a progression standpoint?
Yeah. I mean, look, I think, you know, it is hard. We appreciate that it's hard sometimes for us to show the progress. I think, you know, in the last couple weeks, we've had three consent orders get terminated. So that's obviously the easiest way to show the progress is to see those consent orders go away, so hopefully that's a good indicator, and I think, you know, I go back to like what we've been saying sort of consistently now for years, right? We as an operating committee, like this continues to be the most important thing. We've gotta get through it all, and we're committed to do that, and we're very confident in our ability to kinda close this stuff out.
Every week we start our conversations on like, you know, where we are, what's going well, what's not, how do you make sure it all sort of moves forward at the right pace. And so the disciplines are the same disciplines we've had now for the last, you know, four plus years. And so I think if you saw that, you'd that would build confidence.
I think internally we can see a lot of the things that we can see the benefits of a lot of the things we're doing through the operating metrics that we look at, whether it's, you know, whether it's operating losses, controls, growth, you know, you can go through a whole bunch of, you know, dashboards that we look at each week, and sometimes daily to see some of that progress come through, and it's just a matter of now sticking with it to sort of finish off, and ultimately you'll see it in, you know, we disclose our operating losses, and so you'll see that, you know, come through, you know, a more sustainably sort of lower operating loss number over time, but I think we feel really confident about our ability to do that.
And hopefully the last couple weeks is just, you know, another, another piece. Hopefully that builds a little confidence with you to sort of see that we're making the progress that we, we say we're making.
Just as a quick reminder for the audience, although there's apparently a Bloomberg function to easily look this up.
Oh, is there?
Yeah. How many consent orders do you have left? And what do the work streams look like to resolve them?
That's. I didn't realize there was a Bloomberg function. Look, we have five left. We've closed nine since 2019, and I think we'll, you know, we're working with the right sense of urgency around that.
Great. So on expenses, the walk that you provided on your outlook this year is very helpful. And you identified $2.4 billion of efficiency or efficiency initiatives. At this point, how much of the savings is from risk and control related projects versus let's call it continuous improvement? And as we think about mile markers like lifting the asset cap or getting rid of those five remaining consent orders, do you expect, like the contribution from efficiency initiatives to increase? Does that bar increase? Or is that some of that savings already contemplated in that $2.4 billion?
Yeah. I mean, look, the vast majority of what we've done over the last, you know, four years, and, you know, we've delivered about $12 billion of efficiency saves over the last number of years. And, you know, really the vast majority of that is just, you know, a basic sort of like hygiene across the whole company. You know, some of that is headcount coming down, and you can kinda see that coming down pretty meaningfully off the peak from, you know, 2020. It's areas like real estate, automation and tech, duplication going away. You know, there's a whole, really every part of the company has contributed to it. We haven't focused on optimizing the risk and control work.
I think in the, you know, in Charlie's shareholder letter the last couple years, he's sort of said we've added about, you know, 10,000 people, a couple billion dollars of spend. That's not an area that we've spent a lot of time trying to optimize. You know, as you finish some of the work, some of the one-time expenses, project expenses fall away, but there's still an opportunity at some point to, you know, in the future to optimize that more. And I think we'll come, you know, as we sort of finish more of this, we'll come back to that, but that'll take a little time to do. And so the $2.4 billion is really more of just sort of the, you know, driving, you know, efficiency across like every part of the company.
and I know it's a bit of a cliché, but like as you sort of peel back the onion, you know, it does, it really.
You find more.
It really does work that way, right? Like you can't, you know, it's a big, it's a big company. You gotta be really thoughtful and careful about how you go about this work, and, and what's most important here is you actually wanna build it into the DNA of how the place operates. Like we can create lots of projects to cut costs and do other things, but, but what we want is the management teams of every one of the businesses at all levels of the company to come in every day saying like, how do I make the place more efficient? Because by the way, like the saving money part is a good benefit, but in most cases, it's actually gonna improve how we serve customers. It's gonna make decisions faster. It's gonna make the, you know, the, the engagement better.
It's gonna make the infrastructure, you know, the technology better. And so there's a whole bunch of benefits that are actually gonna drive more value over time, than just like the cost saving. And then it allows us to, you know, really invest more in the business, right? So we've invested a lot, a big chunk of that $12 billion back into the businesses by adding people, building better technology and really across, you know, every single one of the businesses. And I think those investments will pay off over a very long period of time.
So I think investors have appreciated that you give your outlook on an absolute expense basis. At what point does Wells Fargo turn more into an efficiency ratio story?
Yeah. I think you gotta be a little careful, like, from where we've come on efficiency ratio, right? Because just because revenue goes up a little, it doesn't mean you got more efficient, right? And I think as you look at, you know, where we've been focused is, it's really driving like real efficiency. It's not making the ratio better. You know, it's like that's a bit of an outcome, not a goal right now, and I think, you know, we really wanna make sure every part of the company is looking at, you know, how many people do we have doing function X over here? And why is that? Why is that the right number? How do we automate it? Like how do we bring better technology to bear?
And I think you can get a little bit lost into thinking you're doing a better job than you are if you focus only on the efficiency ratio. At some point, you know, will we, you know, will it switch? Maybe, you know, probably, but like, I think we still have more to do, just driving like real discipline there. And so it'll. We'll see as we go.
On the theme of automation, you know, AI has clearly been a big theme. How are there any use cases for AI right now at Wells Fargo, and as you look forward, what are the best use cases for AI at Wells?
Yeah. I mean, look, I, you can't leave a conversation these days without talking about AI. And, you know, I think you have to distinguish between traditional AI and generative AI. On the traditional AI side, banks like us have been using it for a long period of time. On the generative AI side, I, you know, I'm really excited about what opportunities it presents for us. It's still early to see it sort of really get, you know, have a big impact. It's evolving really, really fast. But it's gonna have an impact on almost every, you know, part of the company at some point. I think in the early days, you'll see it focused more on internal use cases.
You know, if you're a teller or a branch banker, you may have like hundreds of different policies and procedures to sort of deal with. It can make that much simpler, much faster, much more intuitive. And we've rolled out capabilities in some of our branches, to do that for those folks. In a call center today, a call center rep's gotta listen to the person, you know, do the call, type a bunch of stuff into a system, and document what happened. AI will effectively do most of that for you at some point in the future. It'll transcribe the call. It'll put it into the system. It'll do searches for different, you know, aspects that you want it to.
That's a real use case that will sort of come to bear pretty you know pretty quickly, but it'll have an impact on pretty much every part of the company at some point. And I think you know we've got I don't know dozens and dozens of different use cases that are being you know piloted in some form across the company, including in you know in functions like finance. It'll change you know it'll do a lot of things for you that are manual today in terms of understanding things. You know it'll read analyst reports at some point so I don't have to and tell me what's important in them and compare them. And is EriKa's tone different than like somebody else's tone?
And so it'll do a lot of that stuff for you and make things much more, much more efficient.
If AI didn't write the report for me.
That's true. It's true. It might, it might at some maybe it did.
Maybe. So, let's talk about net interest income. And again, fun to be 30 minutes in and just diving into net interest income, which is a reminder to the audience, you're looking for it to be 1%-3% higher than 2024. How should we think about overall deposit growth this year? And could non-interest bearing deposit growth resume in 2025, presuming that we're pretty close to the neutral rate?
You know, look, I think you know the good news on deposits, right, is that you've really seen the stabilization of non-interest bearing and interest bearing continue, and you know, I think that's you know we still expect that to be pretty stable as we go through you know this year. You know, obviously depending on where things trend from here, I think that but that should still be sort of the good base case, and embedded in sort of our guidance, we do think you'll see a little bit of growth in deposits across the board. Some of that'll still be in CDs and other you know interest bearing deposits.
Hopefully, as you know, if the economy continues to be strong and we continue to do a better job at acquiring new customers, you'll also see some non-interest bearing growth there, as well. There's some nuances to the corporate side. As interest rates come down, you'll see some non-interest bearing go up potentially, you know, 'cause you have earnings credit rates, so I think there's a lot of factors, you know, that go into that, but I think, you know, it's been good to see over the last, you know, couple quarters that deposits have been performing, you know, probably better than, you know, people would've expected, you know, as you sort of come through this and, you know, this cycle and you start to see rates come down a little at least.
And we'll see as we go through the year, but we do expect it to still be pretty constructive there.
It's been a while since the neutral rate has not been zero, for a lot of investors. How should we think about your, quote, natural cost of deposits in the event that, again, the neutral rate is close to 4%?
To me, it feels forever ago that rates were at zero. You know, look, I think we'll see, right? I think, you know, it's exactly what you would expect, right? Probably, you know, when you look at the commercial side, you'll have competitive sort of pricing on deposits that generally will be fine relative to what you're making on the asset side. You know, if the last couple of years are any indicator on the consumer side, it'll work out fine. Like, you know, standard pricing didn't really move a lot. You saw some CDs and savings promos, you know, sort of as part of that mix. You know, I think we'll see.
It's a really hard kind of what if, right? Depending, you know, you really have to see what else is happening across, you know, across the macro backdrop to know how to feel about where it's gonna go, but.
On the other side of that, could we unpack your expectations for CIB markets and banking loans for the year and maybe also touch on auto and credit card growth?
Yeah. On the consumer side, we don't really expect that much to happen in aggregate. You know, you'll see, you know, mortgages come down a little. You'll see, you know, cards go up and you'll see a little bit of growth in auto, potentially. You know, part of that is we signed an agreement with Volkswagen and Audi that will become operational at some point in the next number of months. You know, and I think it starts to go live quite in the next month or two, and then sort of grows from there. And so you'll see, but that probably nets out in aggregate across the consumer side to be not a lot.
And then, you know, on the commercial side, we generally expect to see a little bit more growth in the second half of the year. I think that goes back to what we were talking about in the beginning, right? If the environment still remains constructive, it's still, people still have this confidence in sort of the path that we're on, then I think you'll see more people invest and more people, you know, build inventories 'cause there's more demand there potentially if the economy's growing. And I think hopefully you'll see that as you go through. But I think in aggregate, it's still, you know, relatively modest, I think, from when you look at, you know, fourth quarter to fourth quarter.
Final question on NII. Based on the drivers that you laid out on that earnings slide, it suggests to us that 2025 is clearly a year of net interest margin or NIM optimization versus balance sheet growth. How should investors think about the NII trajectory from here and the exit rate in 4Q 2025, provided that we're in the ballpark of Fed funds and 10-year that you laid out on that slide?
Yeah, well, I mean, you know me well enough, Erica, that I'm, there's no chance I'm gonna talk about the exit rate.
I tried.
But look, I think if things, you know, if our guidance if it sort of plays out roughly sort of, you know, the way our guidance would suggest, right, that'll be somewhat constructive, right? And so, as you look at where it goes from there, but I think there's a long way to go between here and the end of the year.
Right. So deregulation has clearly been a theme since the election. So talk to us about how the new administration might impact future capital and liquidity regulations and more importantly, supervisory practices.
Yeah. I mean, certainly the tone's changed quite a bit, it feels, in a lot of ways. I'll sort of try to unpack it quickly. On the capital side, there's a few things happening. You have stress testing or CCAR, you know, changing. The Fed put out a statement in December. The industry's been engaged, obviously, with a lawsuit and other engagement with the Fed on that topic. So we do expect to see some changes happen on the stress testing side. You know, there's some minor nuances, you know, for this year's test. But so it'll be more meaningful, you know, we're expecting to see some more meaningful, you know, discussion of sort of what they're proposing as we go over the coming months.
On the broader capital rule set in Basel III, I mean, the direction, you know, it should head, it should be better than what I think was under the old regime. It feels like that'll be constructive. I think the industry still thinks we should try to finalize Basel III. I think that puts some certainty around sort of how we should manage the balance sheets. And I think that'll be a good thing if we can kind of get that finalized. But I think that's gonna take some time given, you know, some of the key regulators were just put in their seats, you know, in the last like 24 hours, 48 hours. And so I do think that'll take a bit of time.
I don't expect a bunch of changes on liquidity anytime soon, but I do think that, you know, generally speaking, the course of direction, you know, should be pretty constructive. On the supervisory side, I think, you know, really, you know, what we hope there is just that the focus is on, you know, material risk, and I think that seems like that'll be the case, you know, but based on what you see. And I think, but our, you know, our relationships and our dialogue with a lot, you know, all the staff that we deal with every day is quite constructive and we remain very engaged with them.
So you've been buying back about $3.5-$4 billion a quarter in the second half of 2024. How should we think about the buyback pace leading up to DFAST 2025? And how much does a lower SCB result impact the pacing if you do receive a lower SCB?
Well, I think, look, our you know, we've been really disciplined about not talking about pacing, right? Because it really, you know, the process we go through has been pretty consistent for years now. Like you really have to start with like, what do you think the risks are out there? What's the opportunity set over multiple quarters, you know, in terms of where you're gonna deploy capital? And then you're gonna look at all the you know, where rates are going and all the other impact that OCI might have. And then you know, think of buybacks as a bit of a toggle for you know, where we wanna manage capital.
What we've said is that, you know, we'll keep capital at, you know, we don't need to grow it from where we are today, you know, in terms of our CET1 ratio. Then, you know, we'll see what that will give us in terms of of buybacks each quarter, and we'll go from there. But certainly, you know, a lower SCB and more certainty around where capital levels overall go give you some confidence too.
So, to the audience, before I ask my last question, just as a reminder, you could send me a question for Mike through the QR code and I'll see it in this iPad. And we'll, we also have mic capabilities if you prefer the old-fashioned way. So last question for me, the street has you reaching a 15% ROTC by 2026. Is that the right timing? And can you accomplish this without the asset cap being lifted?
Yeah. Well, before I answer that, I'll go back to maybe on the expense side, just a minor near-term point. You know, we do have seasonal expenses in the first quarter.
Yeah.
That not everybody sort of like quite models for some reason, even though we tell everybody about it. But so I would just keep that in mind for modeling on expenses. On returns, you know, look, I think, you know, we started the journey at 8%. We said we would get to 10%. We then said, you know, 15%. I think reasonable people can have, you know, different, you know, different, a different view on exactly when you get there. The good news is that we're not that far off, right, in terms of when you look at, you know, the results coming out of last year, and I think our focus is just to continue to execute on all the things we said we were gonna do. And whether it's, you know, whether it's then or, you know, we'll see ultimately.
But I think the good news is we're getting much closer and we feel very confident to get there. And then once we get there, we'll set expectations from there.
Great. So we have one minute left. Does anybody have any questions in the audience that they'd like the mic for? All right. Thank you so much, Mike.
Thank you.
Thanks, Mike.