Wells Fargo & Company
Q1 2021 Earnings Call Transcript

Published: 14 Apr 2021

[Operator:]

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo First Quarter 2021 Earnings Conference Call. . I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

[John Campbell:]

Thank you, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first quarter results and answer your questions. This call is being recorded.

[Charles Scharf:]

Thanks, John, and good morning, everyone. I'll make some brief comments about our first quarter results, the operating environment, and update you on a few important topics. I'll then turn the call over to Mike to review the first quarter results in more detail. We earned $4.7 billion or $1.05 per common share in the first quarter. As you can see, these results included a $1.6 billion decrease in the allowance for credit losses. Higher net interest income more than offset a decline in net interest income, and expenses are just beginning to reflect progress on our efficiency work. The impact of this work should increase in the latter half of the year. Credit quality continued to outperform our expectations with charge-offs at historical lows, but low interest rates and tepid loan demand remained headwinds for us during the quarter. And we continue to manage within the constraints of our asset cap which require us to anticipate the inflows from government stimulus, effects of QE, and additional fiscal actions which could impact our balance sheet. Overall economic trends improved during the quarter, and while there are risks, the likelihood of improvement continues to increase, and you certainly see this in the markets. Equity markets are rising, spread have tightened, and liquidity is strong. Additional fiscal stimulus, continued monetary support, and the acceleration of vaccine availability provide a path to a more complete reopening and further economic expansion. U.S. GDP growth is on track to surpass its pre-pandemic peak by the end of the summer and is expected to increase in 2021 by more than any year since 1984. Overall, the consumer is strong, though there are inconsistencies which I will address later. Consumer net worth was up 10% in 2020, hitting a new all-time high of $130 trillion. Personal savings is approximately $1.3 trillion greater today than it was a year ago. It's expected that more than $1 trillion will be spent over the next 5 months, and this does not include the impact of President Biden's proposed initiatives, Wells Fargo customers specifically as of last week, over $46 billion has flowed into our customers' deposit accounts related to round 2 and round 3 of federal stimulus payments, and we estimate that half has been spent and half remains in their accounts.

[Michael Santomassimo:]

Thanks, Charlie, and good morning, everyone. Charlie highlighted many of the ways we're actively helping our customers and communities, which we highlighted on Slide 2, so I'm going to start with our first quarter financial results on Slide 3. Net income for the quarter was $4.7 billion or $1.05 per common share. Revenue grew from both a year ago and the fourth quarter as the decline in net interest income was more than offset by higher noninterest income. Our first quarter results included a $1.6 billion decrease in the allowance for credit losses. And as a reminder, in the first half of last year, we built reserves by a total of $11.5 billion, and we had $18 billion of allowance for credit losses at the end of the first quarter. We completed the sale of approximately half of our student loan portfolio in the first quarter, which resulted in a $208 million gain and $104 million goodwill write-down, and we closed the majority of the remaining portfolio just this past weekend. Our effective income tax rate in the first quarter was 6.4%, which included net discrete income tax benefits related to closing out prior year's tax matters.

[Operator:]

. Our first question comes from the line of Scott Siefers with Piper Sandler.

[Scott Siefers:]

I guess first one I wanted to ask about is on NII guidance. So specifically in terms of premium amortization, there's about a $250 million delta between today's level of premium am and where it was a year ago. Does that -- last year's level of about $360 million or so, does that represent, in your mind, a pretty typical level? And then kind of how quickly does it move back down to there?

[Michael Santomassimo:]

Scott, it's Mike. I think you really got to remember what happened last year that would have impacted premium amort, right? It was a bit of an abnormal quarter as you sort of got to the end of the quarter. I think from here, I think, based on what we're seeing, premium amort probably has peaked in the first quarter and starts to trend down from here. How long it takes to sort of get to a kind of normalized view, I think we'll see over the next -- we'll have a better clarity on that, I think, over the next couple of quarters. But we would expect it to start trending down from here.

[Scott Siefers:]

Okay, perfect. And then just a separate question. So the lending recovery is kind of a big question for you guys and others. I guess, just regardless of what happens with industry trends, maybe if you could speak to where you feel you guys are getting your fair share of loan growth and where you think you might still need to do better. I know you had mentioned, for example, credit card as being very underpenetrated, but just curious to hear broader thoughts there as well.

[Michael Santomassimo:]

Yes. Look, as what you'll probably hear from a lot of folks, the demand across really most commercial client segments has been pretty weak now and probably has stabilized or seems to have stabilized over the last couple of months, but But I think we'll sort of see how that progresses into later this quarter. I think as we sort of look at where the opportunity is, as the economy and the momentum in the economy really starts to take off more, it's really across the board in our core client segments. In our Middle Market, our Commercial Banking, more broadly, I think there'll be opportunity in kind of the core large Corporate segment, maybe to a lesser degree, but we do really expect to see that Commercial Banking demand start to pick up as the economy picks up. And so, I would sort of highlight that. I think Charlie has talked a lot about the credit card space. I think there'll be growth there, but given sort of the relative size of our portfolio to the balance sheet, I think that the impact there will be modest to the overall size of sort of our loan portfolio.

[Operator:]

Your next question comes from the line of Ken Usdin with Jefferies.

[Ken Usdin:]

Just wondering, Mike, if you can kind of just recodify that expense commentary for the year. You said the $53 billion number, and then you also talked about the revenue-related lift of about $800 million. So, is that just the reset to $53.8 billion, all things equal? I just want to make sure we know what that includes and doesn't include and how you expect it to traject from here.

[Michael Santomassimo:]

Yes. Sure, Ken. Thanks for the question. So, if you recall how we sort of set the $53 billion target, I'll just give you a little bit of a background there so -- that we covered last quarter. So, embedded in that $53 billion target was an increase of about $0.5 billion of revenue-related expenses and about $1 billion of operating losses sort of embedded in there. And what we excluded from there is the cost to exit the businesses, which you saw a little bit this quarter, the $100 million or so this quarter for the student loans business and any restructuring charges that come throughout the year. So, as you sort of think about the go-forward piece of it, the $53 billion, we still feel really good about. I think what's putting a little bit of pressure on that is the incremental $300 million of revenue-related expense. So, I don't think it's a foregone conclusion. That -- it's -- we're going to be $300 million higher, but I do think that's putting pressure on the $53 billion. So, it's possible we're a little over that if the revenue-related expenses hold, which by the way should be a good thing, right, because that means there's plenty of revenue on the other side of that to offset it.

[Ken Usdin:]

And that was going to be my follow-up, Mike, which is was the revenue uplift, what you had already seen in the first quarter or is it things that you feel better about going forward that we haven't necessarily seen yet but you're now anticipating a better revenue environment?

[Michael Santomassimo:]

Yes. We did see a little bit of it in the first quarter as equity markets outperformed, I think, everyone's expectations. So, if those market levels hold throughout the rest of the year, that's when you'll see the rest of that revenue-related comp come in. And so, you'll see the revenue associated with it throughout the rest of the year.

[Ken Usdin:]

Okay. And then I'm sorry, just last one on it. Are you still expecting the end-of-year on expenses to be lower than the beginning, as you had said, also in the fourth quarter, that trajectory still holds directionally?

[Michael Santomassimo:]

Yes. Directionally, that's right. We'll get more benefit from the efficiency initiatives that we're executing later in the year, so that will sort of impact the run rate, and I would just point out and remind people that we do have a lot of seasonal expenses that hit the first quarter. And so you sort of need to normalize for those as you go out for the rest of the year as well.

[Operator:]

Your next question comes from the line of Erika Najarian with Bank of America.

[Erika Najarian:]

My first question is a clarification question for Mike. Clearly, the market responded to this comment. I think you noted that if loan growth was going to be -- continue to be tough this year, that you would be -- NII would be down 2% from annualized fourth quarter, which I think the market is taking that you're bringing in your NII guide for the year. And I just wanted to make sure we interpreted that correctly, that it seems like a more realistic outlook for NII now with the curve steepening and perhaps green shoots on loan growth is flat to down 2%.

[Michael Santomassimo:]

Yes. No. Thanks, Erika, for the question. Our guidance still holds that down -- it's somewhere between flat to the fourth quarter run rate to down 4%. And consistent to what we said in the first quarter, to get to the top of the range, we need to see some loan growth. That's still the case, although rates have offset some weakness that we've seen so far. And I think to get to kind of the middle of the range, we really need rates to kind of hold where they are, and we won't need a lot of loan growth from here to hit that. But I think there's plenty of scenarios that you can sort of think through that put you somewhere else in the range. But what we tried to give you were a couple kind of realistic data points relative to where we think it -- what's possible in terms of where we'll land within the range.

[Erika Najarian:]

Got it. Very helpful. And my second question is for Charlie. Charlie, clearly, the market is reacting to what seems to be a brighter revenue picture for Wells and continued progress in your transition and turnaround, and it feels like it's shrugging off. Typically, your stock wouldn't be up 3% after saying that expenses could slip higher. And clearly, the market doesn't care given the revenue outlook. I guess I'm wondering as we look forward to 2021 and hearing you loud and clear on some of the investments that you're already planning to make in the consumer side, what are the puts and takes in terms of a greater bottom line or benefit from the second half of that $8 billion cost savings that you've identified versus an economic picture that is clearly brightened, even over the past 3 months? In other words, should we think of your expenses having a higher floor, let's say, $50 billion to $51 billion, as we look out to 2022? And obviously, that would come with greater efficiencies as revenue continue to improve.

[Charles Scharf:]

Thanks, Erika. Listen, I don't think there's anything more that we're going to say in terms of what we would expect expenses to be going forward beyond what Mike covered in his remarks and what we said on last quarter. When we look at the opportunities to continue to drive efficiency in the company, which is really all about just running a better company, those continue to be extremely significant. We laid out, just on a gross basis, what we thought those opportunities were and our degree of confidence in being able to achieve that given the level of specificity that we had in the line of sight. And I think that still holds true. And over time, we would expect to continue to find more, kind of peeling the onion back. And at the same time, we are investing in the business. And it's on the consumer side. It's on data. It's across the Home Lending platform, the card platform, our products in the consumer bank, what we're doing in our Middle Market Business with technology account, I mean, I can go on and on of all the things that we're doing. So I think that's all embedded in our statement that we would expect the fourth quarter, in order to get to $53 billion, just would clearly be a lower run rate than the $53 billion itself. And that as we look forward, we hope to see net expense reductions as we continue to drive efficiency while continuing to add investments into the business. So hopefully, that's responsive to what you're asking.

[Erika Najarian:]

Strong message this quarter. Appreciate it.

[Operator:]

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

I had a question around how you're thinking about the dividend and the buybacks. We know that post-CCAR stress test, assuming you pass that, that there's a little bit more room for you to do both of those things. So maybe you could give us a sense as to how you would approach the buyback and the dividend decision post stress test. And in particular, what kind of time frame are you thinking about that you would need to optimize the capital structure down to your management targets because you're sitting with a lot of excess capital today, as you know?

[Charles Scharf:]

Sure. Mike, why don't I start and then you can pick up? I guess we'd start with the dividend. It's not lost on us that our dividend is quite low, certainly relative to where we're earning today and as we look forward. And we all know that that's a consequence of 2 things. It's a consequence of the restrictions that were put in place by the fed in terms of what those limitations were, but it was also a point of view that we had, which was we didn't want to have to, if the environment even would get worse from that point in time, be in a position to have to reduce the dividend again. So we would like to increase the dividend to a more reasonable level. We think about it as targeting a payout ratio, excluding reserve releases and things like that. And then beyond that, it is investment in the business. It's deploying our capital for our clients and the difference being buybacks ultimately, just given the amount of excess capital that we have today. And, Mike, you can talk a little bit about the timing.

[Michael Santomassimo:]

Yes. And as you sort of think about timing, obviously, we've got a lot of components to sort of think about there. But you sort of think about it over the next year or so or year, I think that sort of gets you probably a reasonable time frame to sort of work our way down, assuming, as we've been told, that the restrictions come off and we're back to sort of a more normal stress capital buffer regime. And so I would sort of think about it over that time frame, Betsy, in terms of what the timing looks like. And obviously, some of that's dependent upon CCAR and the results and how that all plays out.

[Betsy Graseck:]

Got it. And on the payout ratios, I mean, the dividend had been on the higher end of the peer group, but your peer group is running somewhere between 30% and 40%. And that's -- I would think what you mean by reasonable -- I'm not asking you to tell me what ratio, but I guess I'm asking you is that the right peer group? Or would you say you should widen your aperture a little bit and go more like 25% to 40%, bring in some of the G-SIBs in there?

[Michael Santomassimo:]

Yes. No. Look, I think as you sort of think about the payout ratio over time, I think we'll sort of come up. And obviously, it's going to be a Board decision, Betsy, in terms of what the dividend trajectory sort of looks like. But it's not lost on us that we need to sort of be in a reasonable sort of payout range over time. And obviously, that's going to be dependent upon what we think the earnings capacity is going to look like. And so I think you'll see that sort of come through over time and as we sort of have more ability to distribute capital.

[Charles Scharf:]

Yes. And I guess I would just add, Betsy, just real quick is, I think the way -- I mean, I think the numbers and whatnot, the way you talked about it is generally the right way to think about it in terms of how -- I mean, number one, we were clearly high relative to what others were and in terms of what we -- probably makes sense for us. That's not the way we're thinking about it. More long-term range in terms, I think what you talked about is right. We would like to do something sooner rather than later. And that might not get us to where we ultimately want to be, but it would be, I think, an important step that that's the direction that we're going.

[Operator:]

Your next question comes from the line of John Pancari with Evercore ISI.

[John Pancari:]

Just on the margin front. I just wanted to see if you could quantify the impact of the hedge ineffectiveness on the net interest margin this quarter. And then separately, could you just talk about margin expectations from here, just given the rate backdrop as you look -- we're looking at the bottom here, and we could see some upside as we move through the rest of the year?

[Michael Santomassimo:]

Yes. Sure. John, it's Mike. The hedging effect in this had about a 3 basis point impact on net interest margin. And as you probably know, we'll get that back, a negative 3 basis point impact, and we'll get that back over time. These are -- hedge ineffectiveness is sort of a temporary difference that comes back. As you sort of look -- think about the outlook from here, if the case that we sort of laid out that gets us to the top of our NII range plays out in the way that underpins that, then we should see some growth in both NII and NIM from here. And so this, hopefully, will be either bottom or pretty close to the bottom as you sort of look forward, if that case plays out. Now as you know, NIM can move around a little bit quarter-to-quarter, so you might have that bounce around, but the general trajectory should be positive.

[John Pancari:]

Okay. Got it, Mike. And then last -- separately, on the cost save side, I know you expect about $1.5 billion to follow the bottom line of the $3.7 billion this year. Can you maybe help us think about the magnitude that can fall to the bottom line of the remaining savings, of the remaining $4.3 billion as they're received? Any additional color you can provide this quarter now that you're beginning to peel the onion, as you noted earlier?

[Michael Santomassimo:]

Yes, John, I would just go back to what we just talked about a few minutes ago. As you sort of think about the trajectory of the expenses, we'll get more of that impact as we go throughout the year. And as Charlie just mentioned, the run rate as we go into the fourth quarter will be a lower -- at a lower rate. And as we sort of think about the investments we need to make and also the additional efficiency initiatives that we vet and sort of are working on top of what we talked about last quarter play out, we'll provide more guidance on that as we think about 2022 when we get later in the year.

[Charles Scharf:]

And this is Charlie. I just want to add a couple of things, if I can. First of all, I'd just remind everyone that we have a tremendous amount of work to do on our control environment and when you look at the consent orders and all those things. And so no one has asked about that. And again, there's really very little that we can say, as I said in my prepared remarks, but we have a lot of work to do. We're going to -- we're committed to spend whatever is necessary, and it is a significant amount of money. And as we get into next year, we're not going to lock ourselves into a certain number because we have to spend what's appropriate. And so as we get closer, we'll be in a better position to give you more color. But it's -- given it's 3 quarters away, it just doesn't make any sense. And I also just want to -- just remark, we are very focused on improving efficiency of the company, but the world is moving really quickly. We have a lot of work to do in terms of building the businesses and putting ourselves in a position so that we do create the kind of revenue growth that we would expect to be able to get out of this franchise. And so that's just a reminder. Part of the reason why we're not being too specific about what we expect beyond this year because as we continue to do our work and plan for the future, we have the ability to do what's necessary to build the company for the long term, while we've still said, we still would expect expenses to be down on a net basis as we look into the out-years. But more to come as time goes on.

[Operator:]

Your next question comes from the line of David Long with Raymond James.

[David Long:]

Charlie, we've talked a lot about the businesses and becoming more efficient, if you will, and focusing on those that impact your strategic priorities. Are there any businesses that you would like to increase your critical mass in or new businesses to get into that you think would be helpful to your strategic priorities?

[Charles Scharf:]

I think -- so when you -- on the first point, I think the -- when we look at these -- our four businesses that we report publicly, we generally believe that there are material growth prospects in all of them, all through very, very different reasons. And so it's hard to sit here today and say whether one should be a little bit higher than the others, but I think we feel great about the positions we have. We feel great about the opportunities in each, and so I think that should be a -- that's an honest assessment of the way we view our businesses. What was the second part of the question again? I'm sorry.

[David Long:]

Just are there any holes or any opportunities that you see to increase critical mass and any specifics in any of those business lines? Just thinking about any areas where if we had some excess capital, could you invest it there to gain some market share, enhance your goal to improve your strategic priority outlook?

[Charles Scharf:]

Yes. I think all the things that we have to do at this point are continuing to build out the products and services that we have at the core of the franchise. I mean we're spending a significant amount of money and think we've got a significant opportunity given the size of our consumer footprint and in terms of what we should be doing from a digital perspective. The way we kind of look at it internally is we're in the game, but we're not at all a market leader in terms of what our digital capabilities are. We have a very, very clear road map about what we intend to build out, and we would start to be bringing those things to market this year. But as I said, when we talk about what we're spending this year in that $53 billion, that is included in there. And we've got opportunities like that across all the businesses, so I think we're not in a position to buy anything at this point. Our focus is on spending our money to strengthen what we have but still believe that there are material opportunities to do that, some shorter term and some longer term.

[Operator:]

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

[Matt O'Connor:]

Just a long-term strategic question, trying to look past the asset cap and everything. As we think about the Investment Bank, what is the vision for that longer term? You've got a competitive advantage in the SLR, which is becoming more and more evident with the fed exemption going away. I think you're about 100, 150 basis points above peers. Is there a way to better leverage that? And then maybe you could just also comment on the equity trading. And it's not huge numbers but was that impacted by a hedge fund out there?

[Charles Scharf:]

So let me start. I think our aspirations in the -- for our Corporate and Investment Bank, it's actually interesting because, actually, other than the fact that we're not afraid to talk about it, I actually don't think about it being really all that different from what we've been doing over the past bunch of years. When you look at our results, the Corporate and Investment Bank is an extremely important part of the company. That's not because I declared anything differently. All we did is we broke out the results, so you actually saw the importance of it. A significant part of it is the Corporate Bank, but the Investment Bank is a meaningful portion of it as well. And so as we think about what it should look like going forward, we want to continue to build out the Corporate and Investment Bank, as we've been doing in a very linear way, not in an exponential way, not moving beyond our risk appetite that kind of defines what Wells Fargo is, but just by serving the existing customers that we have in most parts of the company in a much more holistic way. And ultimately, over a period of time, that does allow you to expand your reach in terms of what your client base is. And so we're focused on the products and services that our predominantly U.S. customers want from us. We've talked about the opportunities to penetrate the Corporate and Investment Banking products into the middle market. But it's true of there's significant opportunities in the large corporate market in the U.S., where we've got significant treasury management relationships, material lending relationships, and we're completely underpenetrated in terms of what fees are for those customers relative to -- at other institutions. So that's the way we're thinking about it. And again, I would just stress, it's a continuation of building it out in a methodical way, not focusing on using risk in order to grow share, but focusing on our customer relationships that we have because we have a shot. And just to be clear, on the equity piece that you're talking about, just remember, we do have an equity platform, which you can see in our results. I would just describe in terms of our prime brokerage business because I'm sure we'll get a question on it, so I'll just answer it now. Our exposure in total and our individual exposures, I would describe as just very consistent with the size of our platform. We manage it the way we -- in terms of risk, the way we manage all the risks in the Corporate and Investment Bank. And I think you've seen the results over a period of time there in terms of what that means because it's not just what you do, it's how you do it. And so we did have a relationship with Archegos. We said publicly that we were always well collateralized. We exited it with all of our exposure with no loss, and I'll just add that we had substantial excess collateral after liquidation. So it just says, again, in terms of the way we think about how we want to manage businesses that have risk in it, not that we'll be perfect all the time, and as is the case in all events, the lessons to be learned, both in terms of what we've done and what others have done, and we'll factor that into how we manage the business as we always would.

[Michael Santomassimo:]

And I would just add just one thing as you sort of think about our growth from here. We are a bit constrained in growing our Investment Bank with the asset cap restrictions that we have in place given the significant growth that we've seen in consumer deposits, in particular. So as you sort of think about that time line and that approach Charlie said, that will take some time to sort of play out.

[Charles Scharf:]

Yes. Just to reiterate that as we look at the actions that we've had to take to accommodate all the liquidity that we've seen, the Corporate and Investment Bank has beared the biggest brunt in terms of where we've actually gone to create a bunch of that capacity. So as we think about the future, the first step is actually just getting back to where we were.

[Matt O'Connor:]

And then just to clarify, the decline in equity trading year-over-year, is that just -- if it wasn't from Archegos, is that distortion from the retirement? There's some noise, I think, related to that in the year ago comp. Was that what's driving that?

[Michael Santomassimo:]

Yes. It's just activity levels in our business. And our business is a little bit different than others, a little bit smaller cash business that sort of, I think, drove a lot of activity this quarter. So I think there's a number of factors sort of driving it. No individual sort of item that's significant.

[Operator:]

Your next question comes from the line of Steven Chubak with Wolfe Research.

[Steven Chubak:]

So wanted to start off with a question for Mike, just on the fee income outlook. Lots of moving pieces in the quarter. But how should we be thinking about the appropriate jumping-off point for core fee income as we think about the completion of the business sales and maybe some normalization in IB and mortgage activity? I know that there's more explicit guidance that's been given on the NII side. I was hoping you can maybe unpack how we should be thinking about that core fee income run rate from here, pro forma the completion of those sales.

[Michael Santomassimo:]

Yes. So obviously, we've given you a lot of detail on those sales, so you can model in the impact that that's going to have on fee income pretty easily. As you sort of think about some of the other big line items underneath that, we had about $2.8 billion in the quarter for advisory and other asset-based fees, primarily in our wealth business. And as you sort of think about the key driver there, it's going to be equity market levels. And so you can model what you think is going to happen there, plus flows that may come in. As you said, another $1.3 billion in the mortgage business. That is a bit cyclical, as you sort of pointed out. But given what we're -- what we see at this point for the second quarter, we expect to have robust origination volumes in our business. And so that should be a good quarter, at least. And as rates continue to rise, you'll see some impact there in terms of volume impact there. As you look at some of the other pieces, you got deposit and lending fees about -- just under a couple of billion dollars there, too. I think those are pressured in the short run but should see some normalization in growth over time. You've got card fees which should grow with economic activity. And then you've got another couple of billion that's kind of -- I'd kind of characterize as more transactional in nature, whether it's commissions or investment banking fees. And so I think if you sort of think about it that way, you can probably come up with a few drivers that sort of help you model that in a way that gives you some -- gives you a view on where it's headed.

[Steven Chubak:]

And just for my follow-up on NII, maybe focusing on liquidity deployment. You guys are in a very strong excess liquidity position. I know that a couple of quarters ago, and I think, Mike, it was actually your predecessor who alluded to the fact that your appetite was tepid to redeploy some of that excess into securities, just given, at that point in time, the curve was flat as a pancake. Now that we've seen some incremental steepening, was hoping you could speak to what's contemplated in the NII guidance in terms of excess liquidity deployment and your appetite to actually grow the securities book from here, just given your liquidity capacity to do so.

[Michael Santomassimo:]

Yes. No. As you point out, we've got plenty of capacity. And I think as you look at what happened in the quarter, kind of in a marginal way, a little under $10 billion we've increased the portfolio. So we've started to redeploy a bit of it. But as you sort of point out, although the curve has steepened, rates are still relatively low. And so we're working to balance sort of the short-term carry we're going to get by redeploying faster with OCI impacts over time and how to do this in the most effective way. And when we get good entry points, we're taking advantage of it. So I would think that we're going to continue to redeploy at a prudent pace as we see opportunities that sort of make sense from, not just the short-term carry view, but also all the other items that we sort of need to take into account as we sort of look forward.

[Operator:]

Your next question comes from the line of Saul Martinez with UBS.

[Saul Martinez:]

Mike, I believe you mentioned that the expenses -- or some of the expenses associated with the Asset Management business and the Corporate Trust business will be sticky and will remain for a bit. And we're talking about, annual, in 2020, about $1.7 billion in aggregate. What's still a little bit unclear to me is in the $53 billion expense number, what proportion of that $53 billion or $1.7 billion is embedded in the $53 billion guide? And I guess, as an adjunct to that, I guess, can you just talk about how sticky those expenses, how -- what proportion of those expenses will stick around? How do they roll off of what time period? Because I guess what I'm a little bit sensitive to is with the sale of the 3 businesses, you're creating about a $2.3 billion revenue hole and just want to make sure that they're -- that we understand that there is no notable impact on the expense base. So if you can just help us unpack some of this stuff, it would be helpful.

[Michael Santomassimo:]

Yes. No. It's a good question. So as you sort of think about Corporate Trust and Asset Management, we assume that those expenses would be here for the full year in the $53 billion. So there's no savings assumed relative to the outlook we gave you. So that's sort of, I guess, point number one. On the other parts of the question, what we were trying to point out is with both of these businesses, probably -- certainly for the Corporate Trust business to maybe a greater degree, we'll have some transition services agreements as they take on and migrate these businesses. So some of the expenses stay. Some of that will get offset in other items, but some of the expenses will stay as part of those agreements. So not everything transitions sort of day 1. That's sort of point number one. Point number two on it is that, as you would expect, there's a portion of these expenses that are more shared across the organization. I use sort of corporate overhead just as an example. So it will take us a little longer to work the majority of that out. And so I characterize that as somewhere between 10% and 20% of it will take a little bit longer. And then I guess, lastly, as we sort of get to closing on these deals, we'll be transparent and provide an update to our guidance on how these will impact it.

[Saul Martinez:]

Got it. But if we're thinking about 2022 in relation to the sort of the ongoing expense run rate, which was reflected in the $53 billion, really, the $1.7 billion, I'm just looking at Asset Management and Corporate Trust, the bulk of that should, by that point, assuming the deal is closed, should, call it, I don't know, 80%, 90% of that, should be out of the run rate by next year?

[Michael Santomassimo:]

Yes, subject to any impact from transition services agreements.

[Saul Martinez:]

Got it. Right.

[Michael Santomassimo:]

So as we get closer, we'll give you more guarantee on that.

[Saul Martinez:]

Which we would get paid for in revenue.

[Michael Santomassimo:]

Yes, yes, yes. As Charlie said, in most cases, for these transition service agreements, we'll have some expense still there, but we'll get reimbursed. And the way the accounting works on that is just geography. We'll get some revenue and offset by these expenses.

[Saul Martinez:]

Is there a reason why these are not placed in discontinued operations until the deal closes?

[Michael Santomassimo:]

Well, I think we moved Asset Management to Corporate, and so we moved it out of the segment that it's in. And as I noted on the call, we'll move Corporate Trust out of the Commercial Banking segment in the second quarter. So you'll be able to clearly see sort of the impact of it in the operating segments.

[Operator:]

Your next question comes from the line of John McDonald with Autonomous Research.

[John McDonald:]

Mike, two quick cleanup items. Just on the tax rate, can you remind us what's making the tax rate low this year and whether the reserve releases put some upward pressure on that? And then more importantly, what -- is it sustainably low as you look out into further years because of tax-advantaged investments? Or is part of it profitability related? Just give us the factors there.

[Michael Santomassimo:]

Yes. The biggest impact, John, on the tax rate, relative to kind of the marginal rate that we've got is the impact we get from the tax credits we get on our low-income housing and renewable energy investments. And as you can see from the K disclosures, those are -- those have been growing year after year, and they grew -- they will -- we expect them to grow in 2021 as well. And those are what they are, right? There's no -- those are pretty easy for us to identify and forecast, and that's the biggest piece of what's bringing down the effective tax rate. And that -- those will -- those credits will continue. Obviously, the more pre-tax income that we have above and beyond what we expect will sort of be at the marginal tax rate. And so presumably, if we -- obviously, theoretically, earn more money, then you'll see that effective tax rate sort of inch up over time.

[John McDonald:]

Okay. And then just on the mortgage outlook, you mentioned...

[Charles Scharf:]

John, this is Charlie. The only one I'd add on that is just -- and Mike, you can correct me. The reserve releases affect the rate, but the size of our total tax number, not that big. Again, the substantial impact on the lower rate is the dollar benefit that we get from these tax-advantaged investments that we have. And as Mike said, just on income going forward, think about it in terms of the marginal rate.

[John McDonald:]

Got it. So you're still expecting a single-digit tax rate this year, Mike, correct?

[Michael Santomassimo:]

Yes. Yes. No. At this point, that's the case.

[John McDonald:]

Okay. And then just to clarify on the mortgage outlook, Mike, I think you said like the industry might be down in volume, but you guys expect to buck that a little bit because of some of the retail strength you have. Or were you kind of just saying that you'll be down a little bit but still robust? If you could just clarify your outlook on mortgage, that would be great.

[Michael Santomassimo:]

Yes. Look, the industry data, typically, their forecast lagged a little bit relative to what the industry is actually seeing. And so I think the industry is projecting that second quarter is going to be down a little bit, but we'll see how that sort of plays out over the coming weeks in terms of what their forecasts are. But I think based on what we're seeing on our pipeline, we feel like it will be a pretty robust quarter on the origination side. You're likely to see that gain-on-sale margins come down, but we're likely to see an increase in volume as well. So...

[Operator:]

Your next question comes from the line of Vivek Juneja with JPMorgan.

[Vivek Juneja:]

Just a couple of cleanup ones, just a little bit further on mortgage banking. Mike, since you just answered that partly. The question I have is Ginnie Mae buyouts. You talked about that boosting your mortgage banking gains. How much was that? And because then that could give us a sense of what did your gain-on-sale margin do in Q1 versus Q4? And how much are you expecting that gain-on-sale margin -- I'm sorry, the Ginnie Mae buyouts to continue in the next couple of quarters, how much more to do?

[Michael Santomassimo:]

Yes. I think, Vivek, I don't have the number in front of me on the impact from the buyouts, but I would also sort of point out -- so we can follow up with you after. But I would also point out that the early buyouts, as we re-securitize them, that impacts sort of our balance as well, sort of our loan balance in Home Lending. And so I think that's another big driver. And we give you some data in the Qs in terms of what those balances look like quarter-to-quarter. So we would expect that over the coming quarters, that we're going to continue to re-securitize more of those loans.

[Vivek Juneja:]

Okay. And then the second one for both of you. I saw the numbers on the expected gain on sale on the businesses, well, the Asset Management and Corporate Trust. Is that net of goodwill? Or is that -- would we need to adjust a goodwill write-down on that, and that will obviously play into your share buybacks? And, Charlie, given that we're all anticipating the asset cap to be lifted at some point, how are you thinking about the pace of share buybacks since that will give you an opportunity to put some of that capital to work in terms of growing the balance sheet, too? Don't worry, I'm not trying to pin you down on timing of asset cap getting lifted, but just the...

[Michael Santomassimo:]

Yes. So Vivek, I'll start there. So I don't want to get wonky on accounting, but the way we accounted for the student loan business was the sale of the portfolio. And so there was a goodwill write-down that showed discretely in the P&L and how that flows through. As you sort of look at the Corporate Trust business sale and the Asset Management sale, you won't have a corresponding write-down of the goodwill, the gains, net of all -- everything that goes into exiting there, so you don't need to adjust for that. I think as it comes to sort of the asset cap question, we'll go back to our stock answer around not -- sort of not commenting on that at all, other than the fact that, as Charlie has said a couple of times on the call, that we're -- it's our top priority, and we're continuing to do whatever we need to do to sort of work our way through that. And we continue to believe we're making good progress there. And as you sort of look at our capital and liquidity levels, we've got a significant -- continue to have a significant amount of excess capital. So...

[Operator:]

Our final question will come from the line of Charles Peabody with Portales.

[Charles Peabody:]

Yes. I have two questions, 1 on cards and 1 on NII. On the card front, you mentioned that you are punching below your weight. And just curious, you're hearing from a lot of the card companies and JPMorgan this morning that they're going to really accelerate their marketing spend on cards in the second half of the year. So are you expecting to grow -- how are you expecting to gain market share? Is it pricing, rewards? How are you going to improve your relative position in that business?

[Charles Scharf:]

Sure. This is Charlie. Thanks for the question. I would say -- first of all, I would say, again, kind of like my comments on the Corporate and Investment Bank, when we think about the opportunity, we're not talking about doing anything that is materially different from a risk perspective for the company. The way we look at it is we have a business today which has $35-ish billion of receivables. When you look at the size of the consumer base that we touch across the franchise, it's hugely substantial, and we're hugely underpenetrated, even though we do have a reasonable-size business to start out with. Ultimately, when you look at what we do as a card company, the fact is our card propositions are not competitive what is available today in the marketplace or where people are going. When we look at our -- things that we do on fraud, when we look at our customer service, every step of the way, we think we have opportunities to make material improvements in what our offerings look like which will make our products far more attractive for those that currently have the products so that it becomes their primary product but also more attractive for the customers that we currently touch. And so it's a very, very -- it's -- we're very, very clear about what we think we've got to do to increase that penetration. In a lot of ways, it's very, very basic because we're building on something which is particularly uncompetitive, which I just look at like it creates great opportunity for us.

[Charles Peabody:]

And as a follow-up question on NII, I believe you guys have modeled scenarios for negative rates at the short end. Can you share some of your findings on that?

[Michael Santomassimo:]

Yes. Look, negative rates in the short end won't have a significant impact on us at all. I think we have the outlet at the fed at 10 basis points, and so I don't see that being an impact for us.

[Operator:]

I'll now turn the conference back over to management for any concluding remarks.

[Charles Scharf:]

This is Charlie again. I just want to thank everyone for the time, and we look forward to talking to you during the quarter and then on the call next quarter. Take care.

[Operator:]

Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.