Wells Fargo and Bank of New York Mellon Report Q2 2024 Earnings: A Tale of Two Banks

Wells Fargo & Company (WFC) Q2 2024 Earnings Call Transcript

Ken Usdin - Jefferies John Pancari - Evercore ISI Ebrahim Poonawala - Bank of America Erika Najarian - UBS Matt O'Connor - Deutsche Bank Betsy Graseck - Morgan Stanley Gerard Cassidy - RBC Capital Markets Steven Chubak - Wolfe Research Welcome, and thank you for joining the Wells Fargo Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference. John Campbell 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 materials, including the release, financial supplement, and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures can also be found in our SEC filings and the earnings materials available on our website. As usual, I'll make some brief comments about our second quarter results and update you on our priorities. I'll then turn the call over to Mike to review our results in more detail before we take your questions. So let me start with some second quarter highlights. Our financial performance in the quarter benefited from our ongoing efforts to transform Wells Fargo. We continue to generate strong fee-based revenue growth with increases across most categories compared to a year ago due to both the investments we're making in our businesses and favorable market conditions with particular strength in investment advisory, trading activities and investment banking. These results more than offset the expected decline in net interest income. Credit performance during the second quarter was consistent with our expectations. Consumers have benefited from a strong labor market and wage increases. The performance of our consumer auto portfolio continued to improve, reflecting prior credit tightening actions and we had net recoveries in our home lending portfolio. While losses in our credit card portfolio increased as expected, early delinquency performance of our recent vintages was aligned with expectations. In our commercial portfolios, losses continued to be driven by commercial real-estate office properties where we expect losses to remain lumpy. Fundamentals in the institutional-owned office real-estate market continued to deteriorate as lower appraisals reflect the weak leasing market in many large metropolitan areas across the country. However, they still remain within the assumptions we made when setting our allowance for credit losses. We continue to execute on our efficiency initiatives, which has driven headcount to decline for 16 consecutive quarters. Average commercial and consumer loans were both down from the first quarter. The higher interest-rate environment and anticipation of rate cuts continued to result in tepid commercial loan demand, and we have not changed our underwriting standards to chase growth. Balanced growth in our credit card portfolio was more than offset by declines across our other consumer portfolios. Average deposits grew modestly from the first quarter with higher balances in all of our consumer-facing lines of businesses. Now, let me update you on our strategic priorities, starting with our risk and controller. We are a different Wells Fargo from when I arrived. Our operational and compliance risk and control build-out is our top priority and will remain so until all deliverables are completed and we embed this mindset into our culture, similar to the discipline we have for financial and credit risk today. We continue to make progress by completing deliverables that are part of our plans. The numerous internal metrics we track show that the work is clearly improving our control environment. While we see clear forward momentum, it's up to our regulators to make their own judgments and decide when the work is done to their satisfaction. Progress has not been easy, but tens of thousands of my partners at Wells Fargo have now worked tirelessly for years to deliver the kind of change necessary for a company of our size and complexity, and we will not rest until we satisfy the expectations of our regulators and the high standards we have set for ourselves. While we have made substantial changes and have meaningfully improved our control environment, the industry operates in a heightened regulatory oversight environment, and we remain at risk of further regulatory actions. We are also a different Wells Fargo in how we are executing on other strategic priorities to better serve our customers and help drive higher returns over time. Let me highlight a few examples of the progress we're making. We're diverging revenue sources and reducing our reliance on net interest income. We are improving our credit card platform with more competitive offerings, which is both - which is important both for our customers and strategically for the Company. During the second quarter, we launched two new credit cards, a small-business card and a consumer card. Since 2021, we have launched nine new credit cards and are almost complete in our initial product build-out. The momentum in this business is demonstrated by continued strong credit card spend and new account growth. We are not lowering our credit standards, but see that our strong brand and a great value proposition are being well-received by the market. Building a large credit card business is an investment as new products have significant upfront costs related to marketing, promo rates, onboarding and allowance, which drive little profitability in the early years. But as long as our assumptions on spend, balanced growth, and credit continue to play out as expected, we expect the card business to meaningfully contribute to profit growth in the future as the portfolio matures. We have been methodically growing our corporate investment bank, which has been a priority and continues to be a significant opportunity for us. We are executing on a multi-year investment plan while maintaining our strong risk discipline and our positive momentum continues. We have added significant talent over the past several years and we'll continue to do so in targeted areas where we see opportunities for growth. Fernando Rivas recently joined Wells Fargo as Co-CEO of Corporate Investment Banking. Fernando has deep knowledge of our industry and his background and skills complement the terrific team Jon Weiss has put together. While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we've already seen with strong growth in investment banking fees during the first half of the year. In our Wealth and Investment Management business, we have substantially improved advisor retention and have increased the focus on serving independent advisers and our consumer banking clients, which should ultimately help drive growth. In the commercial Bank, we are focused on growing our treasury management business, adding bankers to cover segments where we are underpenetrated, and delivering our investment banking and markets capabilities to clients and believe we have significant opportunities in the years ahead. And we continue to see significant opportunities for consumer, small and business banking franchise to be a more important source of growth. Let me give you just a few examples some of the things we're doing here. We continue to optimize and invest in our branch network. While our branch count declined 5% from a year ago, we are being more strategic about branch location strategy. We are accelerating our efforts to refurbish our branches, completing 296 during the first half of this year, and are on track to update all of our branches within the next five years. As part of our efforts to enhance the branch experience, we're also increasing our investment in our branch employees and improving technology, including a new digital account opening experience, which has been positive for both our bankers and our customers. We continue to have strong growth in mobile users with active mobile customers up 6% from a year ago. A year after launching Fargo, our AI-powered virtual assistant, we have had nearly 15 million users and over 117 million interactions. We expect this momentum to continue as we make further enhancements to offer our customers additional self-service features and value-added insights, including balanced trends and subscription spending. Looking ahead, overall, the U.S. economy remains strong, driven by a healthy labor market and solid growth. However, the economy is slowing and there are continued headwinds from still elevated inflation and elevated interest rates. As managers of a large complex financial institution, we think about both the risks and the opportunities and work to be prepared for the downside while continually building our ability to serve customers and clients. The actions we have taken to strengthen the Company have helped prepare us for a variety of economic environments, and while risks exist, we see significant opportunities in front of us. Our commitment and the progress we are making to build an appropriate operational and compliance risk management framework is foundational for our Company, and we will continue to prioritize and dedicate all necessary resources to complete our work. We have a diversified business model, see opportunities to build a broader earnings stream, and are seeing the early progress in our results. And we've maintained strong financial risk disciplines and a strong balance sheet. Operating with a strong capital position and - in anticipation of the uncertainty the stress test regime imposes on large banks and the potential for increases to our regulatory capital requirements resulting from Basel III finalization has served us well. It also allows us to serve our customers' financial needs and we remain committed to prudently return excess capital to our shareholders. As we previously announced, we expect to increase our third quarter common stock dividend by 14% to $0.40 per share, subject to the approval by the Company's Board of Directors at its regularly scheduled meeting later this month. We repurchased over $12 billion of common stock during the first half of this year, and while the pace will slow, we have the capacity to continue repurchasing stock. I'm proud of the progress we continue to make and thankful to everyone who works at Wells Fargo. I'm excited about the opportunities ahead. Net income for the second quarter was $4.9 billion, or $1.33 per diluted common share. EPS grew from both the first quarter and a year ago, reflecting the solid performance in our fee-based businesses as we benefited from the market environment and the investments we've been making. We also continue to focus on driving efficiency across the Company. I will also note that our second quarter effective income tax rate reflected the impact of the first quarter adoption of the new accounting standard for renewable energy tax credit investments, which increased our effective tax rate by approximately 3 percentage points versus a year ago. This increase in the effective tax rate had a minimal impact on net income since it had an offsetting increase to non-interest income. Turning to Slide 4. As expected, non-interest income was down - net interest income was down $1.2 billion, or 9% from a year ago. This decline was driven by higher funding costs, including the impact of lower deposit balances and customers migrating to higher-yielding deposit products in our consumer businesses and higher deposit costs in our commercial businesses as well as lower loan balances. This was partially offset by higher yields on earning assets. Net interest income declined $304 million, or 2% from the first quarter. Given the higher rate environment and neat commercial loan demand, loan balances continue to decline as expected. We saw positive trends, including average deposit balances growing from the first quarter with growth in all of our customer-facing businesses, including within our consumer business. Customer migration to higher-yielding alternatives was also lower in the quarter. This slowed the pace of growth in deposit pricing with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter. If the Fed were to start cutting rates later this year, we expect that deposit pricing will begin to decline with the most immediate impact from new promotional rates in our consumer business and standard pricing for commercial deposits where pricing moved faster as rates increased, and we would expect betas to also be higher as rates decline. On Slide 5, we highlight loans and deposits. Average loans were down from both the first quarter and a year ago. Credit card loans continue to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average deposits were relatively stable from a year ago as growth in our commercial businesses and corporate funding offset declines in our consumer businesses, driven by customers migrating to higher-yielding alternatives and continued consumer spending. Average deposits grew $4.9 billion in the first quarter. Commercial deposits have grown for three consecutive quarters as we've successfully attracted clients' operational deposits. After declining for nearly two years, consumer deposit balances grew modestly from the first quarter. We've seen outflows slow as many rate-seeking customers in Wealth and Investment Management have already moved into cash alternative products and we've successfully used promotion and retention-oriented strategies to retain and acquire new balances in consumer small and business banking. These improved deposit trends allowed us to reduce higher-cost market funding. The migration from non-interest-bearing to interest-bearing deposits was similar to last quarter with our percentage of non-interest-bearing deposits declining 26% in the first quarter to 25%. Turning to non-interest income on Slide 6. Non-interest income increased 19% from a year ago with growth across most categories, reflecting both the benefit of the investments we've been making in our businesses as well as the market conditions as Charlie highlighted. This growth more than offset the expected decline in net interest income with revenue increasing from a year ago, the sixth consecutive quarter of year-over-year revenue growth. I will highlight the specific drivers of this growth when discussing our operating segment goals. Turning to expenses on Slide 7. Second quarter non-interest expense increased 2% from a year ago, driven by higher operating losses, an increase in revenue-related compensation, and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower salaries expense and professional and outside services expense. Operating losses increased from a year ago and included higher customer remediation accruals for a small number of historical matters that we're working hard to get behind us. The 7% decline in non-interest expense in the first quarter was primarily driven by seasonally higher personnel expense in the first quarter. Turning to credit quality on Slide 8. Net loan charge-offs increased 7 basis points from the first quarter to 57 basis points of average loans. The increase was driven by higher commercial net loan charge-offs, which were up $127 million in the first quarter to 35 basis points of average loans, primarily reflecting higher losses in our commercial real-estate office portfolio. While losses in the commercial real-estate office portfolio increased in the second quarter after declining last quarter, they were in line with our expectations. As we have previously stated, commercial real estate office losses have been and will continue to be lumpy as we continue to work with clients. We continue to actively work to derisk our office exposure, including a rigorous monitoring process. These efforts help to reduce our office commitment by 13% and loan balances by 9% from a year ago. Consumer net loan charge-offs increased $25 million from the first quarter to 88 basis points of average loans. Auto losses continued to decline, benefiting from the credit-tightening actions we implemented starting in late 2021. The increase in credit card losses was in line with our expectations as older vintages are no longer benefiting from pandemic stimulus as more recent vintages - and as more recent vintages mature. Importantly, the credit performance of our newer vintages has been consistent with our expectations, and we currently expect the credit card charge-off rate to decline in the third quarter. Non-performing assets increased 5% from the first quarter, driven by the higher commercial real estate office non-accruals. Moving to Slide 9. Our allowance for credit losses was down modestly from the first quarter, driven by declines across most asset classes, partially offset by a higher allowance for credit card loans driven by higher balances. Our allowance coverage for total loans has been relatively stable over the past four quarters as credit trends remain generally consistent. Our allowance coverage for our commercial real estate office portfolio has also been relatively stable at approximately 11% for the past several quarters. Turning to capital liquidity on Slide 10. Our capital position remains strong and our CET1 ratio 11% continue to be well above our current 8.9% regulatory minimum plus buffers. We're also above our expected new CET1 regulatory minimum plus buffers of 9.8% starting in the fourth quarter of this year as our stressed capital buffer is expected to increase from 2.9% to 3.8%. We repurchased $6.1 billion of common stock in the second quarter, and while the pace will slow, we have the capacity to continue to repurchase common stock as Charlie highlighted. Also, we expect to increase our common stock dividend in the third quarter by 14%, subject to Board approval. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer, small and business banking revenue declined 5% from a year ago, driven by lower deposit balances and the impact of customers migrating to higher-yielding deposit products. Home lending revenue was down 3% from a year ago due to lower net interest income as loan balances continued to decline. Credit card revenue was stable from a year ago as higher loan balances driven by higher point-of-sale volume and new account growth was offset by lower other fee revenue. Auto revenue declined 25% from last year, driven by lower loan balances and continued loan spread compression. Personal lending revenue was down 4% from a year ago, driven by lower loan balances and loan spread compression. Turning to some key business drivers on Slide 12. Retail mortgage originations declined 31% from a year ago, reflecting our focus on simplifying the home lending business as well as the decline in the mortgage market. Since we announced our new strategy at the start of 2023, we have reduced the headcount in home lending by approximately 45%. Balances in our auto portfolio declined 14% compared with a year ago, driven by lower origination volumes, which were down 23% from a year ago, reflecting previous credit tightening actions. Both debit and credit card spend increased from a year ago. Turning to Commercial Banking results on Slide 13. Middle Market Banking revenue was down 2% from a year ago driven by lower net interest income due to higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 17% year-over-year, including lower net interest income, lower lease income, and revenue from equity investments. Average loan balances were down 1% compared with a year ago. Loan demand has remained tepid, reflecting the higher for longer rate environment in a market where competition has been more aggressive on pricing and loan structure. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 3% from a year ago, driven by higher investment banking revenue due to increased activity across all products, partially offset by lower treasury management results driven by the impact of higher interest rates on deposit accounts. Commercial real estate revenue was down 4% from a year ago, reflecting the impact of lower loan balances. Markets revenue grew 16% from a year ago, driven by strong performance in equities, structured products and credit products. Average loans declined 5% from a year ago as growth in markets was more than offset by reductions in commercial real estate, where originations remain muted and we've strategically reduced balances in our office portfolio as well as declines in banking where clients continue to access capital goods funding. On Slide 15, Wealth and Investment Management revenue increased 6% compared with a year ago. Higher asset-based fees driven by an increase in market valuations were partially offset by lower net interest income, reflecting lower deposit balances and higher deposit costs as customers reallocated cash into higher-yielding alternatives. As a reminder, the majority of WIM advisory assets are priced at the beginning in the quarter, so third quarter results will reflect market valuations as of July 1st, which were up from both a year ago and from April 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results from our venture capital investments. Turning to our 2024 outlook for net interest income and non-interest expense on Slide 17. At the beginning of the year, we expected 2024 net interest income to be approximately 7% to 9% lower than full-year 2023. During the first half of this year, the drivers of net interest income largely played out as expected with net interest income down 9% from the same period a year ago. Compared with where we began the year, our current outlook reflects the benefit of fewer rate cuts as well as higher deposit balances in our businesses than what we had assumed in our original expectations, which has helped us reduce market funding. Deposit costs increased during the first half of this year as expected, but the pace of the increase has slowed. However, late in the second quarter, we increased pricing in Wealth and Investment Management on sweep deposits and advisory brokerage accounts. This change was not anticipated in our original guidance, federal lines rates paid-in money market funds and is expected to reduce net interest income by approximately $350 million this year. Our current outlook also reflects lower loan balances. At the beginning of the year, we assumed a slight decline in average loans for the full year, which reflected modest growth in commercial and credit card loans in the second half of the year after a slow start to the year. As we highlighted on our first quarter earnings call, loan balances were weaker than expected and that trend continued into the second quarter. We expect this underperformance to continue into the second half of the year with loan balances declining slightly from second quarter levels. As a result of these factors, we currently expect our full-year 2024 net interest income to be in the upper half of the range we provided in January, or down approximately 89% from full-year 2023. We continue to expect net interest income will trough towards the end of the year. We are only halfway through the year and many of the factors driving net interest income are uncertain, and we will continue to see how each of these assumptions plays out during the remainder of the year. Turning to expenses. At the beginning of this year, we expected our full-year 2024 non-interest expense to be approximately $52.6 billion. We currently expect our full-year 2024 non-interest expense to be approximately $54 billion. There are three primary drivers for this increase. First, the equity markets have outperformed our expectations, driving higher revenue-related compensation expense in Wealth and Investment Management. As a reminder, this is a good thing as these higher expenses are more than offset by higher non-interest income. Second, operating losses and the other customer remediation-related expenses have been higher during the first half of the year than we expected. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses during the remainder of the year. Finally, we did not anticipate the $336 million of expense in the first half of the year for the FDIC special assessment, which is now included in our updated guidance. We'll continue to update you as the year progresses. In summary, our results in the second quarter reflected the progress we're making to transform Wells Fargo and improve our financial performance. Our strong growth in fee-based businesses offset the expected decline in net interest income. We made further progress on our efficiency initiatives. Our capital position remains strong, enabling us to return excess capital to shareholders, and we continue to make progress on our path to a sustainable ROTCE of 15%. [Operator Instructions] Our first question will come from Ken Usdin of Jefferies. Your line is open. Ken Usdin Thanks a lot. Good morning. Mike, I wonder if you could provide a little bit more detail on those latter points you made on the changes on the deposit cost side. First of all, I guess relative to the 12 basis points that you saw in terms of interest-bearing cost increase, which was lower than the 17%, how do you just generally expect that to look going forward? And how - and is that sweep pricing also a part of what that number will look like going forward? Thank you. Mike Santomassimo Yes. Thanks, Ken. Yes, I mean the sweep pricing will be included in that going forward about - you saw about a - basically about a month's worth in the quarter. We made the change in June so you saw about a third of a quarterly impact already included in the number. Look, I think when you drill into what's going on in the deposit side, I'd say a few things. One, the overall - you know, we're not seeing a lot of pressure on overall pricing in deposits. On the consumer side, this migration that's been happening now for a while from checking into savings or CDs is still happening, but at a slower pace. And you can see that over the last couple of years as it's been pretty stable the last quarter or two, but it's definitely slowing as you look at the quarter. And so I'd anticipate you'd still see more migration, but continuing to slow as we look as we look forward. On the wholesale side, we - the pricing has been pretty competitive now for a while and that's the case. And so we've been pleased to see that we're able to grow good operational deposits. And so given the competitive pricing there, that puts a little near-term pressure on NII, but those deposits are going to be very valuable over a long period of time, particularly as rates start to come back down. And so the positive, I think overall is you saw deposits grow in every line of business for the first time in a long time, and that migration is slowing to higher-yielding alternatives. And so we'll see how it plays out for the rest of the year, but I think there's some good positive trends that are emerging there. Ken Usdin Great. Thank you. And just a follow-up. The fees were really good and the trading business continues to demonstrate that it's taking market share. I guess how do we understand how to kind of measure that going forward, right, versus what the Group is doing? You guys are definitely, zigging and outperforming there. And where do you think you are in terms of market-share gains, and how sustainable do you think this new kind of run-rate of trading is going forward? Thanks. Mike Santomassimo Yes. No, I'll take that and Charlie can chime in if he wants. As you look at trading at any given quarter, it's going to bounce around, right? So you can't necessarily straight-line any single quarter. So I'll be careful there as you look forward. But I think the good part is like we've been methodically sort of making investments in really all the asset classes, FX, credit, lesser degree in equities and other places, but we're getting the benefit of those investments each quarter on an incremental basis. I think that business is still constrained by the asset cap. And so we are not growing assets or financing clients' assets at the same level we would be if we didn't have the asset cap, which also then drives more trading flow as we go. And so I'd say we're still methodically sort of building it out and there should be opportunity for us to grow that in a prudent way for a while. But any given quarter may bounce around a little bit depending on what's happening in the market or an asset class. And we're getting good reception from clients as we engage with them more and see them move more flow to us. Charlie Scharf And this is Charlie. Let me just add a couple of things, which is, you know, as we think about the things that we're doing to invest in our banking franchise, both markets and the investment banking side of the franchise, it's not risk-based. It's actually - it's focused on customer flows on the trading side, it's focused on expanding coverage and improving product capabilities on the banking side. So what we look at - and we're also very, very focused on returns overall, as you can imagine, as all the other large financial institutions are. So as we're looking at our progress, we do look at share across all the different categories and would expect to see those to continue to tick up. And so as you look through the volatility that exists in the marketplace, we are looking at a sustained level of growth, recognizing that we don't control the quarter-to-quarter volatility. The next question will come from John Pancari of Evercore ISI. Your line is open, sir. John Pancari Good morning. You expressed confidence that NII should bottom towards the year-end or towards the back half of this year. Maybe you could just give us what gives you the confidence in maintaining that view just given the loan growth dynamics that you mentioned and you just mentioned the funding cost and the rate backdrop. If you could just kind of walk us through your confidence around inflection and I guess what it could mean as you go into 2025. Thanks. Mike Santomassimo Yes. We won't talk much about 2025, John, but as you sort of look at what's happening, you're seeing this pace of migration on the deposit side flow, as I mentioned earlier. So you're seeing more stability as time goes by there. Once the Fed starts lowering rates, which the market expects to happen later in the year, you'll start to see betas on the way down on the wholesale side of the deposit base. You'll continue to see some gradual sort of repricing on the asset side as you see more securities and more loans sort of roll. And so you got to look exactly calling sort of the trough is which quarter it's going to be. Sometimes can be a little tough, but as you sort of look at all the components of it, we still feel pretty good about being able to see that happen over the coming few quarters. John Pancari Okay. Thanks, Mike. And if I just hop over to capital buybacks, I mean, you bought back about $6.1 billion this quarter similar to the first quarter. You indicated the pace will slow. Maybe you could give us a little bit of color on how we should think about that moderation, and how long that could persist at this point and how long until you could be back at the run rate you were previously? Charlie Scharf Yes, let me take a shot at it, Mike, and then you can add the color on this one. Listen, I think when you look at where we've been running capital, we've been trying to anticipate, as I mentioned in my prepared remarks, the uncertainties that exist around the way we find out about SEB, as well as the uncertainty that exists with where Basel III ultimately comes out. The reality of those two things are we know where the SEB is for this year at this point. We still don't know where Basel III ultimately winds up. So I think as we sit here today, we will continue - we'll be conservative on capital return in the shorter term until we learn more about exactly where Basel III will ultimately wind up, and then we can get more specific about what that means for capital return. So I think we're just trying to be very pragmatic. The reality is we're still generating a significant amount of capital and a reasonably sized dividend that's increased as our earnings power has increased. Given the fact that we have constraints, it is most of what the remainder of our capital generation goes towards capital return, but we want to see where Basel III ultimately winds up. The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir. Ebrahim Poonawala Hi, good morning. Just maybe one follow-up first, Mike and Charlie on capital. Is 11% in-line in the sand right now as you wait for Basel and clarity there, as we - at least you're not guiding for it, but as we think about what the pace of buybacks might be, or could CET1 go below 11% still significant buffer over the 9.6% minimum? I would appreciate how you think about that ratio in the context of capital return. Charlie Scharf I think where we are plus a little bit, probably not minus a little bit, but plus some is probably the right place to be at this point. Remember, the SEB was higher than we expected, and so that's factoring into our thinking. And so that's really what's driving our thinking in terms of slowing the pace of buybacks at this point. But again, hopefully, we'll get some more clarity on Basel III. We know what you know and then we'll be much clearer about what we think the future looks like there. But again, overall, we still have the capacity to buy back. We just as we've always been, we want to be prudent. Ebrahim Poonawala Understood. And then just moving to expenses. So I get the expense guide increase, but remind us, has anything changed maybe, Charlie, from you first on the expense flex that's a big part of the wealth thesis around efficiency gains, which should lead to the path for that 15% ROTCE? And what are you baking in, in terms of the fee revenue for the back half as part of that guide like does it assume elevated levels of trading in IBA? Thank you. Charlie Scharf So let me just take the first part. So just - and I appreciate you asking the question. I think, as far - from where - as we look forward, nothing has changed for us as we think about the opportunity to continue to become more efficient. That story is no different today than it was yesterday or last quarter. As we increased the estimates for the year, it's really reflective of three broad categories. One are the variable expenses that relate to our Wealth and Investment Management business where we have higher revenues that results in higher payout. And as Mike always points out, that's actually a good thing, even though it's embedded in the expense line, which causes that number to head upwards. The second thing are the fact that we've had higher customer remediations and FDIC expenses in the first half of the year, than when we contemplated the expense guidance. On the customer remediations, we've said it's - they're not new items. They're historical items. We're getting closer to the end of finalization in these things. And as that occurs, things like response rates and making sure that we've identified every - the full amount of the population gets all fine-tuned and that's what's flowing through. But that's a - it really rates to historical matters and not something that's embedded in what we see in the business going forward. So what you're left with is the rest of the earnings, I'm sorry, the expense base of the Company and it's playing out as we would have expected. And so as we sit here and look forward, all the statements I've made in the past are still true, which is we're not as efficient as we need to be. We're focused on investing in growing the business. We're focused on spending what's necessary to build the right risk and control infrastructure and we're focused on driving efficiency out of the Company and that lever is as continues to be exactly what it's been. Ebrahim Poonawala Got it. And you assume fees staying elevated in the back half as part of the guidance? Mike Santomassimo Yes. I assume equity markets are about where they are today, yes, it's still staying pretty elevated. The next question will come from Erika Najarian of UBS. Your line is open. Erika Najarian Hi. Good morning. First, I just want to put context to this question, because I didn't want to ask it just in isolation because it seems ticky-tacky, but it's not. So the stock is down 7.5%, and if I just take consensus to the higher end of your NII range to 9%, that would imply that consensus would adjust 3.5% in isolation. So this is just a context of why I'm asking this question on expenses. So your expenses went up in terms of from your original guide, $1.4 billion. I guess and you laid out those three bullets and you quantified FDIC special assessment. I guess, I'm just wondering, if you could give us a little bit more detail on how much more of the remediation expenses and op losses were up versus your original expectation because I think what the market wants to understand is, PP - you know, NII, okay, we get it, that's happening because of deposit repricing. But is core - you know, are the - is core PPNR outside of that in turn going up, right? Just sort of want to have that assurance in terms of is the EPS going to be down as much coming out of this as the market is indicating. Mike Santomassimo Yes. No, Erika. It's Mike. I appreciate the question. We give you the operating loss line in the supplement so you can see that. And if you - based on what we had said in January, if you assume that the $1.3 billion on a full-year basis was just split evenly across all the quarters, you can see that the operating losses are up about $500 million year-to-date over that run-rate. So that's the way to think about approximately what the impact of that is year-to-date in the first half. Right. And the remainder is roughly the revenue-related expenses in wealth management. Charlie Scharf So that's why, Erika, when I was talking before, when you look at what's driving the increase in the expense guide, it is remediations in the first and second quarters. It's the FDIC expense that you've seen, and it's the increase in variable expenses. Everything else is playing out as we would have expected. Erika Najarian Got it. Okay, that makes sense. And just maybe some comments on how you're thinking about credit quality from here. It looks like you continue to release reserves in the second quarter. Is this a message that you feel like you've captured most of the CRE-related issues, of course, absent of a further deterioration in the economy, and how should we think about the trajectory of the reserves from here relative to your charge-offs? Charlie Scharf Well, when you say - well, I think when we look at the reserves, you have to bucket into different pieces. Our exposures are coming down in parts of the consumer business. And our - based on underwriting changes we've made, it's not just balances, but also the actual losses. So that's what's driving the reductions in that part of the loss reserves on the consumer side. And on the credit card side, it's really driven - the increase is really driven by balances. So you've got two very different dynamics going on there with the releases being just representative of a smaller higher credit quality credit portfolio. And then on the wholesale side, what we - the losses that we've seen and the credit performance in our CIB office CRE portfolio is playing out no worse than we would have expected when we set our ACL, but there's still uncertainty there so we're maintaining the coverage. So overall, there's really - in terms of our expectations, no real change from what we're seeing in the CRE portfolio, which is where the lost content is actually coming through. And elsewhere, things are still fairly benign other than some episodic credit events in part of the wholesale business, but no real trend there. The next question will come from Matt O'Connor of Deutsche Bank. Your line is open, sir. Matt O'Connor Good morning. Can you just elaborate a bit on why you increased the deposit costs for wealth? Was it to keep up with the competition? Was it trying to get ahead of some potential pricing pressures? Or what was kind of the logic there? Mike Santomassimo Yes. Hi, it's Mike, Matt. So this was very specific to a sweep product in the wealth business. So it's a portion of that overall deposit, and it doesn't have any bearing on any other products. So I would just leave that very specific to that one individual product in fiduciary accounts or advisory accounts. We didn't - we don't - that's not something we normally have out there. But you can see the impact is, - I sort of highlighted the impact is roughly $350 million for the rest of the year - for the second half of the year. And - so I would just use that as - and that's already embedded in sort of the guidance we gave. Matt O'Connor Okay. And then just a separate topic here. I mean, the credit card growth has been very good. You highlighted rolling out some new products. And the question as always, when you - anybody growth kind of so much in a certain category, you mentioned not growing too quickly, the loss rates have gone up maybe a little more than some peers, not as much as some others, obviously in line with what you were targeting. There was that negative Wall Street Journal article on one of your cards. So just kind of taken together, what kind of checks and balances you have to make sure that a somewhat new initiative for you that you're growing at the right pace? Thank you. Charlie Scharf Yes. So, Mike, why don't I'll start, and then you can chime in? So first of all, we - when we look at our credit card performance, we do not look at it in total, right? We look at each individual product. We look at all of the performance broken out by vintage, and we compare the results that we're seeing, both in terms of balance build as well as credit performance, not losses, but starting very early with early-on book's delinquencies, and we look at how they're playing out versus pre-pandemic results as well as what we would have anticipated when we launched the product. As I've said, we look at the actual quality of the consumers that we're underwriting and the overall credit quality. We haven't compromised credit quality at all. We've probably tightened up a little bit as time has gone on relative to where we had been, but the actual performance when you look at the vintages is it's really spot-on with what we would have expected. So what you're seeing in terms of the increase in loss rates is just the maturing of the portfolio. And the last thing I'll just say is just when you think about the Wall Street Journal article, you know, that - we've launched a lot - a bunch of new credit cards. That is a - relative to the size and the scope of all of the cards that we issue and what our strategy is, that's a very, very, very small piece of it. Mike Santomassimo Yes. And I would just add one piece. As you look at new account growth, we're not originating anything less than 660. So, as Charlie mentioned, some of the credit tightening with 660 FICO, sorry. So as Charlie mentioned, the credit box has not been brought in really at all. And when you look at some of the bigger products like cashback, like the cashback card, active cash, the new originations are coming in at a higher credit quality than the back-book was. And so at this point, as Charlie said, we go through it at a very, very granular level each quarter and the results are kind of right where we expect. And if we start to see any kind of weakness at all, we're adjusting where needed. Charlie Scharf And just one last comment here, which is, again, because I appreciate the question. Whenever it's - you know, whenever you see a lot of growth in a product that has risk in it, it's always the right thing to ask the questions. We're not - this isn't - the people that are doing this, both in our card business, club who runs consumer lending myself like it. This is not a new product for us. We've seen this happen in the past. We've seen people do this well and we've seen people not do this well. And so we're very, very conscious of the risks that you're pointing out as we go forward, just as we are on the other businesses that we're investing in. Matt O'Connor Okay, that's helpful. And obviously, you talked about card losses going down in 3Q, so that's consistent with everything that you said as well. So thank you for the color. The next question will come from Betsy Graseck of Morgan Stanley. Your line is open. So just wanted to make sure on the expense guide I get the point that a bunch of that is related to better revenues from wealth management. And so your - we should be anticipating as a part of that, that revenues for wealth management in the second half is going to be at least at one-half or maybe even a little higher. Is that fair? Mike Santomassimo Yes. I mean, I - Betsy, I covered that in my script too. So as you look at the advisory assets there, they get price-based on - and most of them get priced in advance for the quarter. So you know what third quarter looks like based on where we are now. And obviously, it's not all equity market. There's some fixed income in there as well. But you should see a little bit of an increase as you go into the third quarter based on where the markets are now and then we'll see what the fourth quarter looks like when we get there. Betsy Graseck Yes, okay. So I just wanted to make sure we balanced out the expenses with the rev. So I know you're not guiding revs up, but interpretation leads you down that path. And so then I guess the other piece of the question I had just had to relate with the loan balance discussion that was going on earlier, and what's your view of interest in leaning into the markets business today? I realize there is opportunity, there's still the asset cap constraint, but you're not at the asset cap. So there is room for you to lean in. There are players who are a little bit more constrained on capital than you even in that space. So is this an area that you would be interested in leaning into, especially when C&I and CRE and other types of loans are low demand right now as you indicated earlier? Thanks. Charlie Scharf Well, let me start. I think - so first of all, relative to where the balance sheet is running, we're not - let me say, we want to - we're careful about how we run the overall balance sheet, right, which is we don't want to operate at the cap on a regular basis because you've got to be prepared both for a customer appetite in terms of lending and deposits when you see it, as well as we lived through COVID where there was an event and all of a sudden there were a bunch of draws and we have to live within that asset gap. So running it with a cushion is a very smart thing we think for us to do, even though you can argue we're giving up some shorter-term profit. So that's just the reality of where we live. And so as we think about the markets business and what that means, yes, in the perfect world, we - you know, we're allowing them to finance some more. There are more opportunities out there for us to be able to do that. But what we are doing is, as we think about inside the Company optimizing the balance sheet and where we get the most returns and where there is more demand and less demand, there has been less demand in other parts of the Company and there's been more demand on the trading side. So our assets are actually up 15%-ish. Mike Santomassimo Yes, trading. If you go to the supplement, that's the trading assets on an average basis are up 17%, a little more on a spot basis. Charlie Scharf So we're just trying to - so we're reflective of what those opportunities are but we've got to keep capacity for the reasons I mentioned. The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open. Gerard Cassidy Thank you. Good morning, Charlie. Good morning, Mike. And Charlie, you mentioned in your opening comments about Fargo - you guys launched Fargo over a year ago, I guess, and you're having real good pickup. Can you share with us any other AI-orientated programs that are in work in progress right now that could lead to increased efficiencies, or cost savings, or even revenue enhancements as you go forward? Charlie Scharf Sure. Yes. As we - first of all, when we think about AI, we do break it into different categories, right? There is traditional AI and then there is GenAI. We have a huge number of use cases already embedded across the Company with just traditional AI. And that is - it's in - it's in our - it's in marketing. It's in credit decision-ing. It's in information that we provide bankers on both the wholesale on the consumer side about what customers could be willing or might be willing to entertain a discussion about. And so that is - in a lot of respects, that's business-as-usual for us. The new opportunity that exists with GenAI is where AI creates something based upon whether it's public data on our own data in terms of things that haven't existed. We are most focused in the shorter term on things that can drive efficiency, but it also contributes to just quality of the experience for our customers. So great examples of things like that are call centers. We take a lots of phone calls and we've got lots of opportunities through AI to answer those questions before someone gets to a call center rep. But once they get to a call center rep, we put a lot of effort into answering that question correctly, but also making sure that we're capturing that information, understanding root cause across all these calls we get. That means bankers have to go - telephone bankers have to go in, actually enter what the call was about, what they think the root cause is. We then have to aggregate that and so on and so forth. Through GenAI, that can be done automatically. It could be done immediately and the work can be done for us to identify that root cause, so then we can go back, look at it, make sure that's the case and make the change. So ultimately, that results in, fixing defects going forward, but it also takes so much manual effort out of what we do. And so that's - and so any place where something is written, something is analyzed by an individual, we've got the opportunity to automate that. Those things exist on the wholesale side as well as the consumer side. And to the extent that they impact a consumer, we're going to move very slowly to make sure we understand the impact of that. And so the work is a meaningful part of as we think about prioritization in terms of our tech spend. Gerard Cassidy Very good. I appreciate those insights. And then just as a quick follow-up. You also mentioned about improved adviser retention in the quarter. And when you look at your Wealth and Investment Management segment, I recognize commissions and brokerage service fees are not the main driver, and investment advisory and other asset-based fees are in revenues for this division. But I noticed that they've been flat-to-down this year, they were up over a year ago. Is it seasonal in the second quarter that, that line of business just gets softer? Or is it the higher-rate environment where customers are just leaving more cash in - more assets in cash because they're getting 5% or so? Mike Santomassimo Yes. There really is no rhyme or reason necessarily, Gerard, to exactly how that moves one quarter to the next necessarily. And obviously, if there's like large balance of volatility, you might see more transaction activity. That certainly hasn't been the case necessarily in the equity market in the second quarter. But to some degree, as that line item - over a very long period of time, that line item probably declines more and advisory goes up. And that's actually a really good thing from a productivity and from an ongoing revenue perspective as well. And our final question for today will come from Steven Chubak of Wolfe Research. Your line is open, sir. Steven Chubak Thanks, and good morning, Charlie. Good morning, Mike. Just given the sheer amount of, I guess, investor questions that we've received on the deposit pricing changes in wealth, I was hoping you could provide some additional context given many of your peers have talked about cash sorting pressures abating, or at least being in the very late innings. And want to better understand what informed the decision to adjust your pricing? Was it impacting advisor recruitment, or retention? Was it impeding your ability to retain more share of wallet? And - or is this an effort to maybe go on the offensive and lead the market on pricing and sweep deposits and force others to potentially follow suit? Mike Santomassimo Yes, Steve. It's Mike. I'd say just a couple of things. One, this is not in reaction to cash sorting. We are seeing cash sorting slow in the Wealth business, just like we're seeing that in the consumer business. So this is not a reaction to that in any way. It's a relatively small portion of the overall deposits that sit within the - in the Wealth business, and it is very specific to this product, which is in an advisory account where there's frictional cash there. So it's not a reaction to competitive forces that we're seeing or us trying to be proactive somewhere to drive growth. Steven Chubak Understood. And just one follow-up on the discussion relating to expenses. And just given the fee momentum that you're seeing within CIB and Wealth, and you're clearly making investments in both of those segments, at the same time, the incremental margins have actually been quite high, especially in CIB where it's running north of 75% on just first-half this year versus last. I was hoping to get some perspective as we think about some of that fee momentum being sustained, what do you believe are sustainable or durable incremental margins within CIB and Wealth recognizing the payout profiles are different? Mike Santomassimo Well, let me start on the Wealth side and I'll come back to the I-banking or banking side. So on the Wealth side, what's really going to help us drive a margin expansion in that business over time are really kind of two things. One is continued productivity and growth in the advisory asset side, which you can see happening, and then two, and we've talked about this in other forums. It's doing a much better job penetrating that client base with banking and lending products. When you look at our loans in the Wealth business and you look at the overall asset base or the advisor for us, we're much less penetrated than some of the peers. And so I think those things really help drive us to get to more best-in-class margins, which are higher than where we sit today. And that takes some time on the lending side. In this rate environment, it's a little harder to drive that growth. And as rates start to come down, you'll probably see more demand there. And so there are some cyclical aspects of it that sort of come to from a timing perspective. But those are things that the - you know, Barry Sommers and the whole management team in Wealth are very focused on and making sure we've got the right capabilities, the right sales force, the right support for the sales force and so forth. On the I-banking side, we've been making investments in that business now for the better part of two-plus years, a little longer than that probably. And as we're adding good people, we're also not necessarily - we're also making sure that we've got the right people in the right seats. And so you're not seeing this really huge increase in overall senior headcount, you're actually - we're making sure we have the right people in the right seats, and so you've seen some reductions as you've seen some growth. And so that's helping also moderate the overall investment. And then also, as we brought those people on, you're paying them full freight when you recruit people, right? So what you're seeing is you're getting the benefit of those investments by adding the revenue piece now, but you've already got the expense in the run-rate to some degree. And so I think you'll see that pace of margin expansion moderate over time, but what you're seeing is what you should expect, which is like we made the investments, you're paying the people, now they're becoming productive incrementally each quarter and that's good to see. Steven Chubak That's a really helpful color, Mike. Thanks for taking my questions. All right, everyone. Thanks very much. We'll talk to you soon. Thank you all for your participation on today's conference call. At this time, all parties may disconnect.

Wells Fargo (WFC) Q2 2024 Earnings Call Transcript | The Motley Fool

Welcome, and thank you for joining the Wells Fargo second-quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, director of investor relations. Sir, you may begin the conference. John Campbell -- Senior Vice President, Investor Relations Good morning, everyone. Thank you for joining our call today where our CEO, Charles Scharf; and our CFO, Michael Santomassimo, will discuss second-quarter results then answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second-quarter earnings materials, including the release, financial supplement, and presentation deck, are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie. Thanks, John. As usual, I'll make some brief comments about our second-quarter results and update you on our priorities. I'll then turn the call over to Mike to review our results in more detail before we take your questions. So, let me start with some second quarter highlights. Our financial performance in the quarter benefited from our ongoing efforts to transform Wells Fargo. We continue to generate strong fee-based revenue growth with increases across most categories compared to a year ago due to both the investments we're making in our businesses and favorable market conditions with particular strength in investment advisory, trading activities, and investment banking. These results more than offset the expected decline in net interest income. Credit performance during the second quarter was consistent with our expectations. Consumers have benefited from the strong labor market and wage increases. The performance of our consumer auto portfolio continued to improve, reflecting prior credit tightening actions, and we had net recoveries in our home lending portfolio. While losses in our credit card portfolio increased as expected, early delinquency performance of our recent vintages was aligned with expectations. In our commercial portfolios, losses continued to be driven by commercial real estate office properties, where we expect losses to remain lumpy. Fundamentals in the institutional owned office real estate market continued to deteriorate as lower appraisals reflect the weak leasing market in many large metropolitan areas across the country. However, they still remain within the assumptions we made when setting our allowance for credit losses. We continue to execute on our efficiency initiatives, which has driven head count to decline for 16 consecutive quarters. Average commercial and consumer loans were both down from the first quarter. The higher interest rate environment and anticipation of rate cuts continued to result in tepid commercial loan demand, and we have not changed our underwriting standards to chase growth. Balance growth in our credit card portfolio was more than offset by declines across our other consumer portfolios. Average deposits grew modestly from the first quarter, with higher balances in all of our consumer-facing lines of businesses. Now, let me update you on our strategic priorities, starting with our risk controller. We are a different Wells Fargo from when I arrived. Our operational and compliance risk and control build-out is our top priority and will remain so until all deliverables are completed, and we embed this mindset into our culture, similar to the discipline we have for financial and credit risk today. We continue to make progress by completing deliverables that are part of our plans. The numerous internal metrics we track show that the work is clearly improving our control environment. While we see clear forward momentum, it's up to our regulators to make their own judgments and decide when the work is done to their satisfaction. Progress has not been easy, but tens of thousands of my partners at Wells Fargo have now worked tirelessly for years to deliver the kind of change necessary for a company of our size and complexity, and we will not rest until we satisfy the expectations of our regulators and the high standards we have set for ourselves. While we have made substantial changes and have meaningfully improved our control environment, the industry operates in a heightened regulatory oversight environment, and we remain at risk of further regulatory actions. We are also a different Wells Fargo in how we are executing on other strategic priorities to better serve our customers and help drive higher returns over time. Let me highlight a few examples of the progress we're making. For diversity revenue sources and reducing our reliance on net interest income, we are improving our credit card platform with more competitive offerings, which is both -- which is important both for our customers and strategically for the company. During the second quarter, we launched two new credit cards, a small business card and a consumer card. Since 2021, we have launched nine new credit cards and are almost complete in our initial product build-out. The momentum in this business is demonstrated by continued strong credit card spend and new account growth. We are not lowering our credit standards but see that our strong brand and a great value proposition are being well received by the market. Building a larger credit card business is an investment as new products have significant upfront costs related to marketing, promo rates, onboarding, and allowance, which drive little profitability in the early years. But as long as our assumptions on spend, balance growth, and credit continue to play out as expected, we expect the card business to meaningfully contribute to profit growth in the future as the portfolio matures. We have been methodically growing our corporate investment bank, which has been a priority and continues to be a significant opportunity for us. We are executing on a multiyear investment plan while maintaining our strong risk discipline and our positive momentum continues. We have added significant talent over the past several years and will continue to do so in targeted areas where we see opportunities for growth. Fernando Rivas recently joined Wells Fargo as Co-CEO of Corporate and Investment Banking. Fernando has deep knowledge of our industry, and his background and skills complement the terrific team Jon Weiss has put together. While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we've already seen with strong growth in investment banking fees during the first half of the year. In our wealth and investment management business, we have substantially improved advisor retention and have increased the focus on serving independent advisors and our consumer banking clients, which should ultimately help drive growth. In the commercial bank, we are focused on growing our treasury management business, adding bankers to cover segments where we are underpenetrated and delivering our investment banking and markets capabilities to clients and believe we have significant opportunities in the years ahead. And we continue to see significant opportunities for consumer, small, and business banking franchise to be a more important source of growth. Let me give you just a few examples of some of the things we're doing here. We continue to optimize and invest in our branch network. While our branch count declined 5% from a year ago, we are being more strategic about branch location strategy. We are accelerating our efforts to refurbish our branches, completing 296 during the first half of this year and are on track to update all of our branches within the next five years. As part of our efforts to enhance the branch experience, we are also increasing our investment in our branch employees and improving technology, including a new digital account opening experience, which has been a positive for both our bankers and our customers. We continue to have strong growth in mobile users with active mobile customers up 6% from a year ago. A year after launching Fargo, our AI-powered virtual assistant, we have had nearly 15 million users and over 117 million interactions. We expect this momentum to continue as we make further enhancements to offer our customers additional self-service features and value-added insights including balance trends and subscription spending. Looking ahead, overall, the U.S. economy remains strong, driven by a healthy labor market and solid growth. However, the economy is slowing and there are continued headwinds from still-elevated inflation and elevated interest rates. As managers of a large complex financial institution, we think about both the risks and the opportunities and work to be prepared for the downside while continually building our ability to serve customers and clients. The actions we have taken to strengthen the company have helped prepare us for a variety of economic environments. And while risks exist, we see significant opportunities in front of us. Our commitment and the progress we are making to build an appropriate operational and compliance risk management framework is foundational for our company, and we will continue to prioritize and dedicate all necessary resources to complete our work. We have a diversified business model, see opportunities to build a broader earnings stream, and are seeing the early progress in our results. And we have maintained strong financial risk discipline and a strong balance sheet. Operating with a strong capital position in anticipation of the uncertainty the stress test regime imposes on large banks and the potential for increases to our regulatory capital requirements resulting from Basel III finalization has served as well. It also allows us to serve our customers' financial needs, and we remain committed to prudently return excess capital to our shareholders. As we previously announced, we expect to increase our third quarter common stock dividend by 14% to $0.40 per share, subject to the approval by the company's board of directors at its regularly scheduled meeting later this month. We repurchased over $12 billion of common stock during the first half of this year. And while the pace will slow, we have the capacity to continue repurchasing stock. I'm proud of the progress we continue to make and thankful to everyone who works at Wells Fargo. I'm excited about the opportunities ahead. I'll now turn the call over to Mike. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Thank you, Charlie, and good morning, everyone. Net income for the second quarter was 4.9 billion or $1.33 per diluted common share. EPS grew from both the first quarter and a year ago, reflecting the solid performance in our fee-based businesses as we benefited from the market environment and the investments we've been making. We also continue to focus on driving efficiency across the company. I will also note that our second-quarter effective income tax rate reflected the impact of the first-quarter adoption of the new accounting standard for renewable energy tax credit investments, which increased our effective tax rate by approximately 3 percentage points versus a year ago. This increase in the effective tax rate had a minimal impact on net income since it had an offsetting increase to noninterest income. Turning to Slide 4. As expected, noninterest income was down, net interest income was down 1.2 billion or 9% from a year ago. This decline was driven by higher funding costs, including the impact of lower deposit balances and customers migrating to higher-yielding deposit products in our consumer businesses and higher deposit costs in our commercial businesses, as well as lower loan balances. This was partially offset by higher yields on earning assets. Net interest income declined 304 million or 2% from the first quarter. Given the higher rate environment meet commercial loan demand, loan balances continue to decline as expected. We saw positive trends, including average deposit balances growing from the first quarter with growth in all of our customer-facing businesses, including within our consumer business. Customer migration to higher-yielding alternatives was also lower in the quarter. This slowed the pace of growth in deposit pricing with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter. If the Fed were to start cutting rates later this year, we expect that deposit pricing would begin to decline with the most immediate impact of new promotional rates in our consumer business and standard pricing for commercial deposits where pricing move faster as rates increase, and we would expect betas to also be higher as rates decline. On Slide 5, we highlight loans and deposits. Average loans were down from both the first quarter and a year ago. Credit card loans continue to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average deposits were relatively stable from a year ago as growth in our commercial businesses and corporate funding offset declines in our consumer businesses, driven by customers migrating to higher-yielding alternatives and continued consumer spending. Average deposits grew 4.9 billion from the first quarter. Commercial deposits have grown for three consecutive quarters as we successfully attracted clients' operational deposits. After declining for nearly two years, consumer deposit balances grew modestly from the first quarter. We've seen outflows slow as many rate-seeking customers in wealth and investment management have already moved into cash alternative products, and we've successfully used promotion and retention-oriented strategies to retain and acquire new balances in consumer small and business banking. These improved deposit trends allowed us to reduce higher cost market funding. The migration from noninterest-bearing to interest-bearing deposits was similar to last quarter with our percentage of noninterest-bearing deposits declining from 26% in the first quarter to 25%. Turning to noninterest income on Slide 6. Noninterest income increased 19% from a year ago, with growth across most categories reflecting both the benefit of the investments we've been making in our businesses as well as the market conditions as Charlie highlighted. This growth more than offset the expected decline in interest income with revenue increasing from a year ago, the sixth consecutive quarter of year-over-year revenue growth. I will highlight the specific drivers of this growth when discussing our operating segment goals. Turning to expenses on Slide 7. Second-quarter noninterest expense increased 2% from a year ago, driven by higher operating losses, an increase in revenue-related compensation, and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower salaries expense and professional and outside services expense. Operating losses increased from a year ago and included higher customer remediation accruals for a small number of historical matters that we are working hard to get behind us. The 7% decline in noninterest expense in the first quarter was primarily driven by seasonally higher personnel expense in the first quarter. Turning to credit quality on Slide 8. Net loan charge-offs increased 7 basis points from the first quarter to 57 basis points of average loans. The increase was driven by higher commercial net loan charge-offs, which were up 127 million from the first quarter to 35 basis points of average loans, primarily reflecting higher losses in our commercial real estate office portfolio. While losses in the commercial real estate office portfolio increased in the second quarter after declining last quarter, they were in line with our expectations. As we have previously stated, commercial real estate office losses have been and will continue to be lumpy as we continue to work with clients. We continue to actively work to derisk our office exposure, including a rigorous monitoring process. These efforts helped to reduce our office commitment by 13% and loan balances by 9% from a year ago. Consumer net loan charge-offs increased 25 million from the first quarter to 88 basis points of average loans. Auto losses continued to decline, benefiting from the credit tightening actions we implemented starting in late 2021. The increase in credit card losses was in line with our expectations as older vintages are no longer benefiting from pandemic stimulus as more recent vintages -- and as more recent vintages mature. Importantly, the credit performance of our newer vintages has been consistent with our expectations, and we currently expect the credit card charge off rate to decline in the third quarter. Nonperforming assets increased 5% from the first quarter, driven by the higher commercial real estate office nonaccruals. Moving to Slide 9. Our allowance for credit losses was down modestly from the first quarter, driven by declines across most asset classes, partially offset by a higher allowance of credit card loans driven by higher balances. Our allowance coverage for total loans has been relatively stable over the past four quarters as credit trends remain generally consistent. Our allowance coverage for our commercial real estate office portfolio has also been relatively stable at approximately 11% for the past several quarters. Turning to capital liquidity on Slide 10. Our capital position remains strong, and our CET1 ratio of 11% continue to be well above our current 8.9% regulatory minimum plus buffers. We are also above our expected new CET1 regulatory minimum plus buffers of 9.8% starting in the fourth quarter of this year as our stress capital buffer is expected to increase from 2.9% to 3.8%. We repurchased 6.1 billion of common stock in the second quarter. And while the pace will slow, we have capacity to continue to repurchase common stock as Charlie highlighted. Also, we expect to increase our common stock dividend in the third quarter by 14% subject to board approval. Turning to our operating segments, starting with consumer banking and lending on Slide 11. Consumer, small, and business banking revenue declined 5% from a year ago, driven by lower deposit balances and the impact of customers migrating to higher-yielding deposit products. Total lending revenue was down 3% from a year ago due to lower net interest income as loan balances continue to decline. Credit card revenue was stable from a year ago as higher loan balances driven by higher point-of-sale volume new account growth was offset by lower other fee revenue. Auto revenue declined 25% from last year, driven by lower loan balances and continued loan spread compression. Personal lending revenue was down 4% from a year ago, driven by lower loan balances and loan spread compression. Turning to some key business drivers on Slide 12. Retail mortgage originations declined 31% from a year ago, reflecting our focus on simplifying the home lending business as well as the decline in the mortgage market. Since we announced our new strategy at the start of 2023, we have reduced head count in home lending by approximately 45%. Balances in our auto portfolio declined 14% compared with the year ago, driven by lower origination volumes, which were down 23% from a year ago, reflecting previous credit-tightening actions. Both debit and credit card spend increased from a year ago. Turning to commercial banking results on Slide 13. The middle market banking revenue was down 2% from a year ago, driven by lower net interest income due to higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 17% year over year, including lower net interest income, lower lease income, and revenue from equity investments. Average loan balances were down 1% compared with a year ago. Loan demand has remained tepid, reflecting the higher for longer rate environment and a market where competition has been more aggressive on pricing and loan structure. Turning to corporate and investment banking on Slide 14. Banking revenue increased 3% from a year ago driven by higher investment banking revenue due to increased activity across all products, partially offset by lower treasury management results driven by the impact of higher interest rates on deposit accounts. Commercial real estate revenue was down 4% from a year ago, reflecting the impact of lower loan balances. Markets revenue grew 16% from a year ago, driven by strong performance in equities, structured products, and credit products. Average loans declined 5% from a year ago as growth in markets was more than offset by reductions in commercial real estate where our originations remain muted, and we have strategically reduced balances in our office portfolio, as well as declines in banking where clients continue to access capital goods funding. On Slide 15, wealth and investment management revenue increased 6% compared with a year ago. Higher asset-based fees driven by an increase in market valuations were partially offset by lower net interest income, reflecting lower deposit balances and higher deposit costs, as customers reallocated cash into higher yielding alternatives. As a reminder, the majority of WIM and advisory assets are priced at the beginning in the quarter, so the third-quarter results will reflect market valuations as of July 1st, which were up from both a year ago and from April 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results from our venture capital investments. Turning to our 2024 outlook for net interest income and noninterest expense on Slide 17. At the beginning of the year, we expected 2024 net interest income to be approximately 7% to 9% lower than full-year 2023. During the first half of this year, the drivers of net interest income largely played out as expected with net interest income down 9% from the same period a year ago. Compared with where we began the year, our current outlook reflects the benefit of fewer rate cuts as well as higher deposit balances in our businesses than what we had assumed in our original expectations, which has helped us reduce market funding. Deposit costs increased during the first half of this year as expected, but the pace of the increase has slowed. However, late in the second quarter, we increased pricing in wealth and investment management on sweep deposits and advisory brokerage accounts. This change was not anticipated in our original guidance, better aligns rates with rates paid in money market funds, and is expected to reduce net interest income by approximately $350 million this year. Our current outlook also reflects lower loan balances. At the beginning of the year, we assumed a slight decline in average loans for the full year, which reflected modest growth in commercial and credit card loans in the second half of the year after a slow start to the year. As we highlighted on our first-quarter earnings call, loan balances were weaker than expected, and that trend continued into the second quarter. We expect this underperformance to continue into the second half of the year with loan balances declining slightly from second-quarter levels. As a result of these factors, we currently expect our full-year 2024 net interest income to be in the upper half of the range we provided in January, were down approximately to 9% from full-year 2023. We continue to expect net interest income will trough toward the end of the year. We are only halfway through the year and many of the factors driving net interest income are uncertain, and we will continue to see how each of these assumptions plays out during the remainder of the year. Turning to expenses. At the beginning of this year, we expected our full-year 2024 noninterest expense to be approximately 52.6 billion. We currently expect our full-year 2024 noninterest expense to be approximately 54 billion. There are three primary drivers for this increase. First, the equity markets have outperformed our expectations, driving higher revenue-related compensation expense in wealth and investment management. As a reminder, this is a good thing if these higher expenses were more than offset by higher noninterest income. Second, operating losses and the other customer remediation-related expenses have been higher during the first half of the year than we expected. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses during the remainder of the year. Finally, we did not anticipate the 336 million of expense in the first half of the year for the FDIC special assessment, which is now included in our updated guidance. We'll continue to update you as the year progresses. In summary, our results in the second quarter reflected the progress we are making to transform Wells Fargo and improve our financial performance. Our strong growth in fee-based businesses offset the expected decline in net interest income. We made further progress on our efficiency initiatives. Our capital position remains strong, enabling us to return excess capital to shareholders, and we continue to make progress on our path to sustainable ROTCE of 15%. At this time, we will now begin the question-and-answer session. [Operator instructions] Please stand by for our first question. Our first question will come from Ken Usdin of Jefferies. Your line is open. Ken Usdin -- Jefferies -- Analyst Thanks a lot. Good morning. Mike, I wonder if you could provide a little bit more detail on those latter points you made on the changes on the deposit cost side. First of all, I guess, relative to the 12 basis points that you saw in terms of interest-bearing cost increase, which was lower than the 17, how do you just generally expect that to look going forward? And how -- and is that sweep pricing also a part of what that number will look like going forward? Thank you. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. Thanks, Ken. Yes, we mean -- the sweep pricing will be included in that going forward. You saw about -- basically about a month's worth in the quarter, we made the change in June. So, you saw about a third of a quarterly impact already included in the number. Look, I think when you drill into what's going on in the deposit side, I'd say a few things. One, overall -- we're not seeing a lot of pressure on overall pricing in deposits. On the consumer side, this migration that's been happening now for a while from checking into savings or CDs, it's still happening but at a slower pace. And you can see that over the last couple of years as it's been pretty stable over the last quarter or two, but it's definitely slowing as you look at the quarter. And so, I'd anticipate you'd still see more migration, but continuing to slow as we look forward. On the wholesale side, we -- the pricing has been pretty competitive now for a while, and that's the case. And so, we've been pleased to see that we're able to grow good operational deposits. And so, given the competitive pricing there, that puts a little near term pressure on NII, but those deposits are going to be very valuable over a long period of time, particularly as rates start to come back down. And so, the positive, I think, overall, as you saw deposits grow in every line of business for the first time in a long time, and that migration is slowing to higher-yielding alternatives. And so, we'll see how it plays out for the rest of the year, but I think there's some good positive trends that are emerging there. Ken Usdin -- Jefferies -- Analyst Great. Thank you. And just a follow-up. The fees were really good, and the trading business continues to demonstrate that it's taking market share. I guess, how do we understand how to kind of measure that going forward, right, versus what the group is doing? You guys are definitely zigging and outperforming there. Where do you think you are in terms of market share gains, and how sustainable do you think this new kind of run rate of trading is going forward? Thanks. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. I'll take that, and Charlie can chime in if he wants. The -- as you look at trading at any given quarter, it's going to bounce around, right? So, you can't necessarily straight line any single quarter. So, I'd be careful there as you look forward. But I think the good part is like we've been methodically sort of making investments in really all of the asset classes, FX, credit to lesser degree in equities and other places, but we're getting the benefit of those investments each quarter on an incremental basis. I think that business is still constrained by the asset cap. And so, we are not growing assets or financing clients assets at the same level we would be if we didn't have the asset cap, which also then drives more trading flow as we go. And so, I'd say we're methodically sort of building it out and there should be opportunity for us to grow that in a prudent way for a while. But any given quarter may bounce around a little bit depending on what's happening in the market or an asset class. And we're getting good reception from clients as we engage with them more and see them move more flow to us. Charles William Scharf -- President and Chief Executive Officer And this is Charlie. Let me just add a couple of things, which is, as we think about the things that we're doing to invest in our banking franchise, both markets and the investment banking side of the franchise, it's not risk-based. It's actually -- it's focused on customer flows on the trading side. It's focused on expanding coverage and improving product capabilities on the banking side. So, what we look at -- and we're also very, very focused on returns overall, as you can imagine, as all the other large financial institutions are. So, as we're looking at our progress, we do look at share across all the different categories and would expect to see those to continue to tick up. And so, as you look through the volatility that exists in the marketplace, we are looking at a sustained level of growth, recognizing that we don't control the quarter-to-quarter volatility. The next question will come from John Pancari of Evercore ISI. Your line is open, sir. John Pancari -- Evercore ISI -- Analyst Good morning. You expressed confidence that NII should bottom toward the year end or toward the back half of this year. Maybe you could just give us what gives you the confidence in maintaining that view just given the loan growth dynamics that you mentioned and you just mentioned the funding cost in the rate backdrop? If you could just kind of walk us through your confidence in that inflection and, I guess, what it could mean as you go into 2025? Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. We won't talk much about 2025, John. But as you sort of look at what's happening, you're seeing this pace of migration on the deposit side flow, as I mentioned earlier. So, you're seeing more stability as time goes by there. You're -- once the Fed starts lowering rates, which the market expects to happen later in the year, you'll start to see betas on the way down on the wholesale side of the deposit base. You'll continue to see some gradual sort of repricing on the asset side as you see more securities and more loan sort of roll. And so, you got to look -- exactly calling sort of the trough is which quarter it's going to be, sometimes can be a little tough. But as you sort of look at all the components of it, we still feel pretty good about being able to see that happen over the coming few quarters. John Pancari -- Evercore ISI -- Analyst OK, thanks. And if I just hop over to capital, buybacks, somebody bought back about 6.1 billion this quarter, similar to the first quarter. You indicated the pace will slow. Maybe if you could give us a little bit of color on how we should think about that moderation and how long that could persist at this point? And how long until you could be back at the run rate you were previously? Charles William Scharf -- President and Chief Executive Officer Let me take a shot at it, Mike, and then you can add the color on this one. Listen, I think when you look at where we've been running capital, we've been trying to anticipate, as I mentioned in my prepared remarks, the uncertainties that exist around the way we find out about SCB as well as the uncertainty that exists with where Basel III ultimately comes out. The reality of those two things are, we know where the SCB is for this year at this point. We still don't know where Basel III ultimately winds up. So, I think as we sit here today, we will continue -- we'll be conservative on capital return in the shorter term until we learn more about exactly where Basel III will ultimately wind up, and then we can get more specific about what that means for capital returns. So, I just -- I think we're just trying to be very pragmatic. The reality is we're still generating a significant amount of capital and a reasonably sized dividend that's increased as our earnings power has increased. Given the fact that we have constraints, most of what the remainder of our capital generation goes toward capital return, but we want to see where Basel III ultimately winds up. The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir. Ebrahim Poonawala -- Analyst Hey, good morning. Just maybe one follow-up first, Mike and Charlie, on capital. Is 11% the line in the sand right now as you wait for Basel and clarity there as we, at least, you're not guiding for it, but as we think about what the pace of buybacks might be or could CET1 go below 11%, still significant buffer with the 9.6% minimum? Would appreciate how you think about that ratio in the context of capital return. Charles William Scharf -- President and Chief Executive Officer I think where we are a plus a little bit, probably not minus a little bit, but plus some is probably the right place to be at this point. Remember, the SCB was higher than we expected. And so, that's factoring into our thinking. And so, that's really what's driving our thinking in terms of slowing the pace of buybacks at this point. But again, hopefully, we'll get some more clarity on Basel III. We know what you know, and then we'll be much clearer about what we think the future looks like there. But again, overall, we still have the capacity to buy back. We just -- as we've always been, we want to be prudent. Ebrahim Poonawala -- Analyst Understood. And then just moving to expenses. So, I get the expense guide increased. But remind us, has anything changed maybe, Charlie, from you first, on the expense flex that's a big part of the wealth thesis around efficiency gains, which should lead to the path for that 15% ROTCE? And what are you baking in in terms of the fee revenue for the back half as part of that guide? Like does it assume elevated levels of trading in IB? Thank you. Charles William Scharf -- President and Chief Executive Officer Let me just take the first part. So, just -- and I appreciate you asking the question. I think as far -- from where -- as we look forward, nothing has changed for us as we think about the opportunity to continue to become more efficient. That story is no different today than it was yesterday or last quarter. As we increased the estimates for the year, it's really reflective of three broad categories. One are the variable expenses that relate to our wealth and investment management business where we have higher revenues that results in higher payout. And as Mike always points out, that's actually a good thing, even though it's embedded in the expense line, which causes that number to head upwards. The second thing are the fact that we've had higher customer remediations and FDIC expenses in the first half of the year than when we contemplated the expense guidance. On the customer remediations, we've said it's -- they're not new items, they're historical items. We're getting closer to the end of finalization in these things. And as that occurs, things like response rates and making sure that we've identified every -- the full amount of the population gets all fine-tuned, and that's what's flowing through. But that's a -- it really rates to historical matters and not something that's embedded in what we see in the business going forward. So, what you're left with is the rest of the earnings -- I'm sorry, the expense base of the company, and it's playing out as we would have expected. And so, as we sit here and look forward, all the statements I made in the past are still true, which is, we're not as efficient as we need to be; we're focused on investing in growing the business; we're focused on spending what's necessary to build the right risk and control infrastructure; and we're focused on driving efficiency out of the company. And that lever is -- continues to be exactly what it's been. Ebrahim Poonawala -- Analyst Got it. And you assume fees staying elevated in the back half as part of the guidance? Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. We assume equity markets are about where they are today, so it's still staying pretty elevated. The next question will come from Erika Najarian of UBS. Your line is open. Erika Najarian -- UBS -- Analyst Hi, good morning. First, I just want to put context to this question because I didn't want to ask it just in isolation because it seems ticky-tacky, but it's not. So, the stock is down 7.5%. And if I just take consensus to the higher end of your NII range to 9, that would imply that consensus would adjust 3.5% in isolation. So, this is just a context of why I'm asking this question on expenses. So, your expenses went up in terms of -- from your original guide 1.4 billion. I guess -- and you laid out those three bullets, and you quantified FDIC special assessment. I guess I'm just wondering if you could give us a little bit more detail on how much more the remediation expenses and the op losses were up versus your original expectation. Because I think what the market wants to understand is PP -- NII, OK, we get it, that's happening because of deposit repricing. But is core PPNR outside of that going up, right? I just sort of want to have that assurance in terms of is the EPS going to be down as much coming out of this as the market is indicating. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. No, Erika, it's Mike. I appreciate the question. We give you the operating loss line in the supplement. So, you can see that. And if you -- based on what we had said in January, if you assume that the $1.3 billion on a full year basis was just split evenly across all the quarters, you can see that the operating losses are up about $500 million year to date over that run rate. So, that's the way to think about approximately what the impact of that is year to date in the first half. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Right. And the remainder is roughly the revenue-related expenses in wealth management. Charles William Scharf -- President and Chief Executive Officer So that's why, Erika, when I was talking before, when you look at what's driving the increase in the expense guide, it is -- its remediations in the first and second quarter. It's the FDIC expense that you've seen, and it's the increase in variable expenses. Everything else is playing out as we would have expected. Erika Najarian -- UBS -- Analyst Got it. OK. That makes sense. And just maybe some comments on how you're thinking about credit quality from here. It looks like you continue to release reserves in the second quarter. Is this a message that you feel like you've captured most of the CRE-related issues, of course, absent of a further deterioration in the economy? And how should we think about the trajectory of the reserves from here relative to your charge-offs? Charles William Scharf -- President and Chief Executive Officer Well, when you say -- well, I think when we look at the reserves, you have to bucket into different pieces. Our exposures are coming down in parts of the consumer business and are -- based on underwriting changes we've made, it's not just balances, but also the actual losses. So, that's what's driving the reductions in that part of the loss reserves on the consumer side. And on the credit card side, it's really driven -- the increase is really driven by balances. So, you've got two very different dynamics going on there, with the releases being just representative of a smaller, higher credit quality credit portfolio. And then on the wholesale side, we're -- the losses that we've seen and the credit performance in our CIB office CRE portfolio is playing out no worse than we would have expected when we set our ACL, but there's still uncertainty there. So, we're maintaining the coverage. So, overall, there's really -- in terms of our expectations, no real change from what we're seeing in the CRE portfolio, which is where the loss content is actually coming through. And elsewhere, things are still fairly benign other than some episodic credit events in part of the wholesale business, but no real trend there. The next question will come from Matt O'Connor with Deutsche Bank. Your line is open, sir. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. Can you just elaborate a bit on why you increased the deposit cost for wealth? Was it to keep up with competition? Or is it trying to get ahead of some potential pricing pressures? What was kind of the logic there? Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. Hey, it's Mike, Matt. So, this was very specific to a sweep product in the wealth business. So, it's a portion of that overall deposits, and it doesn't have any bearing on any other products. So, I would leave with that very specific to that one individual product in fiduciary accounts or advisory accounts. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer We didn't -- we don't -- that's not something we normally have out there. But you can see the impact is -- I sort of highlighted the impact is roughly $350 million for the rest of the year for the second half of the year. So, I would just use that as -- and that's already embedded in sort of the guidance we gave. Matt O'Connor -- Deutsche Bank -- Analyst OK. And then just a separate topic here. I mean the credit card growth has been very good. You highlighted rolling out some new products. And the question is always when you -- anyway growth kind of still makes sense in certain category, even if they are not growing too quickly. The loss rates have gone up maybe a little more than some peers, not as much as from others, obviously in line with what you were targeting. There was that negative Wall Street Journal article on one of your cards. So, just kind of taken together, what kind of checks and balances you have to make sure that a somewhat new initiative for you that you're growing at the right pace? Thank you. Charles William Scharf -- President and Chief Executive Officer Yes. So, Mike, I'll start, and then you can chime in. So, first of all, we -- when we look at our credit card performance, we do not look at it in total, right? We look at each individual product. We look at all of the performance broken out by vintage. And we compare the results that we're seeing, both in terms of balance build as well as credit performance, not losses, but starting very early with early on books delinquencies. And we look at how they're playing out versus pre-pandemic results as well as what we would have anticipated when we launched the product. As I said, we look at the actual quality of the consumers that we're underwriting and the overall credit quality. We haven't compromised credit quality at all. We've probably tightened up a little bit as time has gone on relative to where we had been, but the actual performance when you look at the vintages is it's really spot on with what we would have expected. So, what you're seeing in terms of the increase in loss rates is just the maturing of the portfolio. And the last thing I'll just say is just when you think about the Wall Street Journal article, that -- we've launched a lot -- a bunch of new credit cards. That is a -- relative to the size and the scope of all of the cards that we issue and what our strategy is, that's a very, very, very small piece of it. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. And I would just add one piece. As you look at new account growth, we're not originating anything less than 660. So, as Charlie mentioned, some of the credit tightening with 660 FICO, sorry. So, as Charlie mentioned, the credit box has not been brought in really at all. And when you look at some of the bigger products like cash back -- the cash back card, active cash, the new originations are coming in at a higher credit quality than the back book was. And so, at this point, as Charlie said, we go through it at a very, very granular level each quarter, and results are kind of right where we expect. And if we start to see any kind of weakness at all, we're adjusting where needed. Charles William Scharf -- President and Chief Executive Officer And just one last comment here, which is again because I appreciate the question. Whatever -- it's -- whenever you see a lot of growth in a product that has risk in it, it's always the right thing to ask the questions. We're not -- this isn't -- the people that are doing this, both in our card business, Kleber who runs consumer lending, myself, like this is not a new product for us. We've seen this happen in the past, we've seen people do this well, and we've seen people not do this well. And so, we're very, very conscious of the risks that you're pointing out as we go forward just as we are on the other businesses that we're investing in. Matt O'Connor -- Deutsche Bank -- Analyst OK. That's helpful. And obviously, you talked about card losses going down in 3Q. So, it's consistent with what you said as well. The next question will come from Betsy Graseck of Morgan Stanley. Your line is open. So, I just wanted to make sure on the expense guide, I get the point that a bunch of that is related to better revenues from wealth management. And so, we should be anticipating, as a part of that, that revenues for wealth management in the second half is going to be at least at one-half or maybe even a little higher. Is that fair? Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. I mean, Betsy, I covered that in my script, too. So, as you look at the advisory assets there, they get priced based on -- and most of them get priced in advance for the quarter. So, you know what third quarter looks like based on where we are now. And obviously, it's not all equity market. There's some fixed income in there as well. But you should see a little bit of an increase as you go into the third quarter based on where the markets are now, and then we'll see what the fourth quarter looks like when we get there. Betsy Graseck -- Morgan Stanley -- Analyst Yeah, OK. So, I just wanted to make sure we balanced out the expenses with the rev beat. I know you're not guiding revs up but interpretation leads you down that path. And so, then I guess the other piece of the question I had just had to relate with, the loan balance discussion that was going on earlier. And what's your view of interest in leaning into the markets business today? I realize there's opportunity. There's still the asset cap constraint, but you're not at the asset cap. So, there is room for you to lean in. There are players who are a little bit more constrained on capital than you even in that space. So, is this an area that you would be interested in leaning into, especially when C&I and CRE and other types of loans are low demand right now, as you indicated earlier? Thanks. Charles William Scharf -- President and Chief Executive Officer Well, let me start. I think -- so, first of all, relative to where the balance sheet is running, we're not -- let me say we want to -- we're careful about how we run the overall balance sheet, right, which is we don't want to operate at the cap on a regular basis because you've got to be prepared both for customer appetite in terms of lending and deposits when you see it as well as we lived through COVID where there was an event. And all of a sudden, there were a bunch of draws, and we have to live within that asset cap. So, running it with the cushion is a very smart thing, we think, for us to do, even though you can argue we're giving up some shorter-term profit. So, that's just the reality of where we live. And so, as we think about the markets business and what that means, in the perfect world, we'd be allowing them to finance some more. There are more opportunities out there for us to be able to do that. But what we are doing is, as we think about inside the company, optimizing the balance sheet and where we get the most returns and where there's more demand and less demand. There has been less demand in other parts of the company, and there's been more demand on the trading side. So, our assets are actually up 15-ish percent. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. Trading -- if you go to the supplement deck, trading assets on an average basis are up 17%, a little more on a spot basis. Charles William Scharf -- President and Chief Executive Officer So, we're just trying to -- so, we're reflective of what those opportunities are, but we've got to keep capacity for the reasons I mentioned. The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open. Gerard Cassidy -- Analyst Thank you. Good morning, Charlie. Good morning, Mike. Charlie, you mentioned in your opening comments about Fargo. You guys launched Fargo over a year ago, I guess, and you're having real good pickup. Can you share with us any other AI-orientated programs that are in work in progress right now that could lead to increased efficiencies or cost savings or even revenue enhancements as you go forward? Charles William Scharf -- President and Chief Executive Officer Sure. As we first -- when we think about AI, we do break it into different categories, right? There is traditional AI and then there is GenAI. We have a huge number of use cases already embedded across the company with just traditional AI. And that is -- it's in marketing, it's in credit decisioning, it's in information that we provide bankers on both the wholesale, on the consumer side about what customers could be willing or might be willing to entertain a discussion about. And so, that is -- in a lot of respects, that's business as usual for us. The new opportunity that exists with GenAI is where AI creates something based upon whether it's public data on our own data in terms of things that haven't existed. We are most focused in the shorter term on things that can drive efficiency. But it also contributes to just quality of the experience for our customers. So, great examples of things like that are call centers. We take lots of phone calls, and we've got lots of opportunities through AI to answer those questions before someone gets to a call center rep. But once they get to a call center rep, we put a lot of effort into answering that question correctly but also making sure that we're capturing that information, understanding root cause across all these calls we get. That means bankers have to go -- telephone bankers have to go in, actually enter what the call was about, what they think the root cause is. We then have to aggregate that and so on and so forth. Through GenAI, that can be done automatically. It could be done immediately, and the work can be done for us to identify that root cause so then we can go back, look at it, and make sure that's the case and make the change. So, ultimately, that results in fixing defects going forward, but it also takes so much manual effort out of what we do. And so, that's -- and so, any place where something is written, something is analyzed by an individual, we've got the opportunity to automate that. Those things exist on the wholesale side as well as the consumer side. To the extent that they impact a consumer, we're going to move very slowly to make sure we understand the impact of that. And so, the work is a meaningful part of as we think about prioritization in terms of our tech spend. Gerard Cassidy -- Analyst Very good. I appreciate those insights. And then just as a quick follow-up, you also mentioned about improved advisor retention in the quarter. And when you look at your wealth and investment management segment, I recognize commissions and brokerage service fees are not the main driver in investment advisory and other asset-based fees are in revenues for this division. But I noticed that they've been flat to down this year. They're up over a year ago. Is it seasonal in the second quarter that that line of business just gets soft? Or is it the higher rate environment where customers are just leaving more cash in -- more assets in cash because they're getting 5% or so? Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yeah. There really is no rhyme or reason necessarily, Gerard, to exactly how that moves one quarter to the next necessarily. Obviously, if there's like large bouts of volatility, you might see more transaction activity. That certainly hasn't been the case necessarily in the equity market in the second quarter. But to some degree, as that line item over a very long period of time, that line item probably declines more and advisory goes up. And that's actually a really good thing from a productivity and from an ongoing revenue perspective as well. And our final question for today will come from Steven Chubak of Wolfe Research. Your line is open, sir. Steven Chubak -- Analyst Thanks. Good morning, Charlie. Good morning, Mike. Just given the sheer amount of, I guess, investor questions that we've received on the deposit pricing changes in wealth, I was hoping you could provide some additional context given many of your peers have talked about cash sorting pressures abating or at least being in the very late innings. And I want to better understand what informed the decision to adjust your pricing? Was it impacting advisor recruitment or retention? Was it impeding your ability to retain more share of wallet? And -- or is this an effort to maybe go on the offensive and lead the market on pricing and sweep deposits and force others to potentially follow suit? Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Yes, Steve. It's Mike. I'd say just a couple of things. One, this is not in reaction to cash sorting. We are seeing cash sorting slow in the wealth business just like we're seeing that in the consumer business. So, this is not a reaction to that in any way. It's a relatively small portion of the overall deposits that sit within the wealth business. And it is very specific to this product, which is in an advisory account where there's frictional cash there. So, it's not a reaction to competitive forces that we're seeing or us trying to be proactive somewhere to drive growth. Steven Chubak -- Analyst Understood. And just one follow-up on the discussion relating to expenses. And just given the fee momentum that you're seeing within CIB and wealth, and you're clearly making investments in both of those segments, at the same time, the incremental margins have actually been quite high, especially in CIB, where it's running north of 75% just first half this year versus last. I was hoping to get some perspective as we think about some of that fee momentum being sustained what do you believe are sustainable or durable incremental margins within CIB and wealth recognizing the payout profiles are different. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Well, let me start on the wealth side, and I'll come back to the iBanking or banking side. So, on the wealth side, what's really going to help us drive margin expansion in that business over time are really kind of two things. One is continued productivity and growth in the advisory asset side, which you can see happening. And then two, and we've talked about this in other forums, it's doing a much better job penetrating that client base with banking and lending products. So, when you look at our loans in the wealth business and you look at the overall asset base or the advisor for us, we're much less penetrated than some of the peers. And so, I think those things really help drive us to get to more best-in-class margins, which are higher than where we sit today. And that takes some time. On the lending side, in this rate environment, it's a little harder to drive that growth. And as rates start to come down, you'll probably see more demand there. And so, there are some cyclical aspects of it that sort of come to from a timing perspective. But those are things that the Barry Sommers and the whole management team in wealth are very focused on and making sure we've got the right capabilities, the right sales force, the right support for the sales force, and so forth. On the iBanking side, we've been making investments in that business now for the better part of two-plus years, a little longer than that probably. And as we're adding good people, we're also -- not necessary -- we're also making sure that we've got the right people in the right seats. And so, you're not seeing this really huge increase in overall senior headcount. You're actually -- we're making sure we got the right people in the right seats. And so, you've seen some reductions as you've seen some growth. And so, that's helping also moderate the overall investment. And then also, as we brought those people on, you're paying them full freight when you recruit people, right? So, what you're seeing is, you're getting the benefit of those investments by adding the revenue piece now, but you've already got the expense and the run rate to some degree. And so, I think you'll see that pace of margin expansion moderate over time, but what you're seeing is what you should expect, which is like we made the investments, you're paying the people now they're becoming productive incrementally each quarter, and that's good to see. Steven Chubak -- Analyst That's really helpful color, Mike. Thanks for taking my questions. Charles William Scharf -- President and Chief Executive Officer All right, everyone. Thanks very much. We'll talk to you soon. Michael P. Santomassimo -- Senior Executive Vice President, Chief Financial Officer Ken Usdin -- Jefferies -- Analyst

The Bank of New York Mellon Corporation (BK) Q2 2024 Earnings Call Transcript

Ken Usdin - Jefferies Glenn Schorr - Evercore ISI Ebrahim Poonawala - Bank of America Steven Chubak - Wolfe Research Brennan Hawken - UBS Betsy Graseck - Morgan Stanley Mike Mayo - Wells Fargo Securities Alex Blostein - Goldman Sachs Gerard Cassidy - RBC Brian Bedell - Deutsche Bank Rajiv Bhatia - Morningstar Good morning and welcome to the 2024 Second Quarter Earnings Conference Call hosted by BNY. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY's consent. I will now turn the call over to Marius Merz, BNY Head of Investor Relations. Please go ahead. Marius Merz Thank you, Operator. Good morning, everyone, and thank you for joining us. I'm here with Robin Vince, President and Chief Executive Officer, and Dermot McDonogh, our Chief Financial Officer. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bny.com. And I'll note that our remarks will contain forward-looking statements and non-GAAP measures. Actual results may differ materially from those projected in the forward-looking statements. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement, and financial highlights presentation, all available on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, July 12, 2024, and will not be updated. Thanks, Marius. Good morning, everyone, and thank you for joining us. Before Dermot reviews the financials in greater detail, I'd like to start with a few remarks about our progress in the quarter. In short, we delivered another quarter of improved financial performance with positive operating leverage on the back of solid fee growth and continued expense discipline. And we continued to make tangible progress on our path to be more for our clients, to run our company better, and to power our culture. Last month, we celebrated our company's 240th anniversary with our people and many of our clients. Even with this rich history of operating across four centuries, I believe that our best days remain ahead of us. That bank with around $0.5 million of capital in 1784 today oversees roughly $50 trillion in assets and powers platforms across payments, security, settlement, wealth, investments, collateral, trading, and more for clients in over 100 markets around the world. As the world changes and global financial markets evolve, so do we. Earlier this year, in January, you heard us lay out our strategy, which maps out what we need to get done and how we need to do it. Last month, we introduced changes to our logo and simplified and modernized our company brand to BNY to improve the market's familiarity with who we are and what we do. This rebranding better aligns the perception of our company to the substance of what we're doing to unlock our full potential as one BNY. Now referring to Page 2 of the financial highlights presentation. BNY delivered solid EPS growth as well as pre-tax margin and ROTCE expansion once again on the back of positive operating leverage in the second quarter. Reported earnings per share of $1.52 were up 16% year-over-year. And excluding notable items, earnings per share of $1.51 were up 9%. Total revenue of $4.6 billion was up 2% year-over-year. This included 5% growth in investment services fees led by continued strength in Clearance and Collateral Management, Asset Servicing and Treasury Services, as well as 16% growth in foreign exchange revenue. Net interest income decreased by 6%. Expenses of $3.1 billion was down 1% year-over-year. Excluding notable items, expenses were up 1%, reflecting further investments in our people and technology while we also continued to realize greater efficiencies. Margin was 33%. And in what is seasonally our strongest quarter, we reported a return on tangible common equity of 25%, 24% excluding notable items. These financial results were against the backdrop of a relatively constructive operating environment. The market calling for a gradual and shallow easing of policy rates, inflation pressures easing, and investor confidence growing. On average, equity market values increased, while fixed income markets finished slightly lower compared to the first quarter. A couple of weeks ago, the Federal Reserve released the results of its annual bank stress test, which once again showcased our resilient business model and our strength to support clients through extreme stress scenarios. The test confirmed that our preliminary stress capital buffer requirement remains at the regulatory floor of 2.5%. And we increased our quarterly common dividend by 12% to $0.47 per share starting this quarter. In May, the transition to T+1 settlement in the US, Canadian and Mexican markets represented one of the more significant market structure changes that our industry has seen in a couple of decades. BNY's critical role in the financial system gives us the opportunity to help clients through major shifts like this, further strengthening their trust in us and deepening our relationships with them. By running the company better, we are starting to capitalize on BNY's truly powerful combination of security services, market and wealth services, and our investments and wealth businesses to serve our clients more effectively across the entire financial life cycle. As an example, this past quarter BNY was awarded a significant mandate by a premier global asset manager with over $100 billion in assets under management. We were selected based on our ability to deliver custody, fund servicing, ETF and digital fund services, Treasury Services, and Pershing. Our holistic offering will power their future growth strategy. In another example, AIA, the pan-Asian life insurance group, announced a new collaboration with BNY and BlackRock as AIA transforms its investment platform. AIA has announced that they will implement BNY's specialized investment operations, data management services, and technology with BlackRock's Aladdin to create a connected and scalable ecosystem to support the company's evolving investment activities. We also continue to be pleased with the growing interest in our wealth advisory platform, Wove. Global Finance recently named Wove as one of the top three global financial innovations as part of its annual Innovators Awards for 2024. At INSITE, Pershing's annual flagship wealth services conference in June, we announced a suite of new solutions on the platform. Wove Investor, a one-stop client portal. Wove Data, a cloud data platform designed for financial professionals at wealth management firms, and Portfolio Solutions, a set of enhancements to the platform that will help advisors move more efficiently from researching investment products, to aligning them to a client's risk objectives and adding them to a portfolio. We also introduced a new ONE BNY offering that enables clients to easily access multiple BNY capabilities, including our managed accounts platform, asset allocation and manager selection, investment management products, customized tax solutions, the interoperable Wove platform for advisors, and custody and clearing services from Pershing. We're a comprehensive unified package leveraging the breadth of BNY to make clients' wealth advisors lives easier. And we have proof points. Example, a fast growing full service regional bank recently selected Pershing to provide custody and clearing services private wealth business. But they are also adopting [Dreyfus Cash Management] (ph), direct indexing, and private banking. As we've said many times, our culture and people are a critical part of being more for our clients and running our company better. We are pleased to see that our actions are enabling us to be a top talent destination for recent graduates and experienced leaders alike. This summer, we're welcoming our largest ever intern and analyst classes, a total of over 3,500 individuals chosen from over 150,000 applications. And we recently announced several new appointments to our leadership team. Shannon Hobbs, our new Chief People Officer joined us in June. Leigh-Ann Russell will join us in September as Chief Information Officer and Global Head of Engineering. Jose Minaya will also join us in September, lead BNY's Investments and Wealth. To wrap up, halfway through the year, we're pleased with the progress that we have made and how it is reflected in both improved financial performance to date as well as our building momentum. One of my favorite quotes comes from Alexander Hamilton, our founder, who famously said that he attributed his success not to genius, but to hard work. We have been hard at work, and we've laid a solid foundation. Our team is in full execution mode and we're starting to demonstrate the power of our franchise and of operating as one BNY for our clients and our shareholders. Thank you, Robin, and good morning, everyone. Picking up on Page 3 of the presentation, I'll start with our consolidated financial results for the quarter. Total revenue of $4.6 billion was up 2% year-over-year. Fee revenue was up 4%. This includes 5% growth in investment services fees on the back of higher market values, net new business, and higher client activity. Investment management and performance fees were flat. Firm-wide AUC/A of $49.5 trillion were up 6% year-over-year and assets under management of $2 trillion were up 7% year-over-year, primarily reflecting higher market values. Foreign exchange revenue increased by 16%, driven by higher volumes. Investment and other revenue was $169 million in the quarter on the back of strong client activity in our fixed income and equity trading business. And net interest income decreased by 6% year-over-year, primarily reflecting changes in balance sheet mix, partially offset by higher interest rates. Expenses were down 1% year-over-year on a reported basis and up 1% excluding notable items, primarily in the prior year. The increase from higher investments, employee merit increases, and higher revenue related expenses was partially offset by efficiency savings from running our company better. Notable items in the second quarter of this year primarily included an expense benefit from a reduction in the FDIC's special assessment, which was largely offset by severance expense. There was no provision for credit losses in the quarter. As Robin highlighted earlier, we reported earnings per share of $1.52, up 16% year-over-year, a pre-tax margin of 33% and a return on tangible common equity of 25%. Excluding notable items, earnings per share were $1.51, up 9% year-over-year, pre-tax margin was 33% and our return on tangible common equity was 24%. Turning to capital and liquidity on Page 4. Our Tier 1 leverage ratio for the quarter was 5.8%. Average assets increased by 2% sequentially on the back of deposit growth. And Tier 1 capital increased by 1% sequentially, primarily reflecting capital generated through earnings, partially offset by capital returns to common shareholders. Our CET1 ratio at the end of the quarter was 11.4%. The quarter-over-quarter improvement reflects lower risk-weighted assets coming off the temporary increase in risk-weighted assets at the end of the previous quarter, and CET1 capital increased by 2% sequentially. Over the course of the second quarter, we returned over $900 million of capital to our common shareholders, representing a total payout ratio of 81%. Year to date, we returned 107% of earnings to our common shareholders through dividends and buybacks. Turning to liquidity. The consolidated liquidity coverage ratio was 115%, and our consolidated net stable funding ratio was 132%. Next, net interest income and the underlying balance sheet trends on Page 5. Net interest income of over $1 billion was down 6% year-over-year and down 1% quarter-over-quarter. The sequential decrease was primarily driven by changes in balance sheet mix, partially offset by the benefit of reinvesting maturing fixed rate securities in higher yielding alternatives. Average deposit balances increased by 2% sequentially. Interest bearing deposits grew by 3%, and non-interest bearing deposits declined by 2% in the quarter. Average interest-earning assets were up 2% quarter-over-quarter. Our average investment securities portfolio balances increased by 3%, and our cash and reverse repo balances increased by 1%. Average loan balances were up 4%. Turning to our business segments starting on Page 6. Security Services reported total revenue of $2.2 billion, flat year-over-year. Total investment services fees were up 3% year-over-year. In Asset Servicing, investment services fees grew by 4%, primarily reflecting higher market values and net new business. We continue to see strong momentum in ETF servicing with AUC/A of over $2 trillion, up more than 50% year-on-year, and the number of funds serviced up over 20% year-on-year. This growth reflects both higher market values as well as client inflows, which included a large ETF mandate in Ireland from a leading global asset manager. In alternatives, fund launches for the quarter continued their recent activity in private markets. Investment services fees for alternatives were up mid-single-digits, reflecting growth from both new and existing clients. And in Issuer Services, investment services fees were up 1%, reflecting net new business across both Corporate Trust and Depositary Receipts, partially offset by the normalization of elevated fees associated with corporate actions in Depositary Receipts in the second quarter of last year. We're particularly pleased to see the investments and new leaders in our Corporate Trust platform beginning to bear fruit. Against the backdrop of a significant pickup in CLO issuance in recent months, we've been moving up the ranks and improved our market share as trustee for CLOs by about 4 percentage points over the past 12 months to 20% in the second quarter. In the segment, foreign exchange revenue was up 16% year-over-year, and net interest income was down 11%. Expenses of $1.6 billion were down 1% year-over-year, reflecting efficiency savings, partially offset by higher investments, employee merit increases, and higher revenue-related expenses. Pre-tax income was $688 million, a 7% increase year-over-year, and pre-tax margin expanded to 31%. Next, Market and Wealth Services on Page 7. Market and Wealth Services reported total revenue of $1.5 billion, up 6% year-over-year. Total investment services fees were up 7% year-over-year. In Pershing, investment services fees were up 2%, reflecting higher market values and client activity, partially offset by the impact of business lost in the prior year. Net new assets were negative $23 billion for the quarter, reflecting the ongoing deconversion of the before-mentioned lost business. Excluding the deconversion, we saw approximately 2% annualized net new asset growth in the second quarter, and we renewed a multi-year agreement with Osaic, one of the nation's largest providers of wealth management solutions. Pershing has supported Osaic since its founding in 1988, and we are proud to help the company drive its growth strategy for years to come. Client demand for Wove continues to be strong. In the quarter, we signed 12 additional client agreements. The pipeline continues to grow, and we are on track to meet our goal of $30 million to $40 million realized revenue in 2024. In Clearance and Collateral Management, investment services fees were up 15%, primarily reflecting higher collateral management fees and higher clearance volumes. US securities clearance and settlement volumes have remained strong throughout the quarter, supported by a grown market and active trading. And we are excited about the opportunity to do even more for clients. Having realigned Pershing's institutional solutions business to Clearance and Collateral Management, we can offer clients a choice across a continuum of clearance, settlement, and financing solutions for those that sell clear as well as those seeking capital and operational efficiency through outsourcing. This allows us to not only deepen our relationships with clients, but also drive continued revenue growth. And in Treasury Services, investment services fees increased by 10%, primarily reflecting net new business and higher client activity. Net interest income for the segment overall was down 1% year-over-year. Expenses of $833 million were up 5% year-over-year, reflecting higher investments, employee merit increases, and higher revenue related expenses, partially offset by efficiency savings. Pre-tax income was up 8% year-over-year at $704 million, representing a 46% pre-tax margin. Moving on to Investment and Wealth Management on Page 8. Investment and Wealth Management reported total revenue of $821 million, up 1% year-over-year. In our investment management business, revenue was down 1%, reflecting the mix of AUM flows and lower equity investment income and seed capital gains partially offset by higher market values. And in wealth management, revenue increased by 3%, reflecting higher market values, partially offset by changes in product mix. Expenses of $668 million were down 2% year-over-year, primarily reflecting our work to drive efficiency savings and lower revenue related expenses, partially offset by employee merit increases and higher investments. Pre-tax income was $149 million, up 15% year-over-year, representing a pre-tax margin of 18%. As I mentioned earlier, assets under management of $2 trillion increased by 7% year-over-year. In the quarter, while we saw $2 billion of net inflows into long-term active strategies with continued strength in fixed income and LDI, partially offset by net outflows in active equity and multi-asset strategies, we saw $4 billion of net outflows from index strategies and $7 billion of net outflows from short-term strategies. Wealth management client assets of $308 billion increased by 8% year-over-year, reflecting higher market values and cumulative net inflows. Page 9 shows the results of the Other Segment. I'll close with a couple of comments on our outlook for the full year 2024. Starting with NII, I'm pleased to report that the first half of the year came in slightly better than we had expected, as we saw the decline in non-interest-bearing deposits decelerate, and we continue to grow interest-bearing deposits. While we are cautiously optimistic, we remain humble as we head into the seasonally low summer months, and for now we will therefore keep our NII outlook for the full year 2024 unchanged, down 10% year-over-year. Regarding expenses, our goal remains to keep expenses excluding notable items for the full year 2024 roughly flat. As Robin put it earlier, BNY is in execution mode and we're embracing the hard work ahead of us. We continue to expect our effective tax rate for the full year 2024 to be between 23% and 24%. And lastly, we continue to expect to return 100% or more of 2024 earnings to our shareholders through dividends and buybacks. Our Board of Directors declared a 12% increased common dividend for the third quarter, and we plan to continue repurchasing common shares under our existing share repurchase program. As always, we are calibrating the pace of our buybacks, considering various factors such as our capital management targets, the macroeconomic and interest rate environment, as well as the size of our balance sheet. To wrap up, we enter the second half of the year on the back of solid fee growth, a better than expected NII performance to date, and continued expense discipline, which gives us incremental confidence in our ability to drive positive operating leverage in 2024. With that, Operator, can you please open the line for Q&A? [Operator Instructions] Our first question is coming from Ken Usdin with Jefferies. Please go ahead. Good morning. Just like to go -- just ask Dermot about that NII humbleness for the second half. Can you just walk us through what the moving pieces would be, including the seasonality that you mentioned and any other things that might have been over-earning in the NII in the first quarter so that you would seemingly in your maintain guide still expect a meaningful ramp down in NII, which I don't think is what seems to be the base case given how well the balance sheet has held up so far, as you pointed out, relative to your expectations? Thanks. Dermot McDonogh Thanks for the question, Ken. I guess the best way to answer the question is a little bit to, in some ways, look back at last year where Q1, Q2, typically strong quarters for us. Q3, typically a seasonally lower quarter, summer months, clients taking their foot off the gas in terms of activity, and then we pick back up again in Q4. Now, as you've seen from this quarter's numbers and the first half overall, we're very pleased with the performance. I guess we've outperformed our expectations for the first half, and that's in large part due to underlying activity within our core businesses, and in my remarks, I particularly called out corporate trust, where we saw like elevated activity in the CLO space which in turn drives deposits. So when our core businesses are doing well, which they've all performed well, that has a knock-on impact in the number of deposits that we have And so we outperformed our expectations in the first half. Notwithstanding that, when I look out at the rest of the year and when we gave the guidance of down 10% in January, the market at that time was roughly calling for six rate cuts. Now we're in the middle of the summer. We had a slowdown in inflation print yesterday. Let's see how Jay speaks on Monday and how he guides out of [Jackson Hole] (ph) and into a September potential rate cut. But we kind of take all of those levers and we just kind of say for now, there's no point in me changing guidance to change guidance again in September or October at the next call. So we're cautiously optimistic. I think I used the word last year in March, askew. So we're playing for the best outcome, but we do expect Q3 to be somewhat seasonally quieter. And that's why we didn't change our guidance. Ken Usdin Okay, and then just can you -- that follow up, just on the size of the deposit, so you're just expecting the size of the deposit base to decline or is it the mix or just trying to understand what pieces of it would revert given that seasonality? Dermot McDonogh So when I think about deposits, I kind of -- I think there are three components to it. One is interest bearing deposits where we outperformed plan, NIBs where we outperformed plan. And so pleased with that, but that really reflects clients showing up in a different way with us and we showing up in a different way with clients. So, good. And then the third thing, and I've talked about this a number of times on previous calls, really the strength of the collaboration and teamwork between our treasurer, our CIO, and our global liquidity solutions platform, where we think about liquidity as a $1.4 trillion ecosystem. And we've been very much in offense mode this quarter. And our GLS team has really shown up in a positive way. And we've really managed to gather good, liquidity-friendly deposits, which is kind of fueling the growth of our balance sheet, and that's allowed us to do more loans. So I think in terms of specifically to your question, it's both, I think the overall balance will come down, and as a consequence, I would expect NIBs from here to grind a little bit lower, which is the main driver of the NII change. Our next question is coming from Glenn Schorr with Evercore ISI. Please go ahead. You alluded to the -- hello. You alluded to the higher Clearance and Collateral Management, higher clearance volumes. I'm just curious if you can parse out how much of that is just clients being more active during a more active second quarter versus winning new business and organic growth. It just might help for the thoughts on the go forward and how to model? Thanks. Dermot McDonogh Thanks, Glenn. I think it's a combination of both. So, clients are for sure doing more. Rate volatility in Q2 was there for all to see. So as a consequence, more activity in the treasury market, more treasury issuance and which feeds volumes. So, overall, very healthy volumes, and we have a high-margin scaled business, which the platform was able to benefit from that increased level of activity. Also, I think as we did last year, we continue to innovate for clients in the domestic market. And as we said on our January call, the international business is also a key growth opportunity for us and our teams are innovating and developing new products and solutions for our clients internationally. And so I think it's a combination of all the factors that we've talked about on previous calls, kind of showed up as a nice tailwind for us this quarter. And for Clearance and Collateral Management, I think I do expect that trend to continue in the near term. Glenn Schorr Thanks, Dermot. You piqued my interest. In the opening remarks, you all talked about T+1 coming in into the market and that helping -- you helping -- help clients. I'm curious now that it's built, now that it's in the run rate, just a couple of quickies of, is there a cost runoff now or is that not big enough? Does T+1 come with lower spread for you, but does it free up capital with more frequent settlement? I'm just curious what the net impact of it all is. Dermot McDonogh Hey, Glenn, I would describe it in terms of like the raw P&L impact, which is sort of the second part of your question, is really pretty de minimis. We spent a bunch of time preparing for this over the course of the past couple of years. So it wasn't like there was some big hump in the cost curve in order to really do it. We sort of worked the process over time. But for us, I think the biggest opportunity associated with T+1 is whenever there's a market inflection like this, and this was one of the most significant ones, but we're looking ahead to treasury clearing is another good example of something like that, it gives us the opportunity get closer to our clients. It creates uncertainty for our clients. How is it going to work and they need help navigating it. And so the combination of uncertainty and a need for assistance is really the macro opportunity for us. And we've leant into that. We'll continue leaning into those types of market changes, again, with treasury clearing being another good example. And I would say overall, these types of changes create things that create more efficiency in the market, things that can reduce risk in the market, things that improve efficiency. Sure, they do sometimes call on more of our products and solutions, which, of course, is great, but it's also just a good thing for the market to improve the effectiveness and efficiency of market operation. And I think over time, we're also a beneficiary of that. Our next question is coming from Ebrahim Poonawala with Bank of America. Please go ahead. Maybe just one follow-up, Dermot, for you on NII. I guess in response to Ken's question, you talked about Fed policy and that having an impact. Remind us the positioning of the balance sheet if the Fed does decide to cut rates come September and we get 100, 150 bps of cuts? Remind us how the balance sheet will behave, how we should think about NII in that backdrop? Dermot McDonogh So, thanks for the question. So I will kind of give a couple of different perspectives on that is, one, cumulative betas are roughly unchanged quarter-over-quarter, which feels like I really believe our book to be fairly priced. As you will remember, our book is largely institutional. We pass on the rates and so cumulative betas are in good shape. So for the dollar portfolio, roughly low 80s, 80 range. And then for euros and sterling we're in the high 50s, low 60s. And so we kind of do a range of scenarios and at the beginning of the year, we're positioned roughly -- we're roughly flat. So if Chairman Powell cuts in September and then cuts again, I guess, which is the general view of the market, we're kind of basically NII, okay, it doesn't really impact the book that much. So for small moves, we're well positioned in terms of expectation. Ebrahim Poonawala Understood. And separately, I guess, maybe Robin, for you just in terms of the fee revenue momentum that you talked about at Pershing and elsewhere, just give us a sense around what the drivers we should be thinking as we think about sort of the medium-term outlook on fee revenue outside of just pure markets activity that could drive fees in a world where NII might be stable to lower as we think about sort of momentum on the positive outlook. Robin Vince Sure. Revenue growth in any given year is somewhat market-dependent because, of course, interest rates, equity fixed income markets, volumes volatility, that stuff all moves around, but our strategy has been, of course, to fuel the organic growth of the company, but also to try to position our businesses to be able to respond as well as they can to growth tailwinds that exist just in markets. And so in answer to Ken -- the question earlier on around the treasury market, we've positioned that business to be able to benefit from what we think is a secular growth in activity in the US treasury market. So that's a place where we're benefiting, yes, from the market, we're also benefiting from the investments that Dermot detailed. And as we go through what's next for our fee growth, we talked a lot about our ONE BNY campaign quarters ago. And we talked last quarter and in January about the fact that we're sort of operationalizing more and more what started off as a movement of ONE BNY into referrals, into new targets, into our commercial model and our Chief Commercial Officer joining and really then getting into the client coverage, the practices, the integrated solutions, which we talked about in our prepared remarks, the fact that we can now bundle individual products into true solutions for clients. So there are a lot of levers on the fee growth, and we've been working very methodically through our plan to build momentum in that space, but also to position the business to be able to take advantage of macro things going on in the market. Our next question is coming from Steven Chubak with Wolfe Research. Please go ahead. So I guess I wanted to build on that earlier line of questioning, but really focusing more on repo activity. It's been a big area of investor focus. You've certainly benefited from recent strength on the repo side. And I was hoping you could potentially quantify the benefit year-on-year from elevated repo activity and just longer term, like, how you're thinking about the durability of the recent repo strength? And what are some of the factors supporting that view? Dermot McDonogh Thanks for the question, Steven. So I would say in terms of year-on-year activity, it's not a kind of a -- cleared repo is not a game changer for us in terms of the overall year-on-year NII story. It's about -- overall in its totality, it makes up about 5% of our NII today. I think I would just echo our follow-on from Robin's answer to the last question in terms of it's a product. Clients want us we're meeting them where they want to be, we're innovating. This come under the $1.4 trillion liquidity ecosystem. Laide runs that business, does a terrific job for us in the clear repo business specifically, we're a top three provider. And so we have a large installed client base who are looking for products and we can meet them with our cleared repo product. And so it's just another tool in our toolbox. And I would say, again, we're positioned, we're investing, we're a scale player and we can provide automated solutions for our clients. So I do expect that business to continue to grow, but in terms of the year-over-year to your specific question, it's not a material driver of the year-over-year change. Robin Vince Steven, I would add one thing to it, which is just remember that in the context of our business, we're really the only global solution provider in the space because we're scaled in Asia, we're scaled in Europe, we're scaled in the United States. And in a world where folks are looking at repo as a collateral tool and an investment tool, the opportunity to be able to help clients navigate the whole world in this product, provide the seamless connectivity between repo and margin and collateral management the connectivity to other things that we do, there's a real appeal, to use Dermot's phrase again about meeting clients where they are. There's a real appeal here for clients in terms of the breadth of what we can offer, but also the innovation that he referred to earlier on in the call where we're creating these new solutions. And so this is another example, along with the US treasury market, but there are so many others in our business of saying there's a macro evolution going on, and we have the opportunity to participate in that as long as we're front-footed with clients and as long as we're innovating. Steven Chubak Thanks for all that color. And just for my follow-up on the Pershing business. I know that the core underlying strength has been obscure to some degree by some large client departures. I was hoping you can give some perspective on what some of the core organic growth trends look like in that business? What the pipeline looks like in that business given some of the recent excitement of our Wove platform and the offering? And have we lapped those headwinds at this point, or is there still some remaining pressure on the come? Dermot McDonogh Okay. So I would say nobody is happier to see the ongoing deconversion of the clients to come to an end. So we expect that to be fully out of the portfolio by Q3. As I've said on previous calls, we believe in our ability to earn our way through that deconversion. It happens in life. And so I think the team has been very resilient in terms of earning their way through it and growing. In my prepared remarks, I talked about the re-sign of Osaic on a several year contract. So we're very pleased about that. You take a step back and you look at where we were 12 months ago, we just came off the INSITE conference in Florida where we announced Wove, 12 months later we've announced a new suite of products to support the Wove. We have signed 21 clients so far this year for Wove. The momentum is building, the clients like us. We -- I kind of reiterated my guidance on prepared remarks about the $30 million to $40 million of revenue for this year. And then just I'll remind you that we're a $3 trillion player in the wealth tech space, number one with broker-dealers, top three with RIAs. And in previous quarters, I've kind of guided mid-single-digits of underlying core growth through the cycle. We continue to believe that, notwithstanding on any given quarter, it may be slower or better. But we believe we're in good shape, and there is good momentum in what is a very, very large market, and in which we're a very big player. Steven Chubak Very helpful color. Thanks so much for taking my questions. Our next question is coming from Brennan Hawken with UBS. Your line is open. Please go ahead. Brennan Hawken Good morning Robin and Dermot. Thanks for taking my questions. So we saw the ECB cut rates this quarter. And while I know euro is in a huge exposure for you in terms of your deposit base, curious about what impact you saw that on your deposit costs in that currency. And maybe how does that experience and the market reaction inform your expectations for beta and customer behavior around rate cuts in other currencies? Thanks. Dermot McDonogh So I would say, overall, euros is roughly 10% of the total portfolio. To -- in answer to the earlier question, I think where we feel very well positioned for the range of outcomes that the forward curve is implying in euros, sterling and dollars, we prepare for it. We talk about it a lot. And so I kind of feel like the way the CIO book is currently set up, where we still have a reasonable amount of securities rolling off into higher-yielding assets. So I just feel like the combination of where our deposit book is in terms of our betas to reiterate again for dollars, low 80s sterling and euros high 60s. And the CIO book kind of still room to grow. And so on rate cuts in terms of how we kind of position the book, we're broadly symmetric in terms of -- on the rate cut side. So I think Chairman Powell has done a job of telegraphing to the market how he wants to do it. So I don't think it's going to be a volatile move in rates when it happens. So he's allowed us time to position and manage and get into the right place. So I think overall, I feel very good about where we're at. Brennan Hawken Yeah. But what I was asking -- I appreciate that. What I was trying to understand was the actual experience with -- in the actual marketplace beyond like the expectation. Did the 50% to 60% beta, I think you said in euros, did that hold when the cut went through? And did you actually experience that? Dermot McDonogh So specifically, yes, we did experience that, and it held up. It behaved as expected. Brennan Hawken Excellent. Thank you for that, Dermot. I appreciate that. Issuer Services very solid. You flagged some CLO trustee gains on the back of a market that's seen solid volume. Could you help us understand maybe how much of the strength and the growth that you saw in that line was attributed to that, which I assume would be in the in the Corporate Trust business and then maybe how to think about the Depositary Receipt fees, just so we're thinking about the right way to baseline and move forward with our models? Dermot McDonogh For sure. Look, Corporate Trust, I think, is, for us, a good opportunity, a very good opportunity. I actually talked about it at some length at the RBC Conference in March when I was chatting with Gerard Cassidy. And I think over the last number of years, Corporate Trust for BNY is a business that's been underinvested in both technology and leadership. And in both Robin and I's prepared remarks, we did emphasize leadership has been a continuous change for us. And we've made a very -- couple of very important hires over the last 12 months in Corporate Trust, and we have new leadership overseeing the business. And it's that investment and in technology, products, leadership that is showing up. And specifically, we've doubled our activity in CLOs over the last 12 months. We've improved our market share. And as Robin said, a couple -- in an answer to another question, we really want to position Corporate Trust as a business that really can take the advantage of scale, a lot of manual processes, a lot of room for AI, a lot of room for digitization and we can improve the operating leverage of that business. We can improve how we show up for clients, client service. So we feel like in Corporate Trust specifically, we have a lot to play for. Depositary Receipts, we have good market share. We punch above us and we expect that to continue. Our next question is coming from Betsy Graseck with Morgan Stanley. Please go ahead. Two quick questions. One, just to wrap up a little bit on the T+1 discussion earlier. Could you give us a sense of how much did T+1 drive sequential revenue growth this quarter? And can you give us a sense as to if there's enough revenue growth you're expecting from this to impact the expense ratio since you've already made the investment? And then I have a follow-up on Wove. Thanks. Dermot McDonogh Hi, Betsy, it's Dermot. So the point I would make about T+1 is not so much a revenue or expense topic. It really is -- it speaks to resilience as a commercial attribute kind of point that we make on behalf of BNY in terms of it's been a large-scale infrastructure change that's been coming to the markets over the last couple of years. And as we are a key player in the financial market infrastructure, it's very important that we execute that to an A+ standard. And what I would say is BNY has shown up for clients and delivering an A+ execution of a very big project. It's not really about revenue or expenses, it's really about delivering a complicated change project for our clients and the ecosystem at large. That's really, I think, the point we're trying to make on T+1. Betsy Graseck Okay. Yeah, I just think if you're in a better spot than others, you could pick up some incremental share on the back of that, but that's maybe a couple of conference calls from here. All right. Then separately on Wove, I know you mentioned that you added new clients to Wove. I just wanted to understand, is this new clients of the firm or this is clients who had been yours for a while and they moved to Wove? Dermot McDonogh So I would say it's both. And so I guess the questions that we've had on previous calls, Betsy, are we cannibalizing existing clients? And the answer to that is most definitely no. And I think it speaks to the point of us innovating. Wove is a very big investment for us in terms of technology over multiple years. Existing clients like the fact that we're willing to put money to work for them and give them better solutions and as a consequence of that, we had over 1,500 people show up to Wove in Florida last year, in Nashville this year. And for those that are there, there's real excitement. And as Robin said in his prepared remarks, it's winning awards. So there's a flywheel effect of, BNY is showing up in the wealth tech space and delivering new solutions for us, we want to see what they have to do. So the network effect of that shouldn't be underestimated. Robin Vince Betsy, let me double-click on it for one second as well because when we started on the Wove journey, and we announced it, as Dermot said, last year, it was initially really focused on that singular KPI of making advisors' lives easier. And so it was a technology front end that went from wealth planning and help clients with wealth planning all the way through to portfolio construction and then getting into market. Now what's evolved since then and what we talked a lot about this year, one year later in the Wove journey was the fact that now we have the opportunity to link all of these other BNY capabilities to be able to deliver to our Pershing and Wove clients. So you can be a clearing and custody client of Pershing, you can be an adviser taking advantage of that initial set of tooling from Wove, but what you can now also do is you can have that ability to manage and aggregate data, including across multiple custodians. We can connect you to models in the investment management space. By the way, we can fulfill those models because we've got active equity and indexing and all these capabilities that come from BNY investments. And so Wove is becoming a bit more of a delivery vehicle for the various capabilities of the firm and it's also opening the aperture of how clients of Pershing think about us in terms of our ability to solve other problems for them, banking-as-a-service which is a Treasury Services business. But we stimulate the conversation for that because people see us as being more than what we used to be in Pershing. We also, to your question, are attracting people who don't necessarily need the clearing and custody service, but who want to take advantage of these other components, which is why Dermot said both because it's both and delivering the breadth of ONE BNY. Our next question is coming from Mike Mayo with Wells Fargo Securities. Please go ahead. Mike Mayo Hi. Could you put a little more meat on the bones for the ONE BNY initiative in terms of products for customers where you're talking about more bundled solutions. Thematically, I understand it. And I guess you're having higher core servicing fees, but connecting from the higher core servicing fees from the high level, let's bundle, let's have everyone work together. I'm just trying to connect the dots a little more. Robin Vince Understood, Mike. And you'd asked me a question, it's probably about more than a year ago now, where you had essentially challenged the fact that in order for something like ONE BNY to be successful, it can't just be hearts and minds, it's got to be deeply operationalized. And we talked at that time about some of our future ambitions for how to really bring it home. So the way that I would now answer your question is, we are rallying around the three strategic pillars that Dermot and I both have talked about a bunch, and this is about being more for our clients. And that's not just words anymore. It's not just a movement. It's just appealing to our people to be able to do -- to be client-obsessed. It's about elevating the effectiveness of our sales organization and the process driving client service differently than we used to. It's about the innovative new products, as we were just talking about Wove, that's a good example. We are being more for clients in that example. And we are also delivering the whole of the company. So it is a great ONE BNY example. Pershing, which used to be somewhat off to the side in the company a few years back, now very much at the heart and benefiting from that integration with all of the other capabilities that we have. And then you hit on a critical word, which is solutions, because that next journey to use the term that Dermot used earlier on of meeting our clients where they are, it's not just about us selling a bunch of great products and client platforms to our clients, it's about the fact that when we look at the challenges that our clients have, they actually need things that cut across multiple parts of our company. And rather than going in disconnected and showing them individually and trying to have them piece it all together, we can now show up and we can actually show them these solutions which bring all the componentry together to solve their needs. And both Dermot and I talked a bit about that in our prepared remarks, and that's the next level of the maturity of that ONE BNY work that we're really doing. That's [involving] (ph) from an initiative and hearts and minds to making everything that we're doing in our commercial organization, the sales practices, the sales targets, the way that we're bringing people together, the account management process, the client service, the digital delivery of tooling and the way that we're thinking about everything that equips our salespeople to be effective across training, we're bringing all of those things together and maturing our commercial model. And over time, we think there's a lot of value both in the process and in what we're actually delivering to clients. Mike Mayo And so when you wrap it all up, I mean, what wallet share do you have per customer today? Where was it a few years ago? Where do you hope that to go just in terms of a ZIP code of expectations? Robin Vince Got it. I think some of those metrics as we think about ways in which to show you that story more over time, some of those metrics will be in our future. Right now, I'm going to point you to two things. There are a whole bunch of inputs. I described a bunch of them. And I think over the course of the past couple of years, we've been trying to really show the key inputs, which we think are the leading indicators for performance. And then you have to actually look at the fee growth result, and you saw that in the first quarter. You've seen that in the second quarter, and that's some of the output. But the story that Dermot and I are trying to describe is a story of a maturing of a process, but with still a distance to go and opportunity ahead. Dermot McDonogh Mike, just to put a metric on us, it's just to give an indication because we need to mature the metrics as we proceduralize all the strategic comments that Robin has just outlined. Year-over-year, the amount of business that we've won that touches more than one line of business has increased by a third of albeit a very low base. So I wouldn't draw too much into the metric, but just the fact that we are showing up in a different way and clients are buying products and services from more than one line of business because we can deliver integrated solutions. And that's the key that over time, we'll be able to track that and communicate that in a more objective way as that strategy takes root. Mike Mayo Understood. So when all said and done, core servicing fees over time, whether it's aspiration or a specific target, where should core servicing fee growth be? Robin Vince My answer to that, which I recognize is a little bit unsatisfying, is we're going to keep pointing you back to the positive operating leverage, which is really how we're focusing for our own growth. We think that each quarter, each year has a different composition to it, but higher fee growth over time is a very important part of that combination of solutions. But any individual quarter or a year is going to have a different composition. We're controlling the things that we can control, albeit we're stoking the engine for growth of organic fees over time. Our next question is coming from Alex Blostein with Goldman Sachs. Please go ahead. Alex Blostein Hi, good morning. Thanks for squeezing me in on this. I wanted to touch on expenses and operating leverage. So, expenses up a little bit year-to-date year-over-year. It sounds like you guys are still targeting flat expenses for the year despite the fact that revenues are obviously shaking out a little bit better than you hoped. So maybe kind of walk us through where you see the flex in the expense base to keep it kind of at that flattish run rate. But I guess more importantly, you guys had a target for pre-tax margin to be at 33% plus recently. You're doing 33% this quarter and obviously you don't want to get too carried away with a single quarter, but it feels like you have an ability to reset the bar. So maybe talk a little bit about what that plus within the 33% could look like a couple of years out? Dermot McDonogh Thanks, Alex. So I guess I would start with the margin part of this. We need to consistently do it. And so one quarter doesn't a medium-term target make. So I'm very pleased that we've done this, but now I want to see it next quarter, the following quarter, the following quarter. So, execution is key. And just showing up in a very disciplined way every day is really important to delivering out that. We don't want to be known as a one-hit wonder. So while I'm pleased that we've managed to do it, I want to see it repeated on a consistent basis. So that's what I would say on margin. On expenses, you and I talked in Madrid a few weeks back at your conference. And I kind of said a little bit like we're in the ZIP code of flat for the year. It's all about running the company better. It's very important that we have 53,000 people wrapped around the same aspiration that we as a leadership team have and everybody is focused on doing it. So there is a real momentum on running the company better, which is the input to how we show up with expenses were being where they are as opposed to a top-down approach. So very different cultural experience within the firm in terms of how we're doing it. And the reason why we're a little bit above trend in the first couple of quarters this year is what I said to you at the conference is revenue-related expenses. And so I kind of anchor that in overall where we are for positive operating leverage in the year. And in my remarks, I kind of said I feel optimistic about delivering positive operating leverage for the year, which in a down 10% NII environment, BNY hasn't really executed to that level before. And so -- and also, Q2 is a seasonally strong quarter for us, which would feed the margin of 33%. So I feel good about expenses. I feel good about flat, notwithstanding there's pressure to that from a revenue-related expense part, but we're very determined to deliver positive operating leverage to our shareholders this year. Alex Blostein Excellent. Great. Well, my second quick question around the balance sheet. There's a lot of discussion around deposits, but I wanted to zone in on the asset side of the balance sheet for a second. We've seen pretty nice growth from you guys in both the securities portfolio and loans sequentially. So could you just spend a minute on sort of the sources where you're investing and then your outlook in maybe deploying some of the liquidity that seems to be perhaps a bit more sticky into both loan growth and securities? Dermot McDonogh So yeah, look, very -- feel very proud of the CIO book team, what they've accomplished over the last couple of years, which is really from Q3 of '22. It really has been just a terrific collaboration with inside the firm. And we're deploying where we think we can see opportunity. Our CIO likes to use the word nibbling, and so we're kind of seeing where the next leg is, and we're deploying where we think we can see opportunity to continue to grow NII. So it's opportunistic at the moment, but we feel overall very good about that aspect of us. We're still rolling off the book into higher-yielding securities. We're picking up to 200 basis points, and so that's feeding NII. And then on loan growth, I think the GLS team is doing a really good job of getting very liquidity-friendly deposits, which allows us to extend credit to our clients. And I think we're showing up in a different way to our clients who are important to us and extending our balance sheet to them as they look to buy products in more than one line of business. So where we need the balance sheet to support business activities, that's what we're doing. And it's a kind of a -- it's a strategic tool in our kit for doing that. Our next question is coming from Gerard Cassidy with RBC. Please go ahead. Dermot, can you share with us, now that we're entering into a phase with monetary policy of quantitative tightening easing up a bit, you guys obviously have been through QE, you've seen the initial stages of QT, do you have any thoughts on how this could affect your balance sheet over the next 12 to 18 months? Have you guys done any type of modeling to see what kind of effect the QT as it shrinks could have on your balance sheet? Dermot McDonogh So, we do a lot of work on that, Gerard. And look, CCAR forces us to do that work as well. And so rates up, rates down, quantitative tightening, quantitative easening. We look at it every which way to Sunday. But the thing that I would kind of remind you and everybody who's listening in is our balance sheet is one of our strengths. In -- this time last year, in Q1 of last year, we kind of -- we called our balance sheet a port in a storm for our clients and you see that fly to quality. So we're kind of very proud of our balance sheet. It's vanilla, it's liquid, it stands stress tests and it allows us to be there for our clients. So it's kind of -- it's short in duration. We repositioned it going into the higher-for-longer rate environment. As you will remember in Q4 of '22, we repositioned it. And so we've taken a lot of proactive steps to make our balance sheet durable and liquid and to withstand a wide range of scenarios. Robin Vince And, Gerard, I'm just going to add that it's easy to think that just because at this very moment in time, we're looking out, there seems to be some greater consensus than we've had for a little while around what might happen with the Fed in the fall across September and the balance of the year. It's easy to think somehow that the range of risks has somehow narrowed as a result of that. But there's still a lot of uncertainty in the world. We've got all bunch of other types of geopolitical risks out in the world. We're sort of continuing to grind through elections that we've talked about through the course of the year. There are all sorts of other things happening. We've still got wars going on. And so our approach to all of these questions, and Dermot really made the point, is to be prepared for all the different types of outcomes that are possible. And so you can see us, we run conservative on liquidity, we run conservative on capital. You can see it in our ratios that we talked about and that Dermot outlined in his prepared remarks. And that's a very important anchor point for us so that we can be agile according to however things play out because the one thing we can be absolutely sure of is they won't play out exactly the way anybody expects. Gerard Cassidy Very good. And then just as a follow-up, Robin, you talked about the new business wins in the quarter, and you talked about ONE BNY as well. It appears that you're having success in chipping down or breaking down some of the silos that many organizations always struggle with. Can you share with us some of the tools you're using to break those silos? And how -- I would assume you're not 100% complete breaking them all down, but how far along are you in actually breaking them down? Robin Vince Well, the company's been around for 240 years, and we've acquired a lot of different businesses and companies over time. And so these things do build up over a period of time. But the short answer to your question is, we passionately believe as a whole leadership team that the answer to the question is culture. And so I've said before in a slightly pithy way and quoting other people or sort of paraphrasing them, if you will, that culture eats strategy for breakfast, as it was once famously said by Peter Drucker. And we add to that, execution eats strategy for lunch. That's just a long way of saying that the power our culture pillar, which is one of our three pillars, is the thing that's enabling us to run our company better. And that, in turn, is allowing us to be more for our clients. And so the trick to this for us has been investing in our people. It's been creating the benefits, the experiences, the employee experience, the pride, association with the company, the feedback loop that shows that when we do these things, we get better outcomes for our clients, and that translates into better outcomes in the bottom line. And so there's a flywheel effect here that actually builds on itself. And the spring in the step of our employees is now powering that forward, and that's what gives us confidence that we've really turned the corner on it. People want to throw in with the whole because they see that it's not only better for the company, it's actually better for their business because joining their products with other products around the company is allowing us to be more for clients. And it actually feels good to see the benefits in the ultimate results. So that's, for us, the North Star of how we're doing it. And while we've certainly got a distance to go, the early results have been pretty encouraging. Our next question is coming from Brian Bedell with Deutsche Bank. Please go ahead. Brian Bedell Great. Thanks. Good morning, guys. Great. Maybe if I could just come back to the -- sticking with the NII guide of down 10%. I'm having trouble getting there. The -- just to confirm, it sounds, Dermot, like what you're saying is it's really almost totally a deposit-driven guide on a seasonal basis. And I just wanted to sort of confirm that given how you've outlined the balance sheet sensitivity to different rate scenarios is pretty strong. And of course, you have the benefit of securities portfolio reinvestment. So is it really simply just the seasonal deposit dynamic? And then if you can just talk about how NIB is factored into that seasonal deposit dynamic. And then, of course, as you move into next year, in 1Q seasonally, of course, that we should be back positive again. I just want to confirm that. Dermot McDonogh So, I guess, Brian, in the way you've asked the question, in some ways you've answered the question to yourself. So I will kind of confirm, a, how you're thinking about it in terms of the seasonal decline and it's a deposit story. And I would just kind of reference last year as the guide in terms of, in January of last year, we guided 20% for the year. And then we started out the gates well. And, you as a collective, put pressure on me to change the guidance, which I didn't do. And we ended the year at 24%. And so last year, we used the word skewed to the upside but humble about the fact of what lies in front of us. And I would say the percentages are different this year, the environment is different, but the sentiment is the same. I'm humble about what the outcome could be and uncertainty is -- can be -- is there because, as Robin said, for sure, what we think is going to happen is not going to happen. But I would say we're cautiously optimistic and your point is it is a deposit story. And within the deposit story, it really is the mix between NIBs and IBs. Brian Bedell Right. Okay. Yeah. Fair enough there. And then maybe just back to the operating leverage dynamic, and this can be for both Dermot and Robin. Obviously, you're starting off really well with, like, 100 basis points plus of positive operating leverage as we move into the second half, notwithstanding market movements, that would obviously influence the fee revenue dynamic. But given the traction that you're showing sequentially in your core business growth and core business sales and, I guess, the fact that you've made these investments already, so I just wanted to get a sense of whether you feel like you're able to scale those investments in the second half. And obviously, with your flat operating expense guidance, it would seem that's the case. If the revenue does turn out to be better than expected from an organic growth perspective, would we see the expense base creep up a little bit notwithstanding, of course, you'd still generate positive leverage? Dermot McDonogh Okay. A lot of questions in that second question. So, I would say, like, when I talk to the teams, right, and this is quite -- you're kind of hitting on a very important point in that I really focus on running the company better, and then we kind of focus on the operating leverage, not expense as a means to an end. And if revenue-related expenses creep up, that we starve businesses of investments to solve for a flat number because that's what we said we were going to do. I think that's quite important. And it's important to get the balance right that investment and running the company better, it kind of is the same thing. And so that's a cultural transformation that's underway with all of our people. And so we really are focused on getting value for money. We spend a lot of money. We spend over $12.5 billion every year. And so we want to get the best value we can for that, and we do that in a number of different ways. So some of the investments that we've made over the last couple of years, we're beginning to see the scale impact in that. And you can see that in our most profitable segment, Market and Wealth Services. It's a mid-40s margin. We continue to invest at the margin, which is what you want to see from us. And we continue to digitize, we continue to automate, we continue to reduce manual process which ultimately will feed into headcount and better quality jobs for our folks and better careers. So, I think over time, if organic growth plays out, it will feed into a better outcome in operating leverage, not us just growing expenses because revenues are better. Robin Vince And I just want to draw out one additional thing that Dermot said as well, Brian, which is we have a lot of work to do. There's no question about it. He used the term skew and slightly optimistic, but staying humble when it related to NII. This one is just about a lot of hard work and really focusing on this point about running the company better. But as a double-click into the way that we're thinking about it, if you look at the second quarter, I mean, we've talked a lot about the fact that it's been a seasonally strong quarter. But if you double-click into it, and the Market and Wealth Services point that Dermot just mentioned, that's an investment story because, as we've said, we're in a good spot on the pre-tax margin of that segment. So we just want more that's growth. We don't want to dilute the margin, but we're not trying to save expense dollars there. But in Securities Services and in Investment and Wealth, where we said there is, in fact, a margin journey that we have ahead of us, that's where you can actually see negative expenses in both of those segments for the quarter, which is a sign of the fact that we're both investing but we're doing even more discipline in those businesses. And so that's how the whole thing comes together for the company. And our final question is coming from Rajiv Bhatia with Morningstar. Please go ahead. Rajiv Bhatia Yeah. There was some progress on the Investment and Wealth Management margin in the quarter. I guess my quick question is, are your margins different on the asset management side of the business versus the wealth management side? And do you have a timeline for getting back to that 25%-plus margin? Dermot McDonogh So I don't think we kind of get into the detail of the split between the two. And so the segment overall, I guess, we've said over the last several quarters, we believe we can go back to the 25% margin over a period of a few years. And, like, just to follow on from Robin's answer to the last question, we've shown, I think, good expense discipline over the last 12 months in terms of, okay, revenues have been a little bit challenged in the segment due to a variety of reasons, and we've taken tough decisions. And so that's allowed us to grow the margin by 200 basis points over the last year, which really is kind of the financial discipline [about it] (ph). And we do believe where we are now with distribution as a platform, very, very strong performance in fixed income and LDI and Insight, that the momentum is there within the segment to grow. And as Robin said, the addition of Jose to the leadership team joining in September, giving his fresh perspective, gives us confidence about what we can do in the future. This concludes today's question-and-answer session. At this time, I will turn the conference back to Robin for additional or closing remarks. Robin Vince Thank you, operator, and thanks, everyone, for your time today. We certainly appreciate your interest in BNY. If you have any follow-up questions, please reach out to Marius and the IR team. Be well and enjoy the balance of the summer. Thank you. This does conclude today's conference call and webcast. A replay of this conference call and webcast will be available on the BNY Investor Relations website at 2:00 p.m. Eastern Standard Time today. Have a great day.