富國銀行 (WFC) 2016 Q4 法說會逐字稿

Good morning.

My name is Regina and I will be your conference operator today.

At this time I would like to welcome everyone to the Wells Fargo fourth-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Jim Rowe, Director of Investor Relations.

Mr. Rowe, you may begin your conference.

Thank you, Regina, and good morning, everyone.

Thank you for joining our call today where our President and CEO Tim Sloan and our CFO John Shrewsberry will discuss fourth-quarter results and answer your questions.

This call is being recorded.

Before we get started I would like to remind you that our fourth-quarter earnings release and quarterly supplement 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 Release and quarterly supplement.

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, in the Earnings Release, and in the quarterly supplement available on our website.

I will now turn call over to our President and CEO, Tim Sloan.

Thank you, Jim.

Good morning and happy new year.

Thank you all for joining us today.

I know it's been a very busy morning for most of you.

Our results in 2016 demonstrated the benefit of our diversified business model, with loan and deposit balances at an all-time high, while we maintained a strong risk discipline.

While the last few months of the year certainly were challenging, I couldn't be more pleased with the hard work and progress that our team made to rebuild trust, which I'll highlight shortly.

But, first, I want to summarize our financial performance for the past year.

We generated earnings of $21.9 billion and EPS of $3.99 a share.

We grew revenue by 3% including 5% growth in net interest income.

Average loans grew $64.5 billion, up 7%, and average deposits increased $56.5 billion, up 5%.

Wealth and investment management total client assets reached a record high of $1.7 trillion, up 7%.

Our credit results continued to be strong with a net charge-off rate of 37 basis points.

We returned $12.5 billion to our shareholders through common stock dividends and net share repurchases.

And we reduced our common shares outstanding by 76 million shares.

On page 3 we describe the progress we've made on our retail banking sales practices remediation plan, including contacting our retail and small business customers and encouraging anyone who has concerns to contact us.

We established a sales practice consent order program office reporting directly to our Chief Risk Officer, which is undertaking actions to meet the requirements of the consent orders that were issued as part of the settlements in September.

As part of this effort, we submitted a reimbursement and redress plan to the OCC and the CFPB in December.

We refunded a total of $3.2 million to customers including the $2.6 million that was part of our original analysis.

As part of the consent orders, work is now under way to expand the time periods of our review to cover the beginning of 2011 and the period through September 2016.

And we've hired an independent consultant to evaluate sales practices.

We've also gone beyond the requirements of the sales practice consent orders as part of our effort to make things right for our customers, including a nationwide mediation program at no cost to our customers.

In addition, we've begun the data analysis to review 2009 and 2010 for potentially unauthorized accounts.

And we've engaged a separate third-party consultant to evaluate sales practices more broadly across Wells Fargo.

We are leaving no stone unturned so that we can emerge from this a better, stronger company.

We've also made progress on evaluating potentially unauthorized credit card accounts, including any impact to customers' credit scores and analysis of credit signatures to verify authorization.

We want to identify anyone who was negatively impacted so we can make things right.

We've accomplished a lot over the past few months but we still have a lot of work to do, and we understand that it will take continued effort and time to rebuild trust with our customers, team members, and other key stakeholders.

Another important action we've taken is the recent launch of our new retail banking compensation program.

This has been a top priority over the past few months and is a significant step in reinforcing to our retail banking team members what is expected of them, how their actions connect to our business priority of serving our customers, and how they will be rewarded for performance against these expectations.

There are five key principles to the new plan which we highlight on page 4.

First, there are no product sales goals, which we previously ended in October.

Second, we will gauge success based on customer service, increases in primary customers, household relationship growth, and risk management and not on opening new accounts.

Third, this new plan includes a strong focus on team performance with metrics heavily weighted toward team and branch goals, not just individual goals.

Fourth, we have stronger controls in place to monitor behavior and ensure we're doing things the right way, including more proactive monitoring at the regional and corporate levels.

And, finally, we will be closely monitoring results for any unintended outcomes or behaviors prompted by the new plan, and we will make changes as needed.

It will take time to communicate the plan and train thousands of team members so they understand the changes they need to make to successfully achieve new objectives.

We are also leveraging a number of new business success metrics, including primary customer growth, which measures the growth of customers that use Wells Fargo as their primary financial institution, and household relationship balanced growth to measure how Wells Fargo satisfied the broad financial needs of our customers.

We will share more details on these and other metrics during our Investor Day in May.

The incentive plan rollout is an important step in restoring trust.

This new program, coupled with our work in redefining our service experience and training our leaders and front-line team members, will be important elements as we continue this work.

Also effective this week as part of our annual compensation review process, we increased our minimum hourly pay rate to a range of $13.50 to $17 an hour, a 12% increase from the previous minimum rate and 86% higher than the national minimum wage.

We believe this increase is the right thing to do for our team members.

On slide 5 we provide the December customer activity in retail banking, which we've been updating on a monthly basis since our last earnings call.

In general, while account openings are still down from a year ago, customers continue to actively use their accounts, and many of the trends have shown improvements from the lows earlier in the fourth quarter.

Let me highlight a few of those trends in more detail.

Customers are increasingly coming into our branches, including a modest increase in banker interactions, which started the last two weeks of November and continued through year end.

Customers continued to open more checking accounts than they closed and primary consumer checking customers increased 3%.

Our credit card business benefited from strong holiday spending, and December had record monthly purchase volume, growing 8% from December of 2015, and active accounts were up 7%.

While new applications stabilized in October, we have not seen an increase in application volume.

The decline in December compared with November reflected normal seasonality.

We have recently started to reintroduce some outbound calling and direct mail and we will be monitoring these results very closely.

Customer experience scores continued to improve from the lows experienced early in October, with branch customer experience scores nearing pre-settlement levels by the end of December.

While customer loyalty scores have steadily improved since the lows in October, we still have work to do in order to return to previous highs.

The improvement in these scores reflects the outstanding job that our retail banking team has done by focusing on providing exceptional customer experience.

Our existing customers have continued to use their accounts.

And we've seen higher deposit and credit card balances and increased credit and debit card transaction volume, which drives near-term revenue.

The decline in the rate of new account openings may impact the pace of future revenue growth, so we'll continue to be transparent regarding those trends.

In addition, we're also tracking the impact to our other businesses.

While businesses that are not reliant on retail banker referrals have not been significantly impacted, lower banker referrals continue to affect businesses such as mortgage.

Referrals accounted for approximately 9% of mortgage originations in 2016 and we expect that lower referrals in the fourth quarter will reduce funding volumes in the first quarter by approximately 2.5%.

In summary, we are pleased that the trends have stabilized and many metrics have started to show improvements.

Before turning the call over to John Shrewsberry to discuss the details of our financial results, I want to update you on our resolution plan.

We're working closely with the Federal Reserve Board and the FDIC to better understand their concerns so that we can bring our resolution planning process in line with their expectations.

Additionally, to demonstrate our commitment to the remediation of the deficiencies and the overall resolution planning process, we have implemented actions to limit the size of our total non-bank subsidiaries' assets to the levels in place as of September 30, 2016.

We've already reduced assets to below this level as of year end and expect to operate at this level for the foreseeable future.

We are committed to remediating the two deficiencies identified by the agencies in our revised submission that is due in March, and have added significant resources to this effort.

John Shrewsberry will now discuss the details of our financial results.

John?

Thanks, Tim, and good morning, everyone.

We earned $5.3 billion in the fourth quarter, the 17th consecutive quarter of generating earnings greater than $5 billion.

Our consistent performance demonstrates the benefit of our diversified business model and has continued to perform well through the challenges we've faced in recent months.

We had solid underlying performance in the quarter including a record level of loans and deposits and strong growth in net interest income.

It's important to note that our results in the quarter included a loss of $592 million or $0.07 a share from the impact of net hedge ineffectiveness accounting.

Slide 8 provides more detail on our long-term debt hedging program.

As we've previously discussed, as part of our overall asset liability management program, we typically swap our fixed rate long-term debt to floating rate in order to balance our deposit-oriented liability structure and better align with the interest rate sensitivity characteristics of our assets.

We also issue non-US dollar long-term debt to diversify our funding sources and a portion of that debt is swapped to US dollars.

While we believe this hedging strategy is prudent from an asset liability management perspective, it's generally not possible to achieve a perfect accounting hedge due to the differences in the required valuation measurement of the hedging instrument and the hedged item.

As a result this can produce hedge ineffectiveness gains and losses from quarter to quarter as interest and exchange rates change.

However, the hedging effectiveness recognized over the life of the hedging relationships is expected to be zero as long as the hedge accounting is maintained and the hedges are held to maturity.

In 2016, we experienced significant quarterly volatility in hedge ineffectiveness due to key interest rate and foreign currency fluctuations, including a hedge ineffectiveness gain net of related economic hedges of $379 million in the first quarter and a net loss of $592 million in the fourth quarter.

However, the 2016 full-year net hedge ineffectiveness accounting impact on our results was a loss of only $15 million.

FASB has issued an exposure draft on hedge accounting guidelines and new guidance is expected to be issued in 2017.

If issued in its current form the interest rate related ineffectiveness associated with our long-term debt hedges would be significantly reduced.

Turning to page 9, let me highlight a few balance sheet trends.

We had strong loan growth, up $6.3 billion from third quarter on commercial loan growth.

Consumer loans were reduced by the $3.8 billion deconsolidation of certain previously sold reverse mortgage loans following the sale of the related servicing in the fourth quarter.

Investment securities increased $17.1 billion, with $44 billion of purchases, predominantly agency MBS.

The growth in these portfolios as well as a smaller balance sheet drove the $32.3 billion decline in short-term investments and Fed funds sold.

Deposit growth was also strong, up $30.2 billion from third quarter, with increases in commercial, consumer, and small business banking balances.

And our short-term borrowings declined $27.9 billion reflecting lower repurchase balances.

Credit quality remained solid and we had a reserve release for the first time in 2016, which was $100 million in the fourth quarter.

Turning to the income statement overview on page 10, while revenue declined from the third quarter, we had strong growth in net interest income, up $450 million, and our NIM increased 5 basis points.

Non-interest income declined $1.2 billion, driven by net hedge ineffectiveness accounting losses as well as lower trading and mortgage banking results, which I will discuss later.

Other sources of non-interest income were diversified and relatively stable.

There were a lot of linked quarter changes in specific expense categories this quarter, which I will highlight later in the call, but in total expenses were down $53 million from the third quarter.

As shown on page 11, loans increased $6.3 billion from third quarter with broad-based growth across many of our commercial and consumer portfolios.

Our auto portfolio was an exception as balances declined $587 million from the third quarter.

To respond to conditions in the competitive landscape and to maintain our risk tolerances, we've tightened our underwriting standards.

Auto originations in the fourth quarter were $6.4 billion, down 21% from the third quarter and down 15% from a year ago.

We currently expect balances in our auto portfolio to continue to decline in the near term.

On page 12 we show year-over-year loan growth.

I'm not going to highlight each portfolio but our commercial growth was strong across many businesses and asset classes.

And the $3.8 billion deconsolidation of reverse mortgage loans reduced the growth rate of our one-to-four family first mortgage loan portfolio.

As highlighted on page 13, we had a record $1.3 trillion of average deposits in the fourth quarter, up $67.4 billion or 6% from a year ago, with growth in both commercial and consumer deposits.

Consumer and small business banking deposits increased 8% from a year ago.

Our average deposit cost increased 4 basis points from a year ago driven by commercial deposit pricing.

There was little to no market response to the rate hike in December 2015, and we currently believe that deposit betas from the rate hike in December 2016 will also be low, at least initially.

Indications so far support this view but we continue to monitor the market to ensure we remain competitive for our customers while maintaining our disciplined relationship-based pricing strategy.

Net interest income was up $450 million or 4% from the third quarter, reflecting growth in loans and investment securities, higher interest income on trading assets and higher income from variable sources, including periodic dividends and fees.

There was also a modest benefit from higher interest rates in the quarter.

Net interest margin increased 5 basis points from the third quarter driven by growth in earning assets, including deployment of cash into investments and the net benefit from higher interest rates.

Income from variable sources benefited the NIM by approximately 2 basis points.

Our growth in earning assets and the higher rate environment continue to benefit net interest income as we remain asset sensitive.

However, first quarter will reflect the impact from two fewer days and the typical linked quarter reduction in income from variable sources.

Non-interest income declined $1.2 billion from the third quarter including the $592 million of net hedge ineffectiveness accounting losses, as well as lower trading and mortgage banking fees.

I've already explained the impact from net hedge ineffectiveness so let me highlight the drivers of our mortgage banking and trading results.

Mortgage banking results decreased $250 million from third quarter and included a $163 million decline in mortgage servicing income, primarily due to higher unreimbursed servicing costs.

These costs increased $109 million in the fourth quarter as a result of actions we took to work through an aged population of FHA foreclosed properties where we've had challenges in repairing and conveying them back to HUD.

As a result, we increased our estimated cost to resolve these properties in the fourth quarter.

However, we expect these actions will reduce unreimbursed servicing costs significantly in 2017.

Residential mortgage origination volume was $72 billion, up $25 billion or 53% from a year ago and up $2 billion from the third quarter.

Applications were down 25% from the third quarter and we ended the fourth quarter with a $30 billion unclosed pipeline, similar to our pipeline a year ago.

Our production margin on residential held-for-sale mortgage originations was 168 basis points in the fourth quarter, down 13 basis points from the third quarter, primarily due to a higher mix of correspondent originations in the fourth quarter.

We currently expect origination volume in the first quarter to be roughly in line with the volume we had in the first quarter of 2016 but down from fourth quarter due to seasonality in the purchase market and lower re-fi volume driven by higher interest rates.

On page 16 we provide some details on trading-related revenue and the impact to net interest income and non-interest income.

Total trading-related revenue was down $378 million from the third quarter.

Trading-related net interest income was up $146 million in the fourth quarter, reflecting higher average trading asset balances as well as $98 million from periodic dividends and carry income on certain hedged trading positions in our equity and RMBS books.

The corresponding decline in the value of these hedges was reflected as a loss in net trading activities so they're revenue neutral.

Net trading activities declined due to a $223 million decrease in secondary trading, reflecting lower client volumes compared with the strong third quarter, as well as seasonality, fewer trading days in the fourth quarter, and lower client demand as clients adapted to the rising rate environment.

While our client focused business model typically underperforms the market in periods of high volatility, we believe we successfully managed through the post-election market volatility in the fourth quarter.

$106 million of the decline in net trading activities was from deferred compensation trading results which was largely offset in employee benefits expense.

Finally, there was a $61 million decline from a change in credit valuation adjustments in the fourth quarter due to market-driven changes in credit spreads and higher swap rates.

Compared with the fourth quarter of 2015, total trading-related revenue was down $27 million.

On page 17 we highlight the five-quarter trend across major fee categories.

Compared with the year ago, many of our fee businesses grew including deposit accounts, brokerage, investment banking, card, and mortgage originations.

This page illustrates that, while many businesses had above average results in the fourth quarter, total non-interest income reflected below average mortgage servicing income and lower market-sensitive revenue, which was down $526 million from a year ago.

As shown on page 18, expenses declined $53 million from the third quarter but our efficiency ratio increased to 61.2%, primarily driven by the impact of net hedge ineffectiveness losses on our revenue.

Our efficiency ratio for the full year was 59.3%.

We expect our efficiency ratio to remain at an elevated level.

While total expenses were relatively flat from the third quarter, there were some meaningful changes in some specific expense items in the fourth quarter.

Personnel expenses were down $195 million from the third quarter, primarily due to lower revenue related incentive compensation, lower deferred compensation expense, and one fewer payroll day.

As a reminder, we will have seasonally higher personnel expenses in the first quarter, reflecting incentive compensation and employee benefits expense.

We have typically higher outside professional services equipment and advertising expenses in the fourth quarter, and, combined, these categories increased $394 million from the third quarter.

This increase was also driven by higher project spending and legal expense.

Operating losses declined $334 million from third quarter on lower litigation accruals.

And all other expenses declined $116 million from third quarter, which included a $107 million donation to the Wells Fargo Foundation.

As we highlight on page 19, we remain focused on expense management and efficiency.

We've been working on a number of initiatives that we expect will reduce expenses by approximately $2 billion annually by year end 2018 with the full year benefit starting in 2019.

This is not a new focus.

We're just providing with you more detail on our initiatives this quarter to reduce expenses.

We've summarized these opportunities into three categories and included the stage of completion on the right of this page.

The largest opportunity relates to centralization and optimization.

We've started to make changes in how we're organized to reduce complexity and redundancy by continuing to realign staff areas including marketing, finance, and technology.

These changes should not only reduce costs but should also enable us to more seamlessly serve customers and team members.

We remain focused on reducing discretionary spending in areas like facilities, non customer-related travel, and third-party spending.

And as we've discussed in the past, we're also focused on selective divestitures of non-core subscale businesses which includes the sale of our crop insurance and health benefits services businesses last year.

We also formed the payments, virtual solutions and innovation group, which will accelerate our focus on delivering the next generation of payments capabilities, advancing digital and online offerings, and investing in new customer experiences and products.

While these efforts should have a meaningful impact to certain expense categories, there will not be a bottom-line impact, as these savings will be reinvested in the business.

Our expense focus enables us to operate more efficiently, generate meaningful expense savings and continue to invest to drive future growth, all while continuing to have a strong efficiency ratio.

Let me take some time to discuss our branch strategy in more detail which, along with each and every business within the Company, is part of our focus on discretionary spending.

We continuously evaluate our branch network.

And while our physical distribution strategy is driven by customer behavior, while branches continue to be a critical component in serving our customers' needs, our investment in digital capabilities has enabled us to seamlessly serve our customers across channels, providing them with more choice and convenience in how they bank with us.

And, as a result, more transactions are occurring outside the branch.

Our strategy is also influenced by geographical differences in our individual markets, economic trends, and competitor actions to close or open branches.

Once external trends indicate that there's an opportunity for branch closures we focus on the customer impact.

Additionally, we evaluate the CRA impact and branch profitability and other key criteria to maximize expense savings and minimize revenue loss.

Based on observed trends and customer behavior, we began to accelerate branch closures in 2016 and closed 84 branches, mostly in the second half of the year.

We expect the pace of branch closures to increase to 200 branches in 2017, and we expect closures at that level or slightly higher in 2018.

There also continues to be opportunities for de novos in some attractive markets.

Many of the closures this year will be in close proximity to another branch and therefore we don't expect a significant revenue or team member impact.

The full-year expense benefit usually occurs one to two years after the branch is closed.

We will be providing more details on our branch distribution strategy at our May Investor Day.

Turning to our business segments, starting on page 21, community banking earned $2.7 billion in the fourth quarter, down 14% from a year ago and down 15% from third quarter.

The declines were primarily due to net hedge ineffectiveness losses and lower mortgage banking results.

We've already discussed many of the business trends within community banking so I won't go into any more detail here.

Wholesale banking earned $2.2 billion in the fourth quarter, up 4% from a year ago and up 7% from the third quarter.

Revenue was $7.2 billion, up 9% from a year ago driven by 16% growth in net interest income.

Balance sheet growth was strong with both deposits and loans at record levels.

Loan growth was broad based with average loans up $44.5 billion or 11% from a year ago, the ninth consecutive quarter of double-digit year-over-year loan growth.

And we completed the final phase of the GE Capital portfolio acquisition in October.

Wealth and investment management earned $653 million in the fourth quarter, up 10% from a year ago and down 4% from the third quarter, which was a record quarter.

Fourth-quarter results reflected strong balance sheet growth with net interest income up 14% from a year ago.

Average deposits were up 10% and average loans increased 11% from a year ago, the 14th consecutive quarter of double-digit year-over-year loan growth.

WIM total client assets reached a record high in the fourth quarter of $1.7 trillion, up 7% from a year ago, driven by higher market valuations and continued positive net flows.

Turning to page 24, net charge-offs increased $100 million from the third quarter with 37 basis points of annualized net charge-offs.

Commercial losses were up $36 million driven by $32 million in lower recoveries.

Consumer losses increased $64 million driven by higher losses in credit card, auto and other revolving credit and installment loans, due to seasonality, higher severity in auto losses and a of movement toward more normalized losses in unsecured lending.

Residential real estate portfolios continued to improve with net charge-offs down $28 million or 41% from the third quarter.

Our first mortgage loan portfolio had net recoveries in the fourth quarter and we had only 38 basis points of loss in our junior lien portfolio.

Non-performing assets continued to decline, down $644 million from the third quarter, with improvements across our consumer and commercial portfolios and lower foreclosed assets.

We had a reserve release of $100 million, reflecting continued improvement in our residential real estate portfolio and stabilization in our oil and gas portfolio performance.

Slide 25 provides details on our oil and gas portfolio.

Outstandings continued to decline, down 8% from the third quarter and down 15% from a year ago.

We had $177 million of net charge-offs in the fourth quarter with all losses from the E&P and services sectors.

Given the current environment, we continue to believe that losses peaked in the second quarter of 2016.

Non-accrual loans were $2.4 billion, down $84 million from the third quarter, and criticized loans declined $776 million or 11%.

Turning to page 26, our estimated common equity Tier 1 ratio fully phased in was stable at 10.7%, well above our internal target of 10% which includes the regulatory minimum and buffers and our internal buffer.

We repurchased 24.9 million common shares in the fourth quarter and entered into a $750 million forward repurchase transaction which settled this week for 14.7 million shares.

We returned $3 billion to shareholders in the fourth quarter through common stock dividends and net share repurchases.

The final TLAC rule was issued in December and becomes effective on January 1, 2019.

We estimate that as of December 31, 2016, we will need to increase our portfolio of qualifying TLAC by approximately $18 billion in order to be compliant.

This shortfall is lower than our previous estimates which were based on the proposed rule, due primarily to the grandfathering of existing debt governed under foreign law in the final rule.

It also is impacted by lower RWA levels at year end.

However, the removal of the phase-in period in the final rule will result in a modest acceleration of our issuance plan.

We issued a total of $32 billion of qualifying TLAC in 2016.

And we currently expect issuance in 2017 will be at a similar level to fund both maturities and our targeted build of qualifying debt.

In summary, our results in the fourth quarter demonstrated solid underlying performance as we continue to meet our customers' financial needs.

We had record levels of loans, deposits and client assets.

Our credit quality, liquidity and capital all remain strong.

We once again earned more than $5 billion in the quarter, demonstrating the benefit of our diversified business model which continued to perform well during a period where we faced unique challenges.

It's been only four months since we signed the sales practices consent orders but we've already made progress in restoring customers' and team members' trust, and we've remained committed to being transparent with investors.

While there is still more work to do, we're confident that we will build a better Wells Fargo that will continue to meet our customers' financial needs, benefit the communities we serve, and provide opportunities for our team members and investors.

And we can now take your questions.

(Operator Instructions)

Our first question will come from the line of John McDonald with Bernstein.

Please go ahead.

Hi.

Good morning.

I wanted to ask about the rate sensitivity profile, John.

I was wondering if there's been any change in the core rate sensitivity.

Could you remind us what kind of benefit you get from the Fed hike that we got in December?

Sure.

We're still in the -- I think we're in the 5% to 15% range, which is what we talked about the last time our Treasurer, Neal Blinde, presented more broadly.

That hasn't really changed very much.

I think we've estimated that the quarterly impact, a full quarterly impact of 25 basis point parallel shift -- which is different than what we got in December, although arguably we got more than that on the long end -- is worth on the order of $150 million per quarter, and that estimation still holds, as well.

I know you put some swaps on in maybe 2015 it was, which muted what would have been your maybe natural asset sensitivity.

Just wondering as maybe you're thinking about the rate environment evolves, are you able to get out of that and adapt that or is that locked in for a few years?

Those hedges will be in place for a few years.

They're captured in this calculation of our rate sensitivity.

So, if you think about LIBOR-based commercial loans as the hedged item there, those won't float up and that incremental benefit won't be passed along in the near term as a result of the choice to fix those out and to earn higher interest income in previous periods and to change their profile.

So, that's not where the benefit would come from.

It's other floating rate loans.

It's incremental floating rate loans in those categories that haven't been hedged.

But that program was a result of a specific decision to reduce interest rate sensitivity in a period that felt lower for longer.

And it will be others assets that float up that create a benefit from the short term.

I guess your sensitivity also will come from your liquidity deployment.

It looks like you put some to work this quarter with the Fed fund sold down $30 billion.

I know you get asked this all the time, but is there a way for us to think about how much of that $270 billion or so of liquidity is deployable and flexible dry powder versus needed to meet the various liquidity and other requirements?

I think we're sticking with the tens of billions at any point in time as incrementally deployable.

There's this relationship between the liquidity value of whatever we might be incrementally investing in and there are limitations, as you know, on the definitions of certain assets as either high quality liquid assets or not, and then there's the capital impact of moving too far off the curve and increasing our exposure to diminution and OCI in a rising rate environment.

So, there's a lot of tradeoffs to be made.

We're making them all the time with the same outcome in mind that you're curious about.

We will be deploying more in a higher rate entry point, but subject to those constraints of what it means for capital and what it means for liquidity versus holding cash.

Okay.

Thanks.

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

Please go ahead.

Hi.

Good morning.

Tim and John, I think people are really appreciative of the incremental, just putting a number around the work you're already doing on the cost side.

You did, however, mention that you expect to reinvest it.

So, I was wondering if you could help us understand your comments just about the efficiency ratio remaining high.

Does that mean high relative to your historical 55%, 59% range, or does it mean high end?

And just how would you help us understand just how you get from point A to point B and how we start to see efficiency improvement over time?

Sure.

John, I'll start and then jump in.

Ken, the efficiency ratio metrics that we set out at our Investor Day last year are really guidelines for us to operate in in the environment that we expected if you turn the clock back to last May.

We think that 55% to 59% range is best in class in the industry and the range that we're expecting to operate in for the next couple of years.

Things have changed, clearly, and expectations have changed.

But the efficiency ratio is a function of not only your expense rate, but also revenue growth.

And we're hopeful that we'll continue to grow revenue over time as we did over the last year in 2016.

Our guidance is that in the short term, as revenue continues to grow and we continue to have some headwinds from an expense standpoint -- and the first quarter's going to be a good example of that because we'll have some impact from annual incentive compensation impact and so on -- that we're going to be at a high end.

And, again, we think about the efficiency ratio not on a quarterly basis, but as much year over year.

So, our expectations for 2017 is it will probably be at the high end of that range.

And the only thing I'd add, and this is implied, but to the extent that we're getting revenue increases from interest income, then that's substantially more efficient in terms of dollar of expense per dollar of revenue than most sources of non-interest income.

So, there should be a lift if we're getting it in interest income.

That's great, John.

That's actually my follow-up, as well, is that you do seem to have a decent path towards NII growth from the factors that you've talked about, and to John's questions before.

Can you talk about just some of the moving parts inside fees in terms of you how those businesses feel?

The brokerage business has flattened out, but maybe hopefully it's turned the corner.

And then obviously there's the mortgage side of things, which obviously with rates, the unclosed pipeline is down a little bit.

So, what drives fee growth as you look ahead?

Where do you see the most opportunities?

And what are the things that we have to just be mindful of?

The big sources, setting mortgage a aside because we talked about it a little bit in the prepared comments, and I think you just nailed it, we're in a lower point in the re-fi cycle, so it's really about getting after the purchase needs of our customers and then those re-fies that do come up.

But applications are down across the industry.

I think people expect that in general.

So what that yields will depend on the path of where rates go, how jobs are formed and what the demand is for home buying.

In our other big sources, deposit, deposit service charges, our customers are using our products more than ever.

So, we've had good growth in debit card and we'll continue to work there.

Now we need to continue to attract new customers to the bank in order for that to grow like it has in the past.

That is an area of focus for Mary as she launches her new program in community banking.

And, of course, a lot of that also comes from the commercial side of things where we're a leader in providing treasury management services for our corporate customers, as well.

And that's been a growing business for us over the last several years.

On the card side, new credit card applications are down, but for the cards that we have out there and the cards that we are originating now, people are using them more.

They're transacting more.

They're spending more.

Their balances are higher, et cetera.

So, those have driven good sources.

And then with respect to brokerage, obviously we're at high market levels right now so we expect good fees from that, as well as institutional asset management.

But with David Carroll's team's focus on meeting the saving for retirement and investing needs of all of our banking customers, my sense is that there continues to be an opportunity there also.

We have to execute along all of those dimensions but there's a real path forward.

I would just reinforce the opportunity we have in wealth and investment management.

As John said, David and team did a terrific job last year.

If you think about growing that business 10% year over year, we just couldn't be more pleased with those performance.

Thanks very much, guys.

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

Please go ahead.

Hi, good morning.

I just wanted to get some clarification on the response to Ken's question.

As we think about the reduction of expenses and investing it back by year-end 2018, does that mean that the expense on an absolute basis could potentially be flattish in 2018?

Or is that too simplistic to think about because we really have to think about the revenue side, as well?

I'm just trying to think about whether or not we should think about the $2 billion as something that can self-fund investments in 2018, or we really should be going back to the 55% to 59% efficiency ratio guidance.

I would stick with the latter.

I would too.

Because you never know where a dollar of revenue is going to come from.

And especially on the non-interest income side, the mix matters in terms of what its related expenses are.

I wouldn't be predicting a couple years forward what that mix is going to look like or what the associated expense impact is going to look like at the margin from a dollar of one sort of non-interest income versus another.

I would think about it as these are undertakings that we have going on to accomplish all of our incremental spending and still stay in 55% to 59% on an annual basis.

And just to clarify, it sounds like if we do get a structurally higher curve, like you said in previous calls, that could really drive the path to the middle or lower end of that 55% to 59% efficiency ratio target.

Over time.

But, again, Erica, it's a function of so many other different variables, not just interest rates, but just fundamental economic growth.

If the economy grows at 3%, it's better than 2%.

That means loan growth is going to be higher and maybe other activity will be higher.

I would just reinforce John's comment, and just think about that 55% to 59%, that we're going to save a lot of money here at Wells Fargo and we're going to reinvest that business for the long term that will pay benefits well beyond the next couple of years.

I do think it's reasonable, though, to say to get to the lower end of the range it's going to be because of the impact of higher rates on interest income.

Okay.

And just if I could squeeze one last question in here, in the back of the retail sales issue there has been a lot of focus on new account openings.

And I'm wondering if you could give us a sense of whether or not the profitability of your primary customer has really been impacted by the scandal.

Because as I've been talking to investors about this, does new account opening really matter if that credit card was not being used anyway or was sitting in a drawer?

I know you've given a lot of detail already, but I'm wondering if the new account openings statistics overstates what the revenue impact to your primary customer is from the retail sales scandal.

It's a good question and I think the short answer is it's too new to tell.

The value of a relationship tends to increase over time.

And generally relationships are a little bit less profitable at the beginning than they might be two years from now and four years from now and five years from now.

I don't mean not to ask your extra question, by the way, Erika.

We'll have to reduce your questions next quarter.

But the fact of the matter is, I think it's too early to tell.

We're just excited that we saw what seems to be an inflection point in the midst of the fourth quarter.

We're starting to see some real positive attributes in some of those metrics, not only in terms of account activity, but also in terms of customer service and experience.

Thank you.

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

Please go ahead.

Hi.

I wanted to follow up on a comment earlier.

I think you said -- I just want to make sure I didn't hear it incorrectly -- but have you promised to keep the absolute size of your balance sheet at the 9-30 level?

Is that the entire balance sheet or was that just segments?

Did I miss something there?

What we've said is that we'll keep our non-bank subsidiary balance sheet at the 9-30 level, and that accounts for probably 10% of our overall balance sheet.

Okay.

All right.

So from my point of view not that big of a deal.

Just separately, you guys have talked about that there's a third-party review of all layers of management into the sales practicing and what was known and what wasn't known.

There's an article, I think, this past weekend just talking about e-mails being reviewed.

I can appreciate that takes a very long time for a firm your size, but any thoughts on when that would be concluded and when and how it would be communicated to investors and analysts?

Think of the review in terms of sales practices in two parts.

One, there's a requirement under the consent orders with the OCC and the CFPB to have a third-party consultant come in and take a look at sales practices, primarily in our retail-related businesses.

That's just begun.

My guess is that will take the good part of this year to accomplish.

And then, separately, because, as I said in my earlier remarks, we want to leave no stone unturned here, we've said, and we have, brought in a separate consultant to look at sales practice across other businesses within the Company.

And my guess, it will take much of this year to complete that work.

And if we find something that's important, we'll communicate that.

But if nothing happens we may not communicate it.

But we'll take it as it comes.

But I think given our desire to be very transparent, we'll probably err on the side of overcommunicating as opposed to undercommunicating that.

Okay.

That's appreciated.

Thank you.

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

Please go ahead.

Good morning.

Back to the sales practice issue, given that you're seeing some turn, some inflection here that you cited in some of these metrics and everything, are you in any better position to help quantify what you would say would be the all-in recurring financial impact of the issue, both with the foregone revenue as well as the related expense impact from this?

No, I would say not.

But, John, jump in if you feel differently.

Just because this has been going on for just the last quarter or so.

And while we're pleased with what we think is hopefully an inflection point, we may have months over the next few months where things turn the other way -- again, for a month.

But what we're really focused on is the long-term trend.

In the short term, the revenue impact has not been significant.

But we want to be careful about that, is that to the extent that we're growing primary checking accounts at 3% instead of 5% over time, that would have a bigger impact.

So, I would still put it in the category of too new to rate.

One specific I could add is that I would estimate that for the next several quarters we're probably at $40 million, $50 million this quarter of outside professional service fees, which includes the third parties.

Incremental.

Incremental.

Which includes the reviewing third parties and law firms as well.

And that probably grows a little bit and then tails off.

So, that's incremental.

All right, thank you.

And then, separately, I know you were alluding to this a little bit earlier with the asset sensitivity questions, but I just wanted to see if I can get some thoughts on your NIM trajectory here in coming quarters, just given the TLAC pace now is going to be a little bit quicker and that's a negative drag.

But also you've got the impact of the rate hike.

So, how would you be thinking about the trajectory of the margin here through 2017?

I'd rather talk about it in dollars, if those are useful to you, because NIM is really an outcome and we can't predict what exactly is going to happen with deposit flows, et cetera.

But just to put a dollar sign on it, if we don't get anymore moves by the Fed in 2017 -- and I anticipate that we might, but if we didn't -- given the pace of TLAC issuance that you mentioned, given the balance sheet positioning today, given what we might expect from loan growth, what we could imagine from redeployment, et cetera, it's pretty easy to sketch out a 4%, 5%, 6% net interest income growth trajectory, full year 2017 over full year 2016.

What that means for NIM, because of what the balances are that are applied to that, is a little harder to pin down.

Is that helpful?

That is.

Okay.

Thank you.

Your next question comes from the line of Paul Miller with FBR.

Please go ahead.

Yes, thank you very much.

You talked about in the beginning of the call that you've gone all the way back to 2011.

But I know there's been some discussion in the media and some politicians of going back farther than that.

Are the regulators good with you going back to 2011?

Or do you need to go back farther later on?

Paul, good question, and let me clarify.

Under the consent orders we're required to go back a little bit earlier in 2011 than we had previously done and then bring forward the analysis to September of 2016 to the date more or less that we signed the consent orders.

That's the regulatory requirement.

We've decided -- this is the management of the Company, not any third parties located anywhere else around the country -- have decided that we think it's appropriate to go back and look at 2009 and 2010.

That's something that we announced in late September, October.

So, we're in the midst of doing that.

But think about that as a separate effort outside of the consent order requirements to make things right for our customers.

Okay.

So, the 2011 is a consent order, you're willing to go back as far as 2009.

And have you had discussions with people in Congress who were asking you guys to go back even further than that?

Does that satisfy their needs?

I'll leave satisfaction rates in Congress to them.

We think that it's important to go back and look at 2009 and 2010.

We picked that time frame because that's when we put Wells Fargo and Wachovia together and we think that's right from our perspective.

It's well beyond the requirements that our regulators set for us.

So, we're in the midst of doing that.

And then my follow-up question -- and I did ask this of Jamie Dimon, but I was wondering what your thoughts of it -- on the mortgage world, the credit box really continues to be tight.

And you heard a lot of the new administration guys talking about opening up the credit box.

Can they open up the credit box effectively?

And what do you guys want to hear for you guys to start drawing down and opening up the credit box in the mortgage world?

It's a good question.

We think it's very important to continue to provide a broad suite of mortgage options to our customers.

We think we do that better than anybody in the industry.

We've got the number one share and we're satisfying customers every day.

There's no question that there have been certain rules and regulations that have been promulgated over the last eight years which have impacted and provided some concern in the industry, not just with big banks, in terms of how we provide credit.

Some of it's related to the fact that we all were part of servicing settlements that went back decades, almost, which were a surprise to everybody.

So, I think the more that there can be clarification -- and FHA is a great example -- the more that there can be clarification on any uncertainty in the future, the better.

Having said that, we're really pleased with the progress that we've made and the performance of our year first mortgage product, which is focused on first-time home buyers.

The volumes have exceeded our expectations.

We're just really pleased with the fact that we've had a very strong origination year.

And the credit quality within the mortgage business has just continued to exceed our expectations.

As John noted in his remarks, we had net recoveries in the fourth quarter from our first mortgage business.

We're really pleased with the position that we have in the mortgage business.

We're hopeful that the new administration can continue to provide clarification in terms of that business, and we look forward to working with him.

Two things I'd add.

We're not looking for a way to put lower credit quality first mortgages on our balance sheet.

If there are others who are looking for loosening the box for that outcome, I don't think that that would apply here.

And as it relates broadly to tightening the credit box as a result of the financial crisis, it's really about underwriting the ability to repay.

That's what's constraining how much money people can borrow and whether they can borrow and it's a reasonable requirement.

And that's how we're operating.

Customers have to be able to provide evidence of their ability to repay.

So, more jobs, et cetera, it advances that cause versus lowering the requirement for the ability to repay.

Hey, guys, thank you very much.

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

Please go ahead.

Hi, Tim and John.

Thanks for taking my questions.

A couple of questions.

One, your guidance for the efficiency ratio remaining to the high end of the range near term, what assumption do you have baked in for rate hikes?

And when you're redefining near term I'm presuming you're thinking 2017.

In our own internal analysis there's one in the middle of the year and one at the end of the year.

So, not much in terms of the short end of the curve providing incremental interest income in that calculation.

Okay.

So then this whole notion of the $2 billion savings that you're talking about, that's going to come over the course of the 2017, 2018, and then the investments also coming during the same time frame.

Is there any timing differences in those or that's all supposed to be at the same time?

It's self funded at the same time.

Okay.

Tim, a completely different question -- living will -- what went wrong with that?

And the changes that you have to make, what kinds of implications will that have for you in terms of your numbers?

A fair question.

The focus of the regulators on our the resubmission that we made last fall related to legal entities and shared services.

So, what we're in the midst of doing is having, as I mentioned, some very good quality meetings with the regulators to make sure that we appreciate what their expectations are, and focus on providing more detail to them in terms of how we manage risk related to all of our legal entities, and then how our shared services would operate in the midst of a catastrophe at Wells Fargo.

Actually, we don't think that's going to occur.

We've redoubled our efforts there.

We've added some additional folks and additional resources, and we're going to work very hard and improve the quality of our submission, which is due at the end of March.

I don't fundamentally believe that it's going to affect our ability to serve our customers and rebuild trust in any way, shape or form.

But we were disappointed and we've got to make some improvements and we'll do it.

Okay.

And will that legal entity change?

Will that make any changes to your funding, your liquidity, any of that?

Any color on that at this point?

At the margin it might impact some things.

But not materially, Vivek.

There might be some prepositioning of capital liquidity into various entities.

But from your perspective it wouldn't have a meaningful difference.

Okay, thank you.

Your next question will come from the line of Marty Mosby with Vining Sparks.

Please go ahead.

I had a couple of little more micro small issues and then I had a big question for you, Tim, at the end.

We're looking at the servicing.

Usually the servicing fees would kick in when rates started to go up.

However, you had that unreimbursable cost.

Your servicing fees dropped down to 18 basis points.

It was about the lowest I've seen.

That is a temporary and should rebound back to a more normal 20-ish type of basis points going forward: I think I heard you say that.

Servicing fees that are coming off of the unpaid principal balance of our servicing portfolio will track how big the servicing portfolio is.

And it has shrunk over time as prepayments have been faster, frankly faster than our share of the origination market, as we've exited different types of businesses to derisk both our mortgage origination as well as our mortgage servicing business, like the reverse mortgage portfolio we sold this quarter for $4 billion of unpaid principal balance, like several of these origination programs that we deemed higher risk over time.

So the notional that is driving the contractual servicing fee stream has been coming down.

And, as you'd expect, we think it will stabilize now because prepayments could slow to a halt or a creep in a higher rate environment.

But as you say, in a higher rate environment we'd also expect that float's worth more.

We have escrows and taxes and insurance and other things, those are worth more to us in a higher-rate environment than a lower-rate environment, and that should start to work its way in over time.

And then specifically on unreimbursed foreclosure costs, on the one hand we're working down the long-term cyclical mound of foreclosed properties, et cetera, that need to be worked out of the system.

We're originating those types of loans, FHA loans in particular, at a much slower pace than we were previously.

And now we've taken this step where we've taken charges in Q4 that we think are really going to reduce the rate of that expense in 2017.

So, I would expect servicing revenue in general to be meaningfully positively impacted by that last piece in particular.

And then when you look at the hedge ineffectiveness where you had the related long-term debt, I would assume that the credit spread comparison, in other words, the real basis risk change was your credit spread gapped out with the reputational issues that you're working through right now in the marketplace, and that drove a large part of this negative.

So that would be an unusual in this particular quarter.

Would that be correct?

I don't think that's as big a driver as you think.

It's a portion of it because you're discounting that leg of the hedged relationship with a credit spread in it, and the swap leg you're not.

But it has more to do with the direction of rates and the amount of the uptick in the swap rate over a short period of time than our spreads.

You can see the impact of our spreads in Q3 versus Q4 in our net CVA outcomes on the trading side of things because we generated positive P&L in the third quarter from our own spreads gapping out and then we didn't have that in the fourth quarter.

But those are relatively small numbers for Wells Fargo.

Okay.

And then Tim, the big question is, Mary Mack's gone around now and you said talked to 3,000 team members.

Is the environment such that had she done that a year ago or two years ago nobody would really want to step up and say anything bad about the Company because everybody was thinking of it as such a hot performing institution.

Is the flow of information freeing up so you're getting some really good information and ways to improve along a lot of different lines with these town hall meetings?

Absolutely, Marty.

And that's part of the -- when we think about rebuilding trust at the Company, rebuilding trust is not only with external stakeholders but, candidly, it's a primary focus with 268,000 team members.

If we don't rebuild trust with all of them, then we've got bigger issues.

I think Mary's outreach in terms of her town halls -- and she's been tireless in terms of these town halls -- is very important.

And many of the other senior leaders within the Company have had similar town halls and have been out there more than we've ever been, talking to our team members.

And the way that we're getting feedback from our team is not just through those town halls but also through requests that we make to them through surveys.

We're getting all kinds of great ideas in terms of how to improve Wells Fargo, and many of them that we're implementing.

So I'm really pleased with the progress that we've made in terms of our internal communication.

And we're seeing that in terms of the some of the feedback that we're getting from our team members.

And then that translates into better service for our customers.

Personally I think that's one of the drivers.

I mentioned that in my earlier remarks in terms of the improvement in the customer experience scores in retail.

I couldn't be more pleased with that performance, given the circumstances.

Appreciate that, Tom.

Your next question will come from the line of Gerard Cassidy with RBC.

Please go ahead.

Thank you.

Good morning, guys.

Tim, I think you touched on that you raised the wages of your lower wage workers well above the Federal Minimum Wage.

Can you share with us what that will do for operating compensation expenses in 2017?

I know seasonally first quarter everybody has the uptick in employment expenses, but what will that do for expenses this year?

A fair question and I'll give you an answer that's probably a little bit frustrating, so I'll apologize in advance.

And that is that we don't really look at it that way.

One of the reasons why we wanted to increase the minimum levels of compensation is that we want some other positive outcomes, outcomes like lower turnover.

That could have a net impact, and would have a net impact, and we think it will have a net impact, on whatever the expense number might be.

Lower turnover means lower training costs.

It means higher productivity because you've got more experienced bankers, tellers, service folks that are working with our customers.

So net-net over time, making this decision we think is a net positive for the Company.

So, we really don't look at it as -- gosh, it's going of have this kind of impact in a certain period of time.

Because the other outcomes that I mentioned aren't really known until we look back a year from now.

Fair enough.

And then the follow-up question is, can you guys give us some color on how the GECC acquisition is performing, how the integration has gone?

Have you been very pleased with it?

Just some color there.

Sure.

Any acquisition and integration is complicated.

So, my answer will not do justice to the incredible amount of hard work and effort to all of the hundreds of people, if not thousands of people, within the Company that have been working hard on that integration.

But overall, I would tell you it has exceeded our expectations.

The quality of team members that we were able to bring on from GE has just been very impressive.

Their engagement in the business and how happy they are to be part of Wells Fargo is very encouraging.

The quality of the customer base that we were able to bring on has exceeded our expectation, and those customers are doing more business with us.

One of the opportunities that we have over time is to broaden those relationships because GECC, which was a terrific lender, was just that, a lender, and we have other products and services that we can provide to that customer base.

If this is a nine-inning game, the first inning we put some points on the board and scored some runs, and hopefully we'll continue to do that.

But, again, long answer to your question, but so far, so good.

I appreciate the color.

Thank you.

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

Please go ahead.

Thank you.

Thanks for taking my question.

I wanted to discuss the branch rationalization strategy a little bit, what the thought process is there, especially the thought process around the 200 branches.

You have a slide where you have some bullets around some of the factors that you consider when you close a branch.

But when I look at that number, it's about 3% of your branch network, the 200 figure.

You've closed fewer branches than perhaps some of your peers have in recent years.

The bigger question is whether you can do a little bit more there and whether you can pull the cost lever harder through a bit more aggressive branch rationalization.

Just wanted to go through the branch strategy and how you think about that and what some of the factors are in determining that 200 figure per year.

I'll start and John jump in.

It's a great question.

What you saw last year is us increasing the pace of branch rationalization.

So, that 80-plus that we closed last year, most of that was in the second of half.

And what that's reflecting is us listening to our customers in terms of how they want to do business with us.

They still want to come into branches but they also are accessing us via online and mobile and through ATMs and on the phone.

So, our strategy is really based upon listening to customers and looking at their habits and how they want to interact with us.

And based upon that, we think it makes sense.

Mary's had an opportunity to oversee the business for the last six months.

And what we've concluded is that we should increase the pace of rationalization to about 200 this year.

I wouldn't describe that as our long-term branch strategy because, again, it's really a function of reactions and habits from our customers.

We may increase, we may decrease.

Who knows.

It's going to be based upon how they want to do business with us.

But what we're seeing right leads us to the conclusion to be focused on that 200 branch number for the year.

I think that's right.

There will be a feedback loop from this process to see how customers react to it, whether we're right or wrong about the customer attrition, deposit attrition or other things that we're trying to minimize by taking the strategy that we're taking.

If six months into this we think there's an opportunity to do more, then we'll come back and we'll do that.

We'll talk in some more detail at our May Investor Day about the process that we use to analyze this, why we think this is the right approach to take, some of the idiosyncrasies of our branch footprint versus the others that you're familiar with, just in terms of owned, leased, cost to operate, et cetera.

We've got branches, a lot of them, as you might know, in very low-cost locations, and so the expense pick-up that you might be imagining may not be exactly the same as if they were all in coastal communities or major metropolitan areas, et cetera.

There's a lot of differences from one to the other.

But this is the beginning of a process where we're picking up.

And the whole time customers will be reflecting in their use of physical versus virtual how much they value coming into our branches, and we can keep feeding that back.

Great, that's helpful.

Just a quick follow-up on an earlier question -- what proportion of your employees are affected by the minimum wage hike?

Do you have that figure?

About 26,000 people.

Okay.

Got it.

All right.

Thanks a lot.

Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities.

Just two questions, please.

One is, you mentioned the tightening of some of your underwriting standards and portions of the auto portfolio.

Could you just maybe give us a little insight into what you were doing and where, whether it's in the credit spectrum or new versus used or how that's playing out?

We've been holding fast on term.

I think we've talked about this with this group before.

But between leasing as a competitive product or just other lenders' willingness to go to seven years and beyond more frequently than we are, that has cost us to lose some volume, sticking by that.

The other two areas, I think, are proof of income, on the one hand, which is part of how we try to underwrite credit, and then back to ability to repay.

You mentioned new versus used.

Because we're not attached to a manufacturer, and we don't have a leasing program, we are disproportionately a used car lender.

So, these are criteria that are meaningful to us and at this part of the cycle it's causing us to lose volume.

Got it.

Okay.

Thank you for that.

And I know there's been many questions on OpEx but I'm afraid I'm still a little confused.

I understand certainly where you're coming out in terms of the efficiency ratio.

But just in absolute dollar terms, relative to the roughly $52.4 billion that you had in 2016, how should we think about that figure in absolute terms for this year?

The way that I would think about it is thinking about it from the expense ratio.

And I know that's a little bit frustrating because, again, one of the reasons why we think about expenses here as part of that efficiency ratio is it's very much a function of revenue opportunities.

And depending upon which business is generating those revenue opportunities or which product, some of them higher or lower expenses associated with them.

But the way that I would think about that $2 billion is we're going to save that $2 billion over the next couple years and then we're going to reinvest it in the business.

Got it.

Thank you very much for the clarity.

Our final question will come from the line of Nancy Bush with NAB Research.

Please go ahead.

Good morning.

This tags onto Gerard's question.

In looking at your new compensation scheme, the fact that it's fairly new, how confident are you in projecting, accruing, et cetera, for comp expenses this year?

Were you able to beta test this at all?

Or is there wide variability in where the numbers can come out?

We were able to test it somewhat, Nancy, but as you can appreciate the time frame that we had was a little bit shorter than we would normally have liked.

I don't want to give you the impression that we're always changing incentive compensation plans for tens of thousands of people in 90 days.

So, there's some risk that we didn't get it completely right.

That's one of the reasons why I wanted to reinforce the point that we're going to be watching this very closely, and to the extent that we need to make some changes, we're not going to wait for a year from the now, we'll make some changes.

When I think about the fundamentals of the plan -- they were reviewed by Mary and team, we had a lot of discussions with the retail folks, we had it reviewed by our risk folks and HR folks and the like -- just the fundamentals of basing it on customer service, increasing in primary accounts and household growth, those are all measurable items.

So, we're not really concerned about having the accruals correct or incorrect.

They're all very important drivers for growth in relationships and, in return, satisfied customers, and that will translate into revenue growth over time.

Yes.

And, secondly, there was another piece of news in the last couple of days where you've gotten a letter, I think, from some members of Congress about the growth in overdraft charges, and whether this is somehow linked to the rest of the issues.

So, if you could just address that whole overdraft issue, I'd appreciate it.

Sure.

I'll start.

John, jump in.

I'm actually waiting to get the letter, so you've read about it of before I've actually received it.

But my understanding is that it was based upon some earlier reporting regarding year-to-year increases.

Recall that in 2014 we made a number of changes in terms of how we provide information to our customers, how we process payments and deposits and debits and credits, and the like, which meant that our overdraft income actually declined in 2015 to 2014.

And so the year-over-year -- again, three quarters to three quarters -- comparison you're seeing, 2016 to 2015, is a reflection of the changes we made in 2014, revenue decline in 2015, and then growing off that number.

And the reason it's growing is not because there's anything nefarious that we're doing or it's part of any retail sales practices issue.

It's just a reflection of the fact that we're seeing growth in our customer base and we're seeing more customer activity.

We think maybe our competitors are making some of the changes that we made a year later, and so maybe that's impacting some of their overdraft revenue.

But I'll be responsive to the letter when I get it and we'll continue to provide the right services to our customer base.

Just a little bit more color on that.

We don't have the largest overdraft revenue base among larger banks.

As Tim said, we made this change, and specifically the change that we made was to post to customers online and mobile account picture items that were being received throughout the course of the day that were going to post overnight in a batch so that they had that information before making a determination about whether to overdraft or not.

We implemented that at the end of 2014 and from 2014 to 2015.

And that's good for customers.

It was on purpose.

It was intended to give people more information to make better decisions about what to do with their money.

We dropped in overdraft revenue from 2014 to 2015.

And then, as Tim said, because the business has grown, because people have gotten used to that information and made different decisions about how they want to run their lives, we picked back up from 2015 to 2016.

We're flat from 2014 to 2016.

As we understand it, our peers adopted that similar customer-friendly technology a year later, and so the point of comparison that is available now is their year of adoption versus the period right afterward when customers can react to that information.

So, it's a little bit of apples and oranges.

But our fee levels, our frequency of charging, et cetera, are right in the middle of the fairway compared to the competitive set.

There's nothing different about Wells Fargo's approach to that activity.

And, Nancy, the more that we can provide information to our customers so that they can make good decisions about how to manage their money, the better.

And we're going to continue to look at ways in which we can use technology, particularly through mobile, to provide that information so it's much more customer friendly to them.

All right.

Thank you.

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

Again, thank you all for spending time with us today.

I know it's been a very busy morning for all of you.

We appreciate your interest in Wells Fargo.

I also just want to reinforce to all of our team members who are listening out there, thank you very much for just a tremendous effort this quarter in the midst of a very challenging period for Wells Fargo.

I couldn't be more proud of everything that you've accomplished.

So, thank you and have a good rest of your day.

Ladies and gentlemen, this concludes today's conference.

Thank you all for joining and you may now disconnect.