WFCNP - Wells Fargo & Company (WFC) Barclays Global Financial Services Conference Transcript

2023-09-12 09:50:26 ET

Wells Fargo & Company (WFC)

Barclays Global Financial Services Conference

September 12, 2023 07:30 A.M. ET

Company Participants

Michael P. Santomassimo - Senior EVP and CFO

Conference Call Participants

Jason Goldberg - Barclays

Presentation

Jason Goldberg

Perfect. Good morning. I'm Jason Goldberg and I cover the U.S. Large Cap Bank Stocks here at Barclays and welcome to day two of our Global Financial Services Conference. Similar to yesterday we have [Technical Difficulty]. It's always great to have any financial services conference. Wells Fargo that plays in many, many aspects of the financial services industry. From the company we are very pleased to Michael Santomassimo, the Chief Financial Officer. Before we -- or as I kind of ask Mike the first question, why don't we put up the first ARS question similar to what we did yesterday and we'll tabulate these results and probably publish them tomorrow. Mike, good morning. Thanks for coming.

Michael P. Santomassimo

Thank you, thanks for having me. I assume this empty seat is for the lost Jets quarterback last night so we'll keep it there just in case.

Question-and-Answer Session

Q - Jason Goldberg

I guess maybe the best place to start is, well services, a broad spot to consumers and commercial customers, just maybe talk to kind of what you're seeing, hearing, as the customers kind of contend with the higher rate, high inflation environment?

Michael P. Santomassimo

Yeah, you know look, I think you first have to reflect on sort of where we are from a macro standpoint and I think we said this last year too, like it's certainly much better than people would have expected at this point. You still have resilient -- a resilient employment picture. You've got people continuing the sort of push out what could be sort of negative GDP growth. At some point our economists still have a couple quarters of negative growth in their forecast for next year, but who knows if that plays out exactly that way. And so I think things are quite resilient I think overall and I think you can see that in the underlying performance. On the consumer side the activity still really good. People are out spending money, you see debit card spend up a couple percent from what it was a year ago through the quarter. You see strong growth in credit card spend, double-digit growth. Now some of that's driven by some of the new products and things we've done in our business, but you're seeing good strong growth in credit card spend. And so people are out there living.

Now some of that is also starting -- some of the environment starting the impact or has been impacting some of the consumers on kind of the lower wage levels or lower income levels and you're seeing that come through a little bit in both where liquidity is down and in those lower cohorts you're seeing a little bit of deterioration in credit in those cohorts. And so you are seeing some of that come through. But overall I think the consumer side is quite -- been quite resilient.

Same on the same on the commercial side, the commercial bank clients, NRCID clients, corporate investment bank clients are doing well. You still see some margin compression, you see some demand fluctuations across different sectors. You see supply chains getting better, inventory builds happening. I don't think you're going to see many customers or many industries build inventory levels to where they were before COVID. But you're seeing a lot of that sort of normalize a little bit. And so overall I think it's been quite good in terms of what we're seeing so far.

Jason Goldberg

And maybe get a kind of a bit more ground in terms of kind of what you're seeing both on maybe the loan and deposit side and I guess from an entry as a whole, deposits have shown some signs of stabilization and kind of mixes change may be slowing, just maybe just talk to in terms of what you're seeing from that front?

Michael P. Santomassimo

Sure, yeah, I'll start on loans. Yeah most of what we've been seeing this year, or at least our activities been tracking with the industry and you can see that come through the HA data from the Fed. And so right now loans quarter-to-date are down slightly, down a little bit and we're tracking in line with the broader industry we are seeing. Now some of that's demand driven, particularly on the commercial side and large corporate side, and some of that is things we're doing on some of the smaller portfolios. And so when you look at the consumer side mortgage just is what it is given where rates are. There's not a lot happening in the mortgage business. And so you see those balances just pay down gradually. In card we are seeing growth. In credit card our spend is as I mentioned, so that is something that continues to grow. And then in some of the smaller portfolios like Auto, we've said this now for a number of quarters, we've definitely stepped back a little bit in originations in the auto business, some of that is spread compression that we've seen over the last 18 months or two years now. And some of that is some credit tightening as we came into a pretty, what could have been a pretty challenging environment.

And then on the commercial side a lot of it's just demand driven. We haven't really seen a lot of credit tightening necessarily there, and so I think you're seeing that. And then the commercial real estate which I'm sure we'll talk about more in depth later, it's just a bit of a different dynamic particularly for office. You're just not seeing a lot of activity in that space at this point. A little bit more maybe over the last few months than you've seen recently, but not a lot of activity at all.

On the deposit side really more of the same of what we've been talking about now for the last two or three quarters. On the -- our commercial deposits have been pretty stable now for a bit. You do have their price competitively, with our peers but those deposits have been pretty stable. We're not seeing trends in pricing that are driving pricing up in that space in any meaningful way, they've just been consistently competitive now for a while.

On the wealth management side, up until very recently we've seen a lot of movement into cash alternatives, some of that has abated over the last couple months and so you still see a little bit of it but that certainly trend has abated some. And then on the consumer side, as we said at earnings, we still expect those deposits to come down a little as we go through the year and really most of that's driven by spending. You have a little bit of it on the consumer side people looking for higher rates, we have some alternatives for them if that's the case. But a lot of that -- the primary driver there is really spending that's driving those deposits down, and so it's a little bit more of the same. We're not seeing big shifts in behavior at this point.

Jason Goldberg

I guess one of the things on the deposit front that is striking, I think your cumulative deposit beta is 32%, so the lowest in our coverage. Just any thoughts in terms of I guess first off kind of what's driving that and then secondly do you have to think you have to play some catch up?

Michael P. Santomassimo

Yeah, I mean look first and foremost it is a business mix, right. And so -- and so when you look it's really hard to compare aggregate betas across firms, right. So if you have a bigger commercial treasury management business in one bank versus another, then your beta is going to be higher. And so I do think that you have to be really careful about trying to compare banks on that that high level number, because I think it just reflects the business mix. As you look at what we're seeing though, as I said on the commercial side, it's been pretty competitive now for a while. And so -- and that's not changing. It's not getting worse. It's not getting more competitive. It's been pretty consistent there. So if rates continue to -- if rates go up more, we'll see that happen if pricing go up a little bit, if rates start to come back down at some point, we'll see it conversely those betas come down correspondingly.

On the consumer side, we really haven't changed standard pricing in a while. And we've got outlets for people that need or want a higher rates. And when you look at our consumer deposit base, the vast majority of those deposits are in accounts with less than $250,000. And so you're not seeing this huge movement in that consumer deposit base. It's really the spending that's driving it. And so it's been pretty consistent now for a while in terms of what we're seeing.

Jason Goldberg

Got it. And maybe, I guess, tying that together, when we last talked in July, you're thinking kind of 14% NII growth for the year kind of given where we sit today, any updated thoughts around that?

Michael P. Santomassimo

Look, we're very comfortable with that guide. As we said at earnings, it's the same set of facts that we're sort of looking at as we go throughout the year. We still expect some deposit -- consumer deposits to come down a little. We still expect a little bit of migration from noninterest-bearing to interest-bearing. And we expect betas to continue to come up just as time goes by and that's all embedded in there. As I said at earnings, we did expect in that guide that we would see some loan growth. We're not seeing that, but that's okay. We didn't expect everything to go right as we sort of guided 14%. And we'll give you a finer point on where we think the year will end up at earnings. But at this point, we're really comfortable with where that is.

Jason Goldberg

Got it. And then kind of just maybe working our way down the income statement. On the fee side, it's kind of been kind of a mixed bag of performance. Some business lines doing better than others. I don't know if you kind of walk us through maybe some general trends in terms of kind of what you're seeing?

Michael P. Santomassimo

Yes. I'll kind of bring you through the fee lines and we can talk about what we're seeing in some of the businesses. And so the investment advisory fee line is one of the bigger lines, the biggest line. And really, the market is going to -- in the short run, the market is going to sort of drive where that goes sequentially. And just as a reminder, a lot of -- most of that fee line is priced in advance for the quarter. So for the third quarter, it would have been priced as of July 1st. And so sometimes you get a little strange outcomes depending on where the market is at any given point. And so what you saw in the second quarter, as you saw the S&P up, I think it was like 8%. So that's one of the bigger drivers of that fee line, not the only one, but one of the bigger ones. And so you'll see that come through in the third quarter fee line. It's sort of flattish the S&P now, I think, quarter-to-date. And so depending on where we end up the quarter, that will drive how to think about the fourth quarter.

Broadly, though, in the wealth business, we are continuing to just invest in making sure that we're doing everything we can to continue to keep the momentum that we've built over the last few quarters on our adviser account and our adviser force. We've -- if you go back a few years, we were seeing a lot of attrition in the advisers there. We've stemmed a lot of that as we've come through the last year or two and so we're just looking to continue to build that momentum. And so over a longer period of time, there's a lot of opportunity to continue to grow that line, not only based on what happens in the market, but also the net flows and the adviser count as that goes.

When you look at mortgage, it's down to a pretty small amount on the fee side. And given where rates are and what's happening in the market and the things that we've done in that business, I don't expect that to change at any point. We've had a couple of good quarters in the trading business in the market side and I think that's a little bit of a function of what we're seeing in the market. We had some good volatility in the market that helped drive the numbers, but it's also we're starting to see some of the benefits of some investments we've been making methodically over the last few years in some of the products like FX and rates and others, which we think are very much like in our wheelhouse and to support our client base there. And so we're starting to see some of those come through. And we're seeing really good performance without a lot of risk-weighted asset growth in the market space. And so we've got good revenue performance, spreading the balance sheet more in that business. And so two quarters doesn't make a trend, but I do think that it's a good sign that we're starting to see some of that come through.

Deposit fees, all the changes we made over the last, I guess, 18 months now are in the run rate around non-sufficient fund fees, overdraft fees. So all that's in there already for a couple of quarters now. And so I think you're just seeing sort of the organic activity levels in that business. And then as we look at places like the private equity and venture space, we'll see how that goes over the next couple of quarters. We've had some impairments in the venture space for the last couple of quarters. There could be a little bit more of that to come as we go, but not super significant when you look at the overall revenue line.

Jason Goldberg

Got it. And then, I guess, maybe working your way down on the expense side. I think on our earnings call, you talked about $51 billion for the year, ex-operating losses. I think that included some severance. Can you maybe give some more color in terms of what you're doing on expenses, I know you've kind of headcount has been coming down for -- it seems like a while now?

Michael P. Santomassimo

Third quarter of 2020.

Jason Goldberg

And just kind of maybe where you are in that journey?

Michael P. Santomassimo

Yes. Look, as we've said now, Charlie and I have said this now, I guess, for a while, but we continue to believe we've got a lot more to do to make the company as efficient as it should be. As you have said, we've brought headcount down close to 40,000 heads over the last couple of years. I think it's been down every quarter since the third quarter of 2020. Now I'm not suggesting it's going to be down every quarter forever, right. But I do think that there's more to do, and you'll see that through the headcount number. And it really just is business by business, group by group, making sure we come in every day, every quarter and have a plan to continue to incrementally get better and better. Some of that is -- affects the headcount and the people that we have and some of it are things like real estate where we had too much real estate before COVID. And so we've been methodically sort of working through that portfolio over the last few years, and we still have more to do there.

And I think the thing that we talked about at earnings that was a little different over the last -- than the last few quarters is that attrition really slowed. And so -- and that really happened probably October, November of last year, where we really saw a noticeable change in attrition rates. And it's really across the board. There really isn't any area that got impacted more than others. And so that's why you see us having to use severance more than what we've had to do over the last couple of years. And I think it's just how do we get -- how do we continually get the run rate down and to a place that we're more comfortable. And I think we've got a lot more to do across most of the company. And what's most important is that we embed this discipline and mindset and process and sort of how we just manage the place every day, right. It shouldn't be a program, it shouldn't be a onetime thing. It needs just to be how we sort of -- how we manage at all levels of the company. And I think we've been doing a good job pushing that down into the organization, but still some more to do there as well.

Jason Goldberg

And I guess, $51 billion is still a good number for the year?

Michael P. Santomassimo

Yes, no update at this point though.

Jason Goldberg

And then, I guess, maybe delve into that because you have this kind of $10 billion expense saves you wanted to get by the end of the year. All that's not going to the bottom line. So you're reinvesting some of that. Maybe just talk to kind of somewhat are the key areas you are focusing on with those reinvestments and kind of where is that money going and maybe what some of the fruits of that and just how you think about that looking out?

Michael P. Santomassimo

Yes. Well, some of it's been going -- a lot of it's been going into the risk and regulatory work that we've been doing. So that continues to be the place that's our -- it's our highest priority, and we're going to continue to spend whatever we got to do to put that stuff behind us. And if there are things that we can do to move that work faster and it costs more money, we're going to do it and those are decisions we make all the time.

Aside for that, we've been investing now consistently for a few years in digital capabilities, marketing, people, sale, like all of the things that across each of the businesses. And when you sort of unpick it, the card business is a really good example. The team has now been there since the latter -- right at the end of 2019. We've refreshed 4 or 5 of our main products in the card space. We've got a couple more to do over the next year plus, we've improved service. We've improved the operations. We've improved that we do a line assignment. And I think you're seeing that come through in some of the results in our card business. And by the way, it's just starting to come through the P&L because a lot of these new products have intro APRs and other things that burn off over a period of time. So hopefully, you'll start to see that come more meaningfully through, but you can see that in the underlying spend data that's there.

You look at our investment banking business. We've been hiring into that business in some key positions in coverage and products over the last couple of years. And I think that momentum will continue to build on itself doing the same thing in the commercial bank. A lot -- some of that's technology. We've launched a new portal for our commercial bank clients at the end of last year called Vantage, that's part of it. Part of it is making sure we've got the right coverage and people in all the markets to go after the opportunity. We're doing the same thing in the wealth business and each of -- each of the underlying areas. And so I think we've got to continue to just do that in a methodical way.

Now the -- it is also not lost on us that we've got payments long-term, short-term, medium-term targets. And so for ourselves and so we try to make sure that we balance all that, but we've got to continually sort of make those investments. And I think when you start to look underneath the covers, you can see some green shoots starting to come from some of those things, but it will take some time. I think the more meaningfully come through the fee line and the P&L.

Jason Goldberg

You mentioned risk and regulatory work, -- go there. But I guess one of the things, operating losses year-to-date have been kind of very tame. Is that maybe a signal that we're kind of getting nearing the end of some of this?

Michael P. Santomassimo

Well, look, they weren't so tamed last year. And so what we said at the end of last year is that we were working hard to put a bunch of stuff behind us. And I think that you can see that in our reasonable possible loss estimate coming down quite meaningfully as we came out of last year. And we've seen now a couple of quarters where it's been a more reasonable number. Like we still have more to do to put the stuff behind us so that could be -- there could be some volatility in that number but we're working hard to continue to do that. I think Charlie said it a number of times. We feel really good about the progress we're making. We still have more to do, and we're going to stay at it until we're done.

Jason Goldberg

I know you get asked this question a lot, but as an outsider looking in, you've made progress, you are at it till you are done, any line of sight, any guidepost, any hints you think you can provide us in terms of those multi consent orders, obviously, the asset cap is of most interest, that I hope you can provide?

Michael P. Santomassimo

Yes. Look, I mean, it's hard. And I can understand the question, and I understand the wanting to get more, but it's really hard for us to provide that. It's up to the regulators when we're done with the stuff. I think if you saw the discipline inside the company, you would be -- you would know that we are making the progress we say we're making but it's really hard for you to see that until we start to close some of these things down externally. It's the single collection of things that we all spend the most amount of time on to make sure that we're delivering on the way we want to deliver it. And ultimately, you'll see that come through the closure of these things, but it does take time to do that. And it is hard to see from the outside for sure.

Jason Goldberg

Got it. And maybe turning to credit quality, let me start with commercial real estate. Office is, I think, 3.5% of loans. You've been building some reserves there. Any talks in terms of kind of how you see that playing out kind of your comfort around that you did add kind of last quarter?

Michael P. Santomassimo

Yes. Well, I'll go through commercial real estate and we can talk about some of the other portfolios, too. But when -- if you look at everything other than office, it's all actually doing quite well. Performance has been pretty consistent now. I mean there's always some story of some idiosyncratic things somewhere, but overall, the portfolios are going doing okay. You're not seeing any kind of -- you're not seeing that systematic stress you're seeing in the office space really in any of the other portfolios and any blips that you may see in different parts of the country in certain areas or feel very temporary and not systematic. And that includes places like any exposure we have to hotel and retail, that all feels actually quite good overall given the performance we're seeing. So really, that systematic weakness that we're seeing is really office story.

And if you go back a year, 18 months ago, I think most people would say, okay, it feels kind of isolated in a couple of different cities, maybe a few, three or four or five cities. It does feel more widespread now in terms of you seeing the stresses across other parts of the country and it's going to be a very much a story like the individual building, what's happening there, is it a new building, is it renovated, what's the story of that individual property, and so we spend a lot of time. I personally spent a lot of time going through property by property about where we are, how are we managing it, what are the risks, how are we getting ahead of it. And so we feel quite good about like what the team is doing in terms of managing through that. We did put up some additional allowance last quarter, as you noted. And we tried in our disclosures last quarter to continue to isolate that portfolio that's in the corporate investment bank, which is about, I think, $22-ish billion at the end of last quarter where we think most of that stress will be.

And so are we done building? We're not -- we don't expect to have anywhere -- there may be a little bit of a build in this quarter, but we don't expect anything of what we saw last quarter to continue to go, and we'll start to see some losses come through in the second half of the year. But a lot of that ends up being very -- it's very hard to predict until you get really towards the end of the quarter. And we've tried to make sure that we're thinking about those near-term potential issues as we look at the [indiscernible]. So I'd say not a lot of new as of -- since the end of the quarter, but that’s the continuation of what we've seen now in the office space. And keep in mind, there's not a lot of properties trading, right. So there's not a lot of activity. So it's hard to get a really good sense of where this -- where -- exactly where it's going to shake out over the near term as you look at it.

When you look at the other portfolios, you continue on the consumer side, you continue to see again, more of the same that we've seen in the last couple of quarters. You look at each of the portfolios. The home lending portfolio has been performing well. Card, you're seeing gradual deterioration that you would expect as we go through this environment, no sort of linear changes at this point in terms of behavior performance. The auto bounces around a little bit quarter-to-quarter, but relatively small in the scheme of things. And then the commercial -- on the C&I and commercial side -- people is performing pretty well.

Jason Goldberg

And maybe shifting to capital. We could put up the next ARS question, which I've been asking for everyone. But we have the Basel III endgame proposals. I'm sure you spent all summer reading it. I guess when we think about Wells, obviously, the operational risk comes to mind as a, I guess, a new component of the standardized risk, RWA. I guess, first off, maybe help us kind of size kind of the RWA inflation we're expecting and just maybe talk about what are you going to do about it?

Michael P. Santomassimo

Yes. Look, so I think I got to 1,088, and I think it's 1089th page it had been closed. And so it is a complicated set of rules. And so you couple that with what's happening with the -- score and TLAC and other things, so there's a bunch of factors that go into sort of the overall package of things that were put out. And so at this point, the industry average, I think, is about 20%. Like we're right around there, maybe slightly -- under slightly about 20% and so that's what we would expect if nothing changed in the rules. And so I think the good part is we come into this with a lot of flexibility given our capital position, right. So if you took our second quarter standardized RWAs and kind of up 20%, we're already there in terms of minimum plus buffers. We're slightly above that. And so the question just is, for us, if nothing changed the question just is how much of a buffer do we want to have and when do we want to build that and then what mitigation actions that we want to take to offset where it is. And so -- so all -- when you look at it, we feel great about our ability to manage the change as we discussed. Now you got to sort of dig in and say, okay, how do you feel about like what's each of the underlying components and how does that ultimately change your plan for portfolios or some of the sub businesses. And so we've been very methodically going through each of them and have a really good sense of impact, and then we'll decide how we want to handle it.

On op risk, certainly, it feels like that there's some duplication of operational risk capital as you sort of look across whether it's how the stress capital buffer is calculated plus this new formula. And so we're hopeful that there'll be some calibration that happens to account for some of that as you go through. And there's plenty of ways to do that and dials to turn and so we'll see how that plays out. There's also a number of things as you sort of look at the underlying details of it that we're hopeful as people go through it that there's just some common sense changes that get made, right. And so I know others have talked about some of these as well. You look at the way investments that people make into renewables is treated. A 400% risk weight, just doesn't seem like it's calibrated to the risk that's there and the priorities that are there. You can look at how private investment grade like companies that are private is treated relative to public companies.

And so there are a number of things that I think we will engage with the agencies on to help show the impact these things might have in terms of the incentives that it might have as you look at each of the portfolios. But as you would expect, there will be a number of things that we can do and others can do to offset some of the some of the increase that will be there. And then -- but we're hopeful that some of -- there'll be some changes that get made that offset a little bit of the increase that seems like it's embedded.

Jason Goldberg

So I guess, given your kind of current capital position and the fact this is looking at ways out, and there's stuff you could do and you bought back $4 billion worth of stock in Q1, you did $4 billion in Q2. How should we think about the pace of buyback going forward?

Michael P. Santomassimo

Yes. Look, we -- Charlie and I've been clear, like the pace is -- we'll decide the pace as we go based on not just capital in Basel III, but also everything else happening around us. And -- and we have been buying back stock this quarter. So it's at a slower pace than what we saw in the first half. And as we go, we'll -- given what I said in terms of where our position is and what we would expect coming from the changes, we should -- we will continue to have the ability to buy back stock, and we'll make decisions on exact pacing as we go each quarter. But we feel really good about our ability to give -- continue to distribute capital back through buybacks, and we'll decide how fast based on all the other factors that go into that each quarter.

Jason Goldberg

You mentioned buffers earlier, and I think you've talked in the past, talked to like 50 to 100 plus 25 type buffer. I guess in the new world, do you need maybe less buffers because the quality of your capital is actually better?

Michael P. Santomassimo

Yes. Look, I think that's certainly a conversation probably everyone is having around exactly what you want your buffer to be as you get through this. And I think that's something we continue to discuss earlier as well. And as we get better clarity of exactly how this is going to play out, we'll set some expectations around that. But I think that's a valid sort of point to consider.

Jason Goldberg

And I guess pre-Basel III endgame, we used to talk about a 15%, I think, normalized ROTCE. I guess, is that still the right number? And just maybe talk about what is normalized versus the puts and takes of kind of getting to that mid-teens sustainable figure?

Michael P. Santomassimo

Yes. Look, as you look at where we are today, obviously, you're going to have to take into account higher capital levels, but it's the same drivers that we've sort of talked about now for a while, right. We've got to continue to deliver on the efficiency side. We've got to get some return on the investments we're making, and that comes through the fee line in a lot of cases, not all cases, but a lot of cases, whether it's wealth, investment banking card, a number of those areas that we've talked about now for a while. And we've got to continue to manage capital really efficiently as we go through. There's no secret sauce there, right. And when you look at the environment we're in today, we've been clear.

NII, we're over-earning in NII, and I think a lot of others have said that, too. I think you're starting to see more normalization of credit and so that's becoming less of sort of a driver and so I think you'll see some normalization in NII. You'll see credit sort of stabilize at some point in terms of a normal run rate. You'll see some growth in fees, and you'll see us continue to manage the efficiency side. And that should -- that's what's going to lead us to sort of a more reasonable return. And for us, the focus is making sure that we get kind of best-in-class returns for each of the underlying businesses. That's the path we're on.

As we looked at the path that we've seen over the last few years, starting at 8% to 10% to 15%, those are just markers along the way as we go -- as we make more progress. But the goal really is to have great returns across each of the underlying businesses and there's no reason why any of those returns shouldn't be comparable to our best-in-class peers.

Jason Goldberg

And I guess how much is a deterrent or headwind of kind of still operating under the asset cap now like five to six years in?

Michael P. Santomassimo

Yes, look, as we've talked about a number of times, the asset cap, we had to take a lot of actions a couple -- a few years ago on the asset cap. And you saw us manage away a lot of deposits from our most interest rate sensitive deposits. So that kind of set us up well as we came into this environment, a rising rate environment. And then also we manage the capital markets balance sheet down significantly. And so it's certainly less of a -- size is sort of less of a pressure point at the moment. But I do think -- we've got to continue to make sure that we put ourselves in a position to manage the asset capital there.

Jason Goldberg

And let's say, a hypothetical world, we live here, Fed puts out a press release as well as asset cap lifted, what do you do?

Michael P. Santomassimo

Yes, you probably know and my team does, but one answer [ph] is my favorite part of this. And look, I think it depends on what the environment looks like when we get there. And I think there are plenty of different scenarios that you can come up with to look at different areas of growth. But again, if you go back to some of the things that we did to manage the asset cap, we reduced our capital markets balance sheet, we reduced some of the deposits we took in across the commercial businesses. So I think there'll be -- the good news is there's going to be a number of opportunities for us to grow the balance sheet as we go. I think the demand will be there from clients. And when we get there, we'll manage it. And I just caution everybody, it's not a light switch kind of moment, right. You don't have asset cap on Monday and Tuesday, all of a sudden, like you see this huge amount of growth, right. If it did work like that, you should be concerned. And so I do think it will take some time to do that and we'll be thoughtful based on the environment we're in when we get there.

Jason Goldberg

Well, I'll pull up there and open up maybe to the audience for questions. Yes, Mike, as the audience kind of thinks of some stuff, you mentioned kind of going through the Basel III proposal kind of business by business and kind of deciding. I guess maybe kind of maybe just really reason in terms of are there any kind of businesses you may be less apt to get in or shying away from maybe other stuff you want to lean into the portfolio as you say, just kind of maybe some initial thoughts in terms of what do you think could be done to mitigate that 20% number?

Michael P. Santomassimo

Yes. Look, I think it's going to be really a very granular exercise, and I would be careful to predict yet until we see the final rules. But I think you certainly want to look at each of the loan portfolios to make sure that you're getting the return you want to get as you look at it. And I think there'll be a number of areas where you're going to have like very granular sub-portfolios where you're going to have to do some repricing as an example. So you may not exit, but you may reprice. And so -- in today's world, a 364-day facility gets beneficial capital treatment tomorrow's world, that's not the case. And so if you've got a 364-day revolver in place, you're likely going to have to reprice those to get the return that you want that impacts like lending facilities for -- mutual funds and other corporate borrowers. And so there'll be a number of things that get to a very granular exercise. If the renewables, the risk rates don't change, that's probably something people are going to do less of, which is probably not a good thing in general, in terms of meeting broader set of priorities, but at a 400% risk rate, it's hard to see good returns there. And so I think there'll be -- and I think in the mortgage space, same thing. I think as you look at you'll likely see even less higher LTV loans, which have some social purpose to, like as you sort of look at those loans on bank balance sheets. And so I think there'll be a number of things that you'll calibrate as you go through based on where they ultimately end up.

Jason Goldberg

Helpful. Any questions? Like the two-minute warning.

Michael P. Santomassimo

It is the benefit of doing 7:30, there are no questions.

Jason Goldberg

I guess, Mike, maybe finally, just you are kind of about to enter the 2024 budget season. Obviously, the macroeconomic environment still has a lot of question. Just how do you kind of go approaching that?

Michael P. Santomassimo

Yes. I mean, look, I think as you look at the budget, it's no different than how we sort of manage day to day, right. You really have to be thinking about a whole range of different scenarios that you're comfortable with. Like as I said today, like our economists in the -- our investment banks don't think there's some negative growth next year going to happen. So -- is it going to happen, is it not going to happen, who knows, right. But you sort of have to -- you have to do a lot of sensitivities around stressing interest rates, both higher and lower. You have to sort of look at what's going to happen if you start to see big changes in credit deterioration and how you're going to manage through that. What are the levers you can pull to sort of calibrate your expenses. So it's no different than how we sort of manage quarter-to-quarter and efficiency is very much in our mind as we sort of go through that, making sure that we're being disciplined with each of the businesses to look at it. And so we'll -- and as we do normally, we'll give some more updates in January.

Jason Goldberg

As the clock hits, please join me in thanking Mike for his time this morning.

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