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 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.
WFC Wells Fargo & Co.
Thank you, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, John Shrewsberry, will discuss third-quarter results and answer your questions. This call is being recorded.
Before we get started, I would like to remind you that our third 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 the call over to Charlie Scharf.
Thanks, John, and good morning, everyone. I'll make some brief comments about our third quarter results, provide some commentary on the operating environment and our direction. I'll then turn the call over to John to review third quarter results in more detail.
Let me start by acknowledging that this will be my last earnings call with John who announced his retirement in July. John has served as an excellent financial and strategic leader for our Company and has been incredibly helpful to me in my first year at Wells. John, thank you very much for all you've done.
You will be missed.
As you know, Mike Santomassimo will be joining Wells Fargo this week as CFO. Mike has more than 20 first year years of leadership experience in banking and finance and most recently served as the CFO of BNY Mellon, and I'm looking forward to Mike hitting the ground running. I'm going to start by making some comments on the markets, economy and operating environment that impacted us this quarter. Most market and liquidity trends are strong and continue to improve in the quarter. Despite modest credit spread widening that followed volatility in the equity markets, market spreads have continued their steady improvement since the peak of dislocation and remain significantly tighter than the levels observed in March. Corporate new issuance volume remains elevated. HQLA bid-ask, a measure of the cost to transfer risk and daily volatility have improved and are now below pre-crisis levels, and the Fed's pledge of unlimited support has improved risk appetite, tightened spreads and deepened market liquidity. The economy has materially improved due to the gradual reopening but also the significant monetary and fiscal stimulus as well as the significant accommodations made by financial institutions and other businesses. Labor markets clearly reflect momentum with the third quarter average jobless rate improving to 8.8% after posting a 13% rate during the second quarter.
However, there's still a long way to go, and there remains significant risk to the recovery. The pace of job growth and the rebound in consumer spending have slowed, and the diminished pace of reopening and the end of some stimulus programs are presenting headwinds. The powerful rebound in the third quarter still leaves the economy well below its pre-COVID peak, including restaurant sales 15% lower, real GDP 4% lower, and unemployment 7% below pre-COVID levels. Clearly, the recovery is in process. And while the gains we've seen this quarter are important, the path to full recovery for all remains uncertain.
Let me now turn to our performance this quarter. We reported net income after tax of $2 billion or $0.42 a share. Revenues benefited from very strong mortgage banking, and most other fee-related items also improved over the prior quarter, with the exception of trading, which while down from the exceptionally strong second quarter, still produced strong results. NII declined, reflecting the impact of the lower interest rate environment and lower loan balances, primarily driven by weaker aggregate demand across our commercial client base. Expenses were elevated and impacted by two significant items, $961 million in customer -- accruals and a $718 million restructuring charge. Charge-offs declined from the second quarter, and our allowance was largely unchanged. Credit performance across almost all loan products was stronger than we would have anticipated a quarter ago.
However, it's certainly too early to draw conclusions yet. The actions from the Fed, our government and financial institutions I referred to earlier have clearly helped consumers and companies of all sizes, but much of this is ending. And until the risks of COVID are behind us, these individuals and companies are still at risk without more support. Having said that, the fact that we are in a better place than expected is a good thing, and that shouldn't be lost.
Our top priority continues to be the implementation of our risk control and regulatory work, but we're also taking targeted actions to improve the experience for our customers, clients, communities and employees. I will discuss this later.
We continue to add talent to the senior management team in key roles to strengthen the foundation of the Company.
In addition to Mike joining as CFO, Ather Williams is joining Wells Fargo this month to lead our Strategy, Digital and Innovations group, and will report to me. He will lead corporate strategic planning, define and manage digital platform standards and capabilities, and manage innovation priorities, opportunities and Company-wide efforts to drive transformation. We added other senior leaders, including a new head of Home Lending and several key risk leaders as part of our enhanced risk model to further strengthen the independent oversight of all risk-taking activities and provide a more comprehensive view of risk across the Company. In August, we announced that Mark Chancy was elected to the Company's Board of Directors. Mark has more than 30 years of banking and financial services experience with impressive combination of business, operational and finance experience. He serves on the Board's Audit Committee and Risk Committee. In the third quarter, we also launched Clear Access Banking, a new low cost, convenient bank account with no overdraft fees. Clear Access is off to a strong start with over 100,000 accounts signed up so far and is proving very popular with people under 25, a big part of its intended target population. This is part of our broader efforts to simplify our products and services and create clear, easy-to-use and better experiences for our customers.
As part of our simplification efforts, we will be reducing the number of different consumer checking accounts we offer, making it easier for both our customers and our bankers while also reducing expenses associated with supporting legacy products.
We continue to have over 200,000 employees working from home and we don't anticipate this changing until at least December.
Just under 20% of our branches remain temporarily closed, but we've opened more of our branch lobbies to enable our customers to come in and have conversations with our bankers, instead of just using our drive-thru for transactions. And our teller and ATM transactions increased 8% from the second quarter. Wells Fargo was recently recognized as leading the U.S. financial services industry in COVID-19 safety according to a nationwide study. This is great recognition for the work of all those at Wells who work tirelessly to keep our employees and customers as safe as possible.
We continue to make significant accommodations for our customers. Since March, we've helped more than 3.2 million consumers and small business customers by deferring payments and waiving fees. The trailing seven-day average of new daily payment deferrals granted as of September 30th has declined 97% from their peak in early April. Debit card spend has remained strong since returning to pre-COVID levels in May, and in the last week of September, was up approximately 10% from the same week a year ago. Consumer credit spend improved throughout the third quarter but still is down approximately 4% in the last week of September compared to a year ago, an improvement from the beginning -- an improvement from being down approximately 10% from a year ago as of the end of June. This reflects steady improvement across a variety of categories. But despite a rebound, hard hit segments like travel, entertainment and fuel remain significantly lower year-on-year. Commercial card spend remains significantly lower throughout the quarter and was still down approximately 30% in the last full week of September compared to the same week a year ago. Digital usage trends continue to be strong.
As an example, mobile deposit dollar volume was a record high in the third quarter and was up 110% compared to a year ago.
Let me take a moment to expand on the conversation I started last quarter on expenses. We believe that our franchise is capable of earning far more than we're earning today.
We continue to believe there's nothing structural in our business to stop us from having a competitive efficiency ratio, though we are far from it today. Prior to 2016, Wells Fargo had an efficiency ratio that was far more competitive with our peers.
As you know, we've had to make significant investments in people and technology to address prior underinvestment in risk and controls, and also have an outsized litigation and customer remediation expenses. This accounts for part of our elevated expense base.
We also believe that we have significant opportunity to take targeted actions that are focused on improving the experience for our customers, clients, communities and employees. These actions should also improve operational and financial performance.
We have also lagged behind our competitors in revenue performance, and we also believe we've got significant opportunities to make substantial improvements here as well. To be clear, our focus starts with running the Company more effectively and efficiently. This includes reducing bureaucracy, simplifying our products, processes and our organization, reducing redundancy and manual work, and migrating customers and employees to digital solutions.
All of this will also improve our control environment. Lower expenses will be a byproduct of doing these things. We're taking an organized and structured approach to reviewing this across the entire Company. We've established dedicated teams in each of our lines of businesses and functions. We're reviewing near-term, medium-term and long-term actions. We're already working on the near-term actions, including streamlining management ranks through spans and layers and other business improvements. Again, these are driven, making it easier for us to serve our customers and each other. These actions were the primary driver of the $718 million restructuring charge we took this quarter. These actions should reduce gross run rate expenses by over $1 billion annually.
We also identified many medium and longer term actions that will take some time to fully implement. These include simplifying products in many of our businesses, optimizing operational and client service delivery, and continuing to downsize our corporate real estate portfolio. I understand that many of you would like more specifics on our plans. The reviews we're conducting across the entire company continue, and we are in the midst of the 2021 planning cycle. We need to be thorough in our work, and it's important that we understand three pieces before providing specifics to you. The magnitude and timing of the initiatives I've just discussed, where we think we need to invest to drive improved operational and financial performance, and most importantly understanding the investments necessary to complete the buildout of our risk and control infrastructure, which will ultimately satisfy our regulatory commitments. I cannot stress the importance of this work enough. We cannot and will not do anything to jeopardize this work. It is also important that Mike has a chance to review our plans, which he will do immediately. All that said, we should be in a position to provide more specificity regarding 2021 expense expectations on our call next quarter.
While there is much work to do and it will take time, our ultimate goal is to build a best-in-class business and hope to show progress along the way. This includes both competitive level of expenses and competitive revenue performance.
Finally, I want to thank all of our employees for their continued hard work and dedication to making Wells Fargo better. I will now turn the call over to John.
Thanks, Charlie, and good morning, everyone. We earned $2 billion in the third quarter, up $4.4 billion from the second quarter, driven by lower provision expense. We grew revenue, but our expenses remained too high. I'll be describing the drivers of our results in more detail throughout the call.
So, let me just summarize a few items that impacted our third quarter results that we included on page two.
As Charlie highlighted, we had a $718 million restructuring charge, predominantly driven by severance expense, which drove the increase in noninterest expense in the third quarter and is expected to reduce our gross run rate expenses by over $1 billion annually. We had $961 million of customer remediation accruals for a variety of matters. The increase of this accrual related mostly to previously disclosed matters and reflected an expansion of the customer population, the time period and/or the amount of reimbursement as part of our ongoing analysis of doing the right thing for our customers while resolving outstanding matters, as quickly as possible.
We also had $452 million of noninterest income related to a change in the accounting measurement model for non-marketable equity securities from our affiliated venture capital partnership.
As you know, we typically have gains or losses from equity securities driven by market valuations, which we had again in the third quarter.
Our effective income tax rate for the third quarter was near our expectations. And we currently expect our effective income tax rate for the fourth quarter to be less than 10%, primarily as a result of expected tax credits.
Turning to page three.
Our capital and liquidity continued to be strong with our CET1 level $28.3 billion above the regulatory minimum and our LCR 34 percentage points above our regulatory minimum. At the end of the third quarter, our primary unencumbered sources of liquidity totaled approximately $494 billion.
Turning to loans on page four. Both, average and period-end loans declined from the second quarter, with growth in consumer loans more than offset by declines in commercial loans. I'll explain the drivers of commercial and consumer period-end loan balances in more detail, starting with commercial loans on page five. C&I loans declined $29.2 billion or 8% from the second quarter, driven by higher paydowns, reflecting continued liquidity and strength in the capital markets, and lower loan demand, including revolving line utilization, declining the pre-COVID utilization levels, particularly in our middle market business. Commercial real estate loans decreased $1.2 billion from the second quarter, reflecting weaker demand in commercial real estate mortgage, which was partially offset by growth in commercial real estate construction in categories that have not been negatively impacted by the pandemic. This includes multifamily projects and industrial facilities, including data centers. Consumer loans increased $15.8 billion from the second quarter. This increase was driven by the repurchase of $21.9 billion of first mortgage loans from Ginnie Mae securitization pools. We had a high level of these early pool buyouts in the quarter due to COVID-related payment deferrals.
We also reclassified $9 billion of first mortgage loans from held for sale to held for investment. Credit card loans were relatively stable from the second quarter as consumer spending increased after declining over $2 billion for two consecutive quarters.
However, balances were down $3.6 billion from a year ago, reflecting the economic slowdown associated with COVID-19. Auto loans declined $358 million from the second quarter and originations declined 5%.
We continue to take certain actions to mitigate future loss exposure, while our spreads on new originations continued to improve. Other revolving credit and installment loans increased $812 million from the second quarter as higher security-based lending was partially offset by lower personal loans and lines and lower student loans.
During the third quarter, we notified our customers of our exit from the student loan business as part of our ongoing process of pruning certain businesses as we assess our strategic priorities.
Turning to deposits on page seven.
We continue to have lower deposit growth in the industry due to actions we've taken to manage under the Asset Cap.
However, even after these actions, average deposits grew $107.6 billion or 8% from a year ago and were up $12.3 billion from the second quarter. The linked quarter growth was driven by noninterest-bearing deposits, which were up 8%, while interest-bearing deposits declined 2%. Period-end deposits increased $74.7 billion from a year ago but declined $27.5 billion from the second quarter. This decline was driven by actions we've taken to reduce nonoperational Wholesale Banking deposits as well as pricing and other actions in our consumer businesses. Consumer and small business banking deposits grew $9.9 billion from the second quarter, reflecting continued COVID-related impacts, including customers' preferences for liquidity, loan payment deferrals and stimulus checks. Average deposit cost declined to 9 basis points, down 62 basis points from a year ago and 8 basis points from the second quarter. Net interest income declined $512 million or 5% from the second quarter primarily due to the low-interest rate environment, which resulted in balance sheet repricing as earning asset yields continued to decline faster than funding liabilities, balance sheet mix shifts into lower-yielding assets, including the impact of lower commercial loan demand, which resulted in higher cash balances, and $120 million of higher MBS premium amortization due to higher prepayment rates. These declines were partially offset by higher variable sources of income and one additional day in the quarter.
For the first nine months of 2020, our net interest income was $30.6 billion.
With the completion of the third quarter, we now expect full year 2020 net interest income to be approximately $40 billion, which is lower than our previous guidance due to lower commercial loan balances and higher MBS premium amortization.
Turning to page nine. Noninterest income increased $1.5 billion or 19% from the second quarter with growth in many fee-related businesses.
While we've continued to waive certain fees for customers impacted by the pandemic, deposit-related fees were up $157 million from the second quarter, driven by higher customer transaction volume. Trust and investment fees increased $163 million from the second quarter, primarily driven by higher retail brokerage advisory fees, partially offset by lower investment banking fees with deal counts down from record second quarter levels. Card fees increased $115 million from the second quarter, with debit card transaction volume up 12% and credit card purchase volume up 22%. Mortgage banking fees increased $1.3 billion from the second quarter. The 2020 mortgage origination market should be the largest on record, and capacity constraints continue to increase margins. Total residential held for sale mortgage originations increased 12% from the second quarter to $48 billion, and our production margin increased to 216 basis points, up 12 basis points from the second quarter and up 95 basis points from a year ago. We currently expect fourth quarter origination volume to be similar to third quarter levels, despite typical seasonal declines, and fourth quarter production margins should remain strong. Mortgage servicing income increased $1 billion from the second quarter due to $296 million of favorable net MSR hedging results in the third quarter and the negative valuation adjustment in our MSR model as a result of higher prepayment assumptions and higher expected servicing costs in the second quarter that did not repeat. Net gains from trading activities declined $446 million from a record second quarter, primarily due to lower fixed income trading results, partially offset by higher equity trading results.
Turning to expenses on page 10.
Our expenses increased $678 million from the second quarter, primarily driven by the $718 million restructuring charge that I highlighted earlier on the call. Charlie highlighted in his comments the details we have on slide 11 on the progress we're making to reduce expenses and build a stronger Wells Fargo. Many ideas have been generated with the fresh perspective from leaders throughout the organization. This renewed focus is critical to our future success, not only improving our efficiency ratio, but also enabling us to become more streamlined and agile and better serve our customers while we continue to invest in our business and meet our regulatory commitments.
Turning to our business segments, starting on page 12.
We continue to make refinements to the composition of our operating segments and allocation methodologies.
Additionally, we're still in the process of transitioning key leadership positions, including Mike Santomassimo, who will be joining Wells Fargo, later this week. We now expect to update our operating segment disclosures, including comparative financial results, in the fourth quarter 2020 and provide full year 2020 results under the new reporting structure. On page 13, we provide our Community Banking metrics. We had 32 million digital active customers, up 6% from a year ago and 3% from the second quarter. Digital logins declined from record second quarter levels but were up 11% from a year ago. And the number of checks deposited using a mobile device reached another record high in the third quarter and increased 36% from a year ago. With approximately 18% of our branches temporarily closed due to COVID-19 and more customers using our digital channels, our teller and ATM transactions declined 22% from a year ago but increased 8% from the second quarter as the economy began to reopen and we reopened more of our branches.
Turning to page 14. Wholesale Banking reported net income of $1.5 billion, up $3.6 billion in the second quarter, driven by lower provision for credit losses. Revenue declined $969 million from the second quarter, reflecting lower net gains from trading activities and investment banking fees, both of which were at record levels in the second quarter. Net interest income declined from the second quarter, primarily due to lower loan-to-deposit balances and lower fixed income trading assets. Average loan balances declined 5% from the second quarter. Revolving loan utilization in September of 36% declined 280 basis points from June, and unfunded lending commitments increased 2% from the prior quarter. Wealth and Investment Management earned $463 million in the third quarter, up $283 million from the second quarter, primarily driven by lower provision for credit losses and higher asset-based fees, benefiting from improved market performance. The decline in earnings from a year ago was driven by the $1.1 billion gain on the sale of our institutional retirement and trust business in the third quarter of 2019. WIM average deposits increased $4 billion from the second quarter and were up $33 billion or 23% from a year ago, driven by higher cash allocation in brokerage client accounts. WIM deposit costs in the third quarter were in the single digits and have declined over 50 basis points from a year ago.
Turning to credit results on page 16.
Our net charge-off rate declined 17 basis points from the second quarter to 29 basis points, which was better than we anticipated a quarter ago given the challenging economic environment. Losses improved across our commercial and consumer portfolios.
However, customer accommodations we’ve provided since the start of the pandemic could delay the recognition of net charge-offs, delinquencies and nonaccrual status.
So, it's too early to draw any conclusions about future losses based on credit performance in the third quarter. Commercial criticized assets declined 2% from the second quarter with broad-based declines in C&I, partially offset by an increase in commercial real estate loans. Nonaccrual loans increased $417 million from the second quarter, driven by higher consumer real estate, auto and commercial real estate nonaccruals. On page 17, we provide more detail on our C&I and lease financing portfolio by industry, including the declines in loans outstanding and total commitments from the second quarter. C&I and lease financing nonaccruals were stable from the second quarter as declines in oil and gas and retail were largely offset by increases in other industries, including health care and pharmaceutical and transportation services. Of note, 39% of nonaccruals were in oil and gas, down from 47% in the second quarter.
Turning to our commercial real estate portfolio on page 18. Commercial real estate nonaccruals increased $126 million from the second quarter with declines in hotel/motel and agriculture, more than offset by increases in other categories with the largest increase in office buildings. Criticized assets were up $2.3 billion or 22% from the second quarter with 92% of the increase driven by hotel/motel, shopping center and retail sectors. The percentage of our consumer loan portfolio that remained at a COVID-related payment deferral as of the end of the third quarter declined, as we show on page 19, we had declines across our consumer portfolios. These calculations exclude first mortgage loans that are guaranteed or insured by the government, which we believe have minimal credit risk. On page 20, we provide detail on our allowance for credit losses for loans.
Our allowance coverage for total loans was 2.22% in the third quarter with stability across most loan classes and an increase for credit card loans.
Our allowance of $20.5 billion was stable from the second quarter, reflecting an improving economic environment and solid credit performance in the third quarter but with continued uncertainty due to COVID-19. In determining our allowance, we considered current economic conditions, which improved compared with prior expectations as unemployment levels decreased during the third quarter.
We also considered that recent credit performance reflected the support of fiscal stimulus, lender accommodations and borrowers' ability to access liquidity. These factors drove lower loss expectations in our quantitative models.
However, there is increased uncertainty in economic forecasts that vary widely, and future credit performance may deteriorate as stimulus effects that benefited recent credit performance come to an end. We increased our qualitative reserves, reflecting a variety of factors, including our exposure to significantly impacted industries, the limited transaction activity and wide variability and market valuations for property types in our commercial real estate portfolio and the elevated default risk for borrowers as payment deferral programs end.
While the timing of the end of the pandemic and the eventual path to an economic recovery remain uncertain, we believe that our allowance captures the expected loss content in our portfolio as of the end of the quarter.
Turning to page 21.
As I highlighted earlier, our CET1 ratio remained well above our regulatory minimum, increasing to 11.4% in the third quarter.
As you can see, our standardized and advanced approach ratios are now in very close proximity. We currently expect internal loan portfolio credit ratings, which were also contemplated in the development of our allowance, will result in higher risk-weighted assets under the advanced approach and under the standardized approach in the coming quarters, which would reduce our CET1 ratio and other RWA-based capital ratios. That said, we expect to maintain strong capital ratios that exceed both, regulatory requirements and internal targets after considering this expected trend in risk-weighted assets. In summary, while our results in the third quarter improved from the second quarter, they were still down significantly from a year ago, reflecting the impact of the economic downturn. Even though we can't predict the path to a full economic recovery, we're focused on improving business performance by reducing our expenses while meeting our regulatory commitments and appropriately investing in our business. And we'll now take your questions.
[Operator Instructions] Our first question will come from the line of Betsy Graseck with Morgan Stanley.
Hi. Good morning. A couple of questions. One is on the $1 billion improvement in expenses that you outlined earlier in your prepared remarks. I realize that you're talking about a lot of investments that you need to make as well. But I'm just wondering is this $1 billion expected to come through in net expense reductions as we look out over the next year.
Hey, Betsy. It's Charlie. Thanks for the question. I would say -- I referred in the remarks, it's gross reduction. It's real. It will be there. We'll see it next year. But, we're still continuing to go through our plans for next year, and we're looking at all of the investments that are necessary, both on the control side as well as the investment side.
And so, it's too early to be definitive about what the net numbers look like at this point. But, as I said last quarter, we want to show progress. And progress is a combination of taking actions on the growth side but also showing something on the net side. But, I think the right thing at this point is to give you a much clearer guidance on next quarter's call, after we finish our budget work and after Mike gets to review the work himself.
Got it. Yes.
Okay. I get that. And then, just separately, Charlie, you were mentioning how there's opportunities to get more efficient. There's also opportunities to get, I don't know, quote unquote your share of the revenue. Could you -- I know it's early, but could you give us a sense as to what you're thinking about when you highlight that? Where do you see opportunities for Wells on the revenue side?
Sure. I mean, I would say, when we look at our business and put the trajectory of NII to the side for a second because of the low rate environment, just talking about building franchise and the opportunities that present itself, I think when you look at -- let's go business by business quickly. When you look at our consumer and small business banking franchise, we've been on the defensive now for a very long time, appropriately so, given the issues and problems that we had. A tremendous amount of work has been done by all the folks leading those businesses.
Our franchise is still extraordinarily strong. And you see it, by the way, even in just the deposit growth that we've had in that segment, which says an awful lot about the -- about what our customers think of us. But while we had been investing in some of the digital capabilities, which you do see the marketplace tremendous opportunities to grow with the affluent customer base, at the other end, we've rolled out a product for those that are far less affluent, which is very competitive and getting real traction.
And so, I just -- I think in the consumer and small business space, the opportunities are significant. In the consumer lending space, the mortgage business, the demand is greater than our ability to process at this point still, and that's still where we sit today.
We have opportunities in the card space to leverage the customer base that we have, staying with our -- within our risk framework, the way we've defined it. We're just doing a better job at delivering card and other payments products. The commercial bank, I think, is an extraordinary franchise. And both things that we do on a standalone basis there as well as things we do in partnership with the products we have in the corporate investment bank are still huge opportunities for us.
Our Wealth and Investment Management space, the wealth business, we’re one of the few that have this sizable franchise in a space that we love. We've made progress at having the business work together across our private bank and across our brokerage business. But, we're just getting started there. And I think, the opportunities, even with the very strong performance we've had this quarter, are still extremely strong. And then lastly, in the corporate investment banking space, again, I would have said as an outsider that Wells had been very, very smart at building the business in where it has traditional strength in serving customers, and that's the path that we'll continue to be on.
So, when I look at all these businesses, I feel very good about our ability to grow the franchise. And it's a question now of timing and prioritization.
Okay. Anything in particular you'd think about maybe saving to make room for growth, given the Asset Cap is kind of getting in the way of growth on the balance sheet at least?
Yes. I mean, I think -- so I mean, we're very actively looking at not below those five businesses that I just described. We're very actively looking at all of the portfolios and all the businesses below that. And we're going to continue to exit some things, which aren't core to the U.S. banking franchise that we are. Not that U.S. only, but supporting the core customer base that we have.
And so,, I would expect over the next couple of quarters, we will create some room on the balance sheet by exiting some things that aren't core.
Super. Thanks. Thanks, Charlie.
I do want to just -- I just want to be clear. We're exiting them because they aren't core to serving our core customer base on a consumer and large corporate side. We're not exiting them because of the Asset Cap.
I think that will help.
Our next question will come from the line of Matt O'Connor with Deutsche Bank.
Good morning. That was a really good kind of overview of how you're thinking about the businesses just from a big picture perspective.
I think, a lot of investors are looking for kind of this big rollout of the strategy that put some numbers and more meat behind kind of what you just said. And obviously, COVID is delaying that, I would assume. Obviously, you're really focused on regulatory issues. But, is that something that you do plan to do? And is the timing of kind of getting out of the Asset Cap, driving something like that, say, like a virtual Investor Day or something similar?
Yes. Well, I think, you said it very well, Matt. I appreciate what you said, which is that there's no doubt that in terms of the way we'd be thinking about the trajectory of the business and what the opportunities for us over the shorter and early medium term are different today that we're in this COVID environment than not.
And so, it's kind of hard to have a meaningful conversation that looks well beyond that when we're far from -- through this.
And so, we are very-focused on the things that we need to do in this environment to improve our performance, albeit with an eye towards making sure that we're building the Company for the long term. The regulatory work, as you mentioned, again, I said it in my remarks, I can't stress it enough. It's a gating factor for us to be able to take advantage of all the opportunities that we have in the franchise. We're putting a tremendous amount of time and attention and effort towards this, and understanding exactly what those resources look like and how that impacts the Company is the work that we continue to go through. And as I said, by the time we get to the end of next quarter, we'll give you a look -- a clear look as to what we think that means for 2021. And then, listen, the Asset Cap, I wish there was more to say about it. But, we're focused on controlling what we can control, which is doing the work that's been asked of us, which is totally appropriate. We're in the process of doing that. And there's no doubt that while the Asset Cap exists that we do have a limitation that others don't have. Others have other limitations with different ratios and whatnot. That is one that we have.
And so, it is fair to say, we will not be able to extract the full potential out of the franchise until after the Asset Cap has gone. It doesn't mean that we don't have the opportunities to grow from where we are today, and we can talk a little bit about that if you want, but that certainly does factor into our thinking about what the trajectory of the Company looks like in the time frames.
And then, just to be clear, in terms of kind of presenting kind of this, call it, while the Asset Cap is still there and kind of the post Asset Cap view, is that something that you're going to come out to investors and put some targets out there and again, some more meat behind the strategic update, or is it we'll get the expense outlook in '21 and a little bit more kind of piecemeal as you think about given guidance and strategic outlook?
I would expect that we get a -- that we'd be giving you, not just an expense outlook, but an update on how we're thinking about different businesses. And when we talk about the things that belong and don't belong, how that fits. And then, we're also going to be giving you at the end of the quarter when we report not just the quarter but the full year results based upon the segment looks, which will make pretty clear where we stand versus our competition, and we'll be able to talk through what those differences are and how we think about that.
They also reflect some strategic decisions that have already been made and allow you to look at the businesses on a heads up basis versus competitors, the way the current leaders are intending to run them going forward.
So, there's a lot of information in that.
And then, just lastly, if I could squeeze in, on the Asset Cap, I think February is going to be three years, which investors ask me like how long I think it's going to linger, and I’m like, I don’t really know, but there is four CEOs, three Chairs, three years. It's obviously been like a lot of change, a lot of effort. And then, there's only so much that you can share and maybe there's only so much that you know. But, like, what should we be looking for from the outside? Because cumulatively, it does seem like there has been a lot of effort and hopefully, it's accelerated the past year, but it seems like there's been a lot of important milestones, at least from an external point of view.
So, what can we look for, if anything?
Listen, I think, I mean, what you can look at is you can look at the people that we have in roles today that have dealt with these issues before. And the organization today does in fact look very different than it looked a year ago or even six or nine months ago. And as I've said, when you look at the Fed consent order, it's pretty straightforward in terms of what they're asking for. The environment that they're asking for is the same thing that they've asked all the other big banks for.
So, getting the experience inside the Company to actually -- that actually understands exactly what is required of us, I think, is extraordinarily important. And that team is actively working through what's got to be delivered. Again, I wish I could say more, Matt.
As I said, it's ultimately the regulators on all of our issues are going to be the ones to determine when it's done to their satisfaction. But again, I could tell you, there's no question in my mind that we have a first class team in place now working on it that's experienced, many that have dealt with these issues before. It has a sense of urgency in the company, which I think is different than what we had in the past. The amount of time and resources that the senior team is spending on this is extraordinary.
You'd be shocked at the amount of time because we know we need to do what's required. And beyond that, again, I can't speak for the regulators.
So that's what I'd say.
Your next question comes from the line of Ken Usdin with Jefferies.
Hey. John, just on your NII point, understanding that we're still kind of seeing this decline in loans and the premium am. Does the fourth quarter get to a stabilization point with NII as you look out into next year? And what would be the drivers to kind of put that bottom in as you think about the mix of earning assets and what you expect with deposit growth? Thanks.
So, the pieces of it are deposit pricing on the one hand, and that's come down meaningfully as a little bit more to go, but will likely bottom out in the low single digits versus the high single digits where it is today.
On the asset side, yes, the softening in C&I loans in particular has been a contributor to things underperforming even recent estimates. And the question of where we go there, both the industry and Wells Fargo will be I think at the margin, the swing factor and what happens for NII and for NIM over the course of the next year or so. And if we forget a little bit of steepening, that would be very helpful. The way we're sort of looking at it, it's possible that we end up flat to down single-digit percentages in NIM, knowing what we know today.
As Charlie mentioned, the forecasting process isn't done for next year.
And so, there'll be more guidance on that as that comes into clarity. But, those are probably the big drivers. Right now, also on the security side, you mentioned premium am.
So, we've got mortgage securities prepaying rapidly. We're replacing 2% yields with, call it, 140 basis-point yields in the current yield, which will bring down the overall book average a little bit too.
So, that's in our forecast, but it's a little bit different than the -- or a continuation of what happened in Q3.
We expect that premium amortization to continue right into next year.
Right. John, can I just ask you to clarify? You said flat to down NIM, but did you mean NII dollars, or can you just re-go through that again, just so we all heard it right?
Yes. I meant NII, sorry, in dollars.
Okay. And then, on the -- can you help us understand what a steepener means in terms of like what does a 10-year delta do to your net interest income, and to your point, about just a helpful steepener if we got it on an all things equal basis?
Yes. Well, it's -- it depends what we choose to do with it in terms of how much we redeploy. But, if you could get the 10-year up toward 100 basis points, it's something like that. We're talking about $1 billion or more of net interest income. Again, it depends on how quickly we redeploy into that, what happens to mortgage yields at the same time, but we are sensitive at the long end of the curve.
Your next question comes from the line of Erika Najarian with Bank of America.
Good morning. The feedback from the investor community essentially indicates that they understand that it's going to take time to have thoughtful plan, especially on expenses.
I think, what's surprising the market today is the base upon which we're thinking about potential future gross reductions was a little bit higher than expected.
So, I guess,, my first question is, as I take out the restructuring charges out of the third quarter run rate, that would imply $14.5 billion with elevated operating losses and suggesting an annual base of $58 billion. Is that the right expense base from which we should think about future gross reductions and also investments?
Yes. No, I would -- in our own math, we would also consider elevated operating losses to be more infrequent and not part of the run rate.
So I get to a lower number on my own. The numbers -- the reported numbers are what they are and should be accounted for. But, as we're thinking about what's run rate and what's not, the elevated levels of operating losses, even though they have occurred now for a couple of quarters in a row, are not anticipated at this level. And restructuring charges -- I'm certain, there will be more, by the way, because that will be evidence that the company is making progress in its plans, but I wouldn't just consider that to be run rate either.
So that would get you to a lower number.
Just a follow-up on that -- go ahead.
Just a follow-up with that, actually.
So, I think, you previously mentioned that a more normal level would be $600 million annually.
And so, if I take that elevated level out, then the base upon which we would then say, okay, this is the base, and then there's further improvement from here, would be $54 billion. Clearly, different math in terms of your future earnings power. Is that the right way to think about it?
That's how I think about it. Yes. That $600 million still seems like a good number.
I think, in this quarter, we have $150 million worth of what we consider to be run rate operating losses, fraud, robbery, those standard things that have been in place for a long time. And what's above that is more episodic, and this quarter had much more to do with a closure of legacy types of issues.
Got it. Very, very helpful. And just as a follow-up question to Ken's line of questioning, all three of your mega cap bank peers essentially indicated that net interest income has either hit a bottom in the third quarter or will hit a bottom in the fourth quarter.
Assuming no change in the outlook for rates and obviously, no change in terms of the Asset Cap, is that a statement that you're also confident in saying on NII bottoming?
I mentioned it could get a little bit softer next year. Remember that we're operating with a with an Asset Cap. That doesn't allow us to expand the size of the balance sheet and earn a little bit of net -- incremental net interest income on these extra deposit balances that we're all gathering.
And so, at the margin, that could be a difference maker. There are other things that go into what our level of NII is. But, at the margin, that's a constraint that we have that others don't.
Our next question comes from the line of John Pancari with Evercore ISI.
Back to the expense discussion on the $1 billion gross expense run rate reduction, could you maybe give us a little bit more detail around the timing of the realization of that? Could it be more front-end loaded in terms of the annual impact?
So, it is a gross number, but the impact will be immediate in the run rate because we've accelerated the costs associated with the actions, and those expenses will drop out.
So, it's more immediate impact there.
Okay. And then, separately, in terms of the additional detail on the expense -- the longer term expenses, next quarter with fourth quarter, when you give us more details, could we get more of the larger expense opportunity detail in terms of potentially the $10 billion that was flagged before and maybe even an expense on an efficiency target beyond that? Just want to get an idea of what type of metrics, Charlie, that you might be in a position to give us.
I think, it was -- between now and then, we'll figure out exactly what we're going to give you. What I said was that we will give you a clear outlook as to what to expect for expenses for 2021 at the end of the quarter.
We also said that you'll be seeing the disclosure of our segments broken out differently and much more comparable to what others report.
And so, you'll be able to see the gaps between our efficiency ratio by business and others. And just to be clear, what I said at the end of last quarter was all we did is we did the math of the people we compete against and said what's their efficiency ratio, looking at business mix and what's ours, and that's the difference.
And so, I assume you all do those calculations as well. We're acknowledging it. And those are the conversations that we have internally to say, is there any reason why our expense base shouldn't look different.
So, you'll actually -- so you'll see what those gaps are, and we'll certainly be in a position to talk about the types of things that we will be doing to close the gap, some of which will be in progress and others which would be to come.
Okay. That's helpful. If I could just ask one more thing.
On the loan growth front, I know you mentioned that C&I is still -- you're seeing the pressure there, and that is a big factor in terms of your spread income outlook. Can you just give us some color around what you're seeing in terms of commercial demand? And could we see some improvement in C&I balances or at least stabilization here?
So, there's a handful of things going on. At the upper end for corporate and institutional borrowers, we're seeing continued utilization of the lines that they have but not a lot of incremental demand for more credit. In the middle market, there's a lot of different stories but they could be summarized to saying that the utilization of existing facilities is down meaningfully below pre-COVID levels. Obviously, we all have the spike in the first part of the year that has abated. But in the middle market, and including asset-based lending, we're seeing lower inventory levels held by customers who would use our financing to fund that inventory.
Some of those may be coming back as inventories get rebuilt, some of them may not, but it's, at the margin, that's pulling down balances. And that’s also I'd say on the high end.
With the capital markets as wide open as they are, both for high-grade credit as well as for more levered credit, that is replacing the utilization of bank lines by funding those things in the capital markets. And that's the story.
And I'll just state the obvious, right, which is that ultimately, the path of the recovery is going to determine the levels of demand that are out there. And you can -- while we were -- try to be very careful in our remarks about when it comes to credit, saying that it's too early to draw any conclusions, at the same time, as you look forward, as you get into next year, there will be a vaccine, there will be therapeutics. The world will continue to open, and everyone is learning how to do it safely, even in today's environment. And ultimately, that's what's going to drive business activity and demand, and that happens will be the beneficiary.
Your next question comes from the line of Saul Martinez with UBS.
First of all, good luck on your future endeavors, John, and be sorry to not have you on these calls going forward. But, I guess, first of all, I want to -- sorry to beat a dead horse with this question, but I just want to make sure I have a good handle for what we should expect.
So, year-end results will get the outlook for expenses in 2021 in addition to enhanced segment disclosure, which will allow us to, I guess, more effectively compare you to your peers on a segment basis. And I guess, what's still a little bit unclear to me is what, if at all, is the plan to go beyond that and give maybe more far-reaching goals as you kind of continue to go through your strategic review, should we expect to see longer-term financial targets and expense reduction plans and maybe long-term expense targets. Is that still the plan and it'll be determined at a future date when you're able to -- and feel comfortable, giving those targets, or is that just kind of on hold for now?
Well, I think three things, Saul. By the way, I completely appreciate the line of questioning.
And so the fact that it's being asked a bunch, I completely understand.
We have a couple of things that we need to get through. We need to finish all of our internal work to understand what it takes to actually build the actions around becoming more effective and efficient at running the Company. At the same time, we're continuing to invest to both build out the Company and to do the regulatory and risk work that has to get done. There's no doubt that the environment that we're in today gives us pause in terms of committing to anything on a longer-term basis because then we'll show you a number, and then you're going to say, what's the timing. And obviously, it's very highly dependent on what the world looks like because of COVID, the Asset Cap because that obviously does impact our ability to grow the balance sheet and offset some of the NII reduction, which ultimately impacts the efficiency ratio.
And so, as we get more clarity around what those things look like, we will provide more detail. It's just not clear when the right time to do that is, but we'll tell you everything we know when we know it.
One more thing to add, Saul, what you'll see at the end of the year is that the results as there -- as they reflect 2020 will also show some -- the results of some strategic positions that have already been made.
So, that will be helpful at the margin.
Okay. No. That's helpful. I want to go back to Erika's line of questioning on how to think about sort of a more normalized basis of expenses currently. And I think a lot of us have been kind of normalizing the op losses to the $600 million and $150 million a quarter. I mean, I guess,, my question there is, like, why is that the right number? Because you haven't been anywhere near that number for quarters and it seems like five years. And I guess, I get the normal amount of fraud and whatnot, but it's been much, much higher than now for a very long time, it has even before the sales issues. And I guess -- so is that really the right number? And I guess, maybe a more important question is, when do you feel like you'll have some of these customer or the litigation accruals that have been pretty elevated in three of the last four quarters kind of running the course and come back down?
Yes. Saul, I guess, I'll start. And John, you can add. I would say, when we look at the customer remediation accruals for both, this quarter and last quarter, they are very -- they're very discrete items where we went through all of the items that we have in our customer remediation queue, of which everything material is -- relates to prior practices that have been around for a period of time. We're working really hard to put these behind us, and put these behind us means determine exactly what we're going to do for remediation, work with our regulators where necessary to make sure that they understand what that means. And what we did over the past couple of quarters is to try and go through the entire inventory to ensure that we were current and realistic about what our actions are and what we're going to do to move these on.
And so, we've done that. I wish it would have taken one quarter as opposed to two, but it took two. And not that there won't be anything going forward, but we don't see anything that looks at all materiality of the types of things that we've done.
And so, we think it's -- those things are booked. It's in a good place, and we're just doing the work to implement them now.
And then, in recent years, there has been this kind of range of litigation, but there's been two big pieces of litigation that have contributed to this in a way that's not expected to recur, one being the -- at that point 10-year-old RMBS settlement where we were among the last people to be brought into the settlement process; and then, of course, the sales practices related litigation that was settled earlier this year. And that similarly is not expected to recur.
So, I get your point, which is, it’s been elevated for a long time. But, when you disaggregate it and look at what is the run rate in the business, we mentioned that adds up to roughly $600 million a year versus what things are specifically related to what I would describe as legacy issues, that is where the line gets done. But, the proof will be demonstrating [multiple speakers] $600 million or below will be helpful.
Yes. Well, it's been a while since you've been there and you've been talking about that number for a while.
It's actually the second quarter of 2020 was $464 million.
So, that's an example.
Okay. Got it. But, just final one, just clarity. When you say flat to down, that's full year '21 versus '20? Is that -- because it seems hard to be flat, given kind of your run rate as you exit 2020.
It depends on what happens with loan growth. That's a good point. But, that is the full year versus the full year.
Your next question comes from the line of Steven Chubak with Wolfe Research.
So, I wanted to start off, John, with just a question on liquidity management. We've heard different messages from your peers regarding appetite to redeploy excess liquidity into MBS and help mitigate some NII pressures.
You're currently running with, arguably the largest excess liquidity pool of all the money center banks. And I was hoping you could frame the potential benefit from remixing into higher yielding securities. And is any of that contemplated in the NII guidance that you provided for next year?
Yes. What's contemplated is a continuation of roughly the same level of redeployment, which just requires redeployment, given the rate at which things are prepaying.
So, there's a question about how long you want to get in a sub 1% 10-year environment with mortgage yields at these levels in the event of a backup, it's a problem, it's a capital problem, it's an earnings problem versus the trade-off of what happens if rates stay low for a very long time or frankly go lower from here or even go negative and what that means from an earnings power perspective.
And so, those discussions, those trade-offs are measured and revisited each time we have an ALCO discussion, given what the forward look is for what could happen to rates and deposit flows and loan demand and other things.
So, we have liquidity available for loan demand.
We have -- we certainly could redeploy tens of billions of dollars into MBS or probably even more into similar duration treasuries. There's some liquidity difference in the characteristics there. But, I think, as you heard from at least one of our competitors, really loading up at these levels and locking into both, duration and/or negative convexity doesn't seem like a great trade-off.
And so, we're faced with those same choices. And right now, we're essentially redeploying to stay at about the same level.
So, in terms of how we think about the opportunity and also how factors into the Asset Cap, so just trying to be clear about what I tried to say before, which is we have an Asset Cap that we have to live with, but we do have some room to operate as we sit here today because of the liquidity that we have, because of where the balance sheet is actually running today, because of other actions that we've taken, and as we think about exiting some things that can create some balance sheet room for us.
And so, while we don't have the same capacity that others have, we do have capacity to deploy more of our capital towards loans than we've currently deployed.
That's great. Thank you both for that color. And then, maybe just a question for you, Charlie, on the expense outlook. I'm going to try to take a different tack here.
Given that one of the biggest sources of pushback that we've we hear from investors is that while the opportunity to drive expenses lower is quite clear and evident, the risk is that revenue attrition is difficult to handicap and could be greater than anticipated, especially given how significant the revenue attrition has been since the last Investor Day update, recognizing you were not in the seat at that time. But just curious as you begin executing on the cost plans and headcount reductions, what efforts you're taking to help limit revenue attrition and your confidence level that you can achieve efficiency gains while protecting revenues?
Sure. I guess, let me answer it a couple of ways.
First of all, when we take a look at just what happened to the franchise in terms of attrition, I mean, the reality of who we are is we are more of a traditional consumer and commercial bank and some of the other large competitors we compete with.
And so, the reduction in NII in those businesses has an outsized impact on us relative to the others because of the business mix.
And so, that revenue decline is not franchise loss in terms of what it means to customer relationships. When we look at the individual businesses and how they're performing from a customer franchise in our consumer business, in our middle market business, in our wealth business, as well as the large corporate business, I actually look at and say it's been extraordinarily strong given all this company has been through. When we think about the actions that we're going to take, first of all, for things that we are going to exit, it doesn't either fit with what we do or have the right return characteristics.
And so, that is a -- those are a core set of decisions, which when we go through them and you see what they are you'll look and see if that make sense given who Wells Fargo is. And then, the other actions that we're taking are all about improving the franchise. We're not -- and so just to be clear, I tried to say this in my remarks, we're not going around saying, we have to cut x billions of dollars and everyone line up and just do it. It is about what do we have to do to run a better company, so that we can be more efficient internally of getting work done and deliver a better quality product for our customers, business by business. There's a gigantic amount of redundancy in multiple platforms across common products, common processes. Those are the types of things that are going to drive the efficiency of the company, but it will make us a better-run company.
And so, we have an extremely heightened antenna when it comes to anything, which impacts the risk work or could hurt the value of the franchise. And in fact, as I said, the conversations around doing everything to help the value of the franchise.
That's great. Thanks, Charlie for all the color. And John, best of luck with your future endeavors.
Thank you very much.
Your next question comes from the line of Vivek Juneja with JPMorgan.
Hi. Thanks for taking my questions, Charlie, John. A couple, let me just start with one clarification. Charlie, you talked about the fact that the operating losses, you've been trying to work on this for the last couple of quarters. I want to check in on one thing. The reimbursements you're trying to -- make sure that where you needed to expand the horizon in terms of customers, time period, et cetera, given that we're concerned about the run rate of this number going forward, has that been signed off by regulators, or is there still that process to come, so that there's some potential that that could change because of the regulatory angle to it?
Yes. Without being specific about whether something signed off on by regulators, I'd say that we have a belief that is by the business leadership and everybody around it that we've arrived at the right numbers that make sense for customers, put these issues behind Wells Fargo and shouldn't be met with any disagreement.
Let me shift gears.
Just a quick one. Treasury management, you talk about fee revenues this time in your slide deck. Normally, you've talked about total revenues. Any reason, can you give us what the total revenue for treasury management? I know that's an important business for you.
Yes, it is. And it gets split between the commercial business and the corporate business. I know that we're -- the way we're describing it, I think, is -- there's a trade-off between NII for earnings credit rate and fee revenue.
So, the way we've described it in the deck is sort of -- is all of the specifics we're putting on it right now. We can talk about breaking it out a little bit more now that we're in a rate environment where we don't have to pay customers through treasury management fees for putting noninterest-bearing deposits with us, but I don't have any more clarity for you right now.
Okay. One last thing, Charlie, in terms of the businesses that you're talking about, the operations. Wealth management operating margin was only 16% this quarter, pretty low, given what you folks have also delivered in the past. Any color, any granularity on what's keeping it so low? Is there a potential to improve that through any business changes?
There's certainly a possibility of it. I mean, it's a question of what we're generating in loan spread and loan yields in that business have come down.
I think there's a belief by the new leadership in that business that there's a much bigger opportunity for securities based lending among other types of lending for wealth customers that we haven't really tapped in the past.
So, that's probably going to be margin enhancing.
On the core fee generation business, the margin isn't likely to change very much, given the relatively linear connection between revenue and expense.
Your next question comes from the line of Gerard Cassidy with RBC.
John, can you share with us, on the premium amortization, you guys obviously have seen this in the past and in past cycles. Can you -- and I know you said it's going to continue to be enforced on the margin going into '21. If interest rates stay at this level, when do you think it will start to meaningfully come down from the current level? And second, what kind of impact is the Fed then having on keeping the yields down in this market with their active buying, which -- actively buying the mortgage-backed securities?
So, a meaningful impact is the quick answer to the second half of your question. I would expect the pace of premium amortization to stay in place throughout 2021, mortgage securities, in part because of the Fed and in part because of the industry's ability to sort of shift and even speed up, take frictions out of the refinancing process, which speeds up prepayments.
I think, we're operating at about 35 CPR right now. That isn't going away, whether it's virtual inspections, virtual tours, paperless closings or at least electronic closings, et cetera. It's made it easier and easier for people to refi. And that's going to keep speeding things up. We think we've accounted for that in the way that we measure that risk in different parts of our business. But, I don't think it's going away. And eventually, we'll have a burn out of the -- in the moneyness of the stock of mortgage securities, but there's still a long way to go.
I think, we mentioned that our expectation for our Q4, very near term, but our Q4 looks a lot like Q3 in terms of volume and margin. And I think, as Charlie mentioned, we're operating at capacity, and so as much of the industry.
Very good. And pivoting to you, Charlie, I know the Asset Cap is not what I'm asking about with this question, but you did point out that you guys are spending a tremendous amount of time of getting everything right with the regulators.
If you're comfortable, can you give us a time line of when you send in the documents, when do the regulators start to see the work that you've done? I assume it's already underway. But,, where we could kind of then figure out maybe the regulators could give us outside of a decision that, yes, you guys are out of the penalty box and…
Again, I think, that's a -- it's a hard question to answer. What I'll say is – so, the regulators are alongside us every single day. They see exactly what we're doing. They see how we're organized. They see whether we've got the right sense of urgency.
So, they don't just sit in their offices and wait for us to send them something and then they study it and react. They're there side-by-side with us, and we have extremely active dialogue with them as all the big banks do. And for us, that's a good thing because we want them to see what we're doing, how we're doing it and how it's different than we tackled these issues in the past. My experience has been when we ask them something very specific or whether we -- when we give them something and submit them -- something to them, they're thorough but they're very timely in their response. How that actually plays out with a consent order, again, I don't know. It is -- what we're focused on is doing the work, having them see the progress. And hopefully, the work will be done to our satisfaction and their satisfaction. And we get -- and we'll move forward at the right time.
Our final question will come from the line of John McDonald with Autonomous Research.
Hey, guys. A couple of quick cleanups here, wrapping up. John, just on the CET1, how much does that change impact CET1, RWA, the new measurement, any idea, just kind of framework for how much that hits?
You can see in the deck what the comparisons have been for the last -- those measurement points. I mean, today, they're basically on top of each other. The question is, what happens to RWA as internal risk ratings change with the passage of time.
And so, we expect to be well above our minimums, our own targets, et cetera. It's not really an issue. But if it pops around by tens of basis points or something, I just want people to know that that's just the -- that's the regulatory framework that we're operating in. There's nothing new or different about the credit risks and these loans. It's accounted for in our allowance and -- but this -- we've always been -- we've been a standardized constrained bank since this regulatory regime came into place. And now that might change for a period of time, as we work through the pandemic. But, I don't anticipate it being that meaningful. And it's the same dollars of capital protecting the same book of loans.
Okay. Got it. And then, just one more on the NII.
For the fourth quarter, is your guidance implying that NII is relatively flat to the third quarter?
Yes. It's flattish. I don't think we have specific guidance, but I wouldn't expect it to move around that much in the quarter.
Okay. And then, if you operated at the fourth quarter annualized, if we annualize that next year and compare that to the $40 billion for this year, that'd be down mid-single digits.
So just -- I got a couple of questions of people asking, how would it be flat year-to-year, like you'd have to have loan growth, right, for it to be flat and you have an Asset Cap.
Yes. They have to have loan growth or a steepening and redeployment. A handful of things would have right for it to be flat.
So, that's why -- I think that's a reasonable range of expectation, flat to down mid single digits. And, we'll give more clarity on that as the budget process is complete and we get closer to the beginning of the year. But, those are the drivers.
Okay. And then, the last thing just for Charlie. Charlie, just to kind of clarify, what you're hoping to do on communications and the timeline.
So, in January, you'll give us some expense guidance for '21, once you've gotten to think through that some more.
So, we'll get an expense guide for next year in January. But, in terms of kind of the further details, like longer term aspirations for ROE and efficiency and long-term cost potential, is that going to be later on, and that depends? If you could just clarify what the time frames are for road maps, that'd be great.
I think, it depends on whether -- how much work we've done over the multiyear period and having bottoms-up supportable plans that we have the confidence to share where we are in COVID, and ultimately, thinking about the interest rate environment as well, because clearly, as we think about our efficiency ratio, revenue these days has a very meaningful impact. But, as we do our work on expenses, the work -- we're taking actions.
You see that in the charge this quarter, and the reserves that we provided for these actions will be taken this year.
And so, you'll see the positive impact next year.
And so, the actions that we're building are very real. It's a question of when it all comes together in terms of understanding the regulatory piece, the necessary investment piece and the expense cuts.
So, again, I think, we just have to take it one quarter a time and understand that people want to see progress on a net basis.
I'll now turn the conference back over for any further remarks.
All right. Everyone, thank you very much for the time. We appreciate it, and we'll talk to you next quarter.
Ladies and gentlemen, that will conclude today's call. Thank you all for joining.
You may now disconnect.