Wells Fargo & Company (WFC) Earnings Call Transcript & Summary

Yes. So I'm sure over the last few years, our market share would have expanded more in certain categories if we weren't living with the combination of issues that you mentioned. Some of it's reputational risk, some of it's focus in bandwidth, some of it's -- it's all of those things together. We don't just compete with the biggest banks, although we compete with them every day. Combined, the 3 of us probably have 30% or 35% market share in retail deposits, and it's different product by product, but we're competing with the entire industry of banks and nonbanks. And against that context, I'd say that the big bank probably still has a big advantage. I mean just this year, in part because of what's happened with COVID, but our retail deposits have grown $100 billion, which is bigger than most banks' total balance sheet. So we do have more to do. There's definitely upside when -- whether it's prioritization, personal focus in bandwidth and maybe the passage of time on reputational issues allows us to operate a little bit more business as usual. But the franchise still feels very strong with the customer franchises that we have, retail deposits, retail lending, everything on the commercial side could always be better. There's still more share to garner in every one of those categories. And I'm sure it would be a little bit better off or, in some cases, a lot better off if we hadn't been through the cycle that we've been through, but we have. And on the asset cap, there are definitely a couple of businesses in particular that are big balance sheet users where we've had to curtail them in order to maintain a total size underneath the cap, and we've talked about those. But the sort of institutional deposit-heavy businesses or the capital markets balance sheet types of businesses, they're the leveraged asset types of things where we would be grossed up and instead we're sort of netted down so that we can keep the balance sheet below $1.952 trillion.

Helpful. Maybe just talk about or provide an update on kind of recent fee income trends. Obviously, mortgage has been a strong area, but you're in several other businesses as well.

Yes. So just comparing my expectation for Q3, it's not over yet, obviously. But versus Q2, because there's such aberration in different line items in Q2, my guess is that deposit-related fees will be stronger in Q3 because there's a lot of waiving of those types of fees in Q2. I don't know how much more, but definitely at a higher level. Trust and investment fees should be stronger because the market started the quarter at a higher level. And for a big piece of those assets, we priced them at the beginning of the quarter. So the Q2 fees were priced at 3 31 which was a tough point in most markets. Card fees should be stronger, both debit and credit card spending. Debit card, in particular, is stronger than it was in the prior quarter. Mortgage, I think, should be very strong. We had a big origination quarter in Q2, but we gave it back on some MSR valuation because fees were so high in prepayment. As we sit here today, my expectation is that the volume and margin on the production side probably is at least as good as it was in Q2, and again, at least at this point, not anticipating an analogous valuation adjustment in the mortgage servicing, right? Trading was probably stronger in Q2 only because it was such an outsized quarter for spread compression, bid offer was very wide, volumes were high. Everything was going our way and the Street's way in Q2. It should still be strong in Q3, but I think Q2 was a high watermark. And then we'll see what happens with sort of the more episodic, some of it's market-sensitive and other things. But I think it will be a better quarter in Q3 than Q2 for most and the aggregate of noninterest income.

So it sounds like maybe some of that softness you alluded to earlier in net interest income gets made up for in kind of the fee income side?

One's going one way and one's going the other. Yes, that's exactly right.

All right. And now we've gotten a little bit more than halfway through our allotted time, and we actually haven't touched on credit quality yet to a degree. So obviously, you know it's coming. But obviously, you had a very large reserve build in Q2 despite the fact it hadn't really seen the emergence of loan losses yet. You kind of baked in some sort of economic outlook. As we sit here today, from an outsider, it feels like the economy is maybe a little bit better or certainly kind of recent unemployment prints than some had expected. As you start to kind of think about the third quarter provision, just maybe talk to kind of what's going better or worse in line with your expectations when you kind of set the second quarter allowance?

Yes. So as you said, some of the macro factors are probably a little bit stronger or at least not worse. And the actual loss-taking or charge-off activity is getting pushed out. On the consumer side, these deferral programs are certainly a big part of it. And then all of the liquidity in the system and other forms of state and federal government support are having the effect of either making things better or at least pushing losses further out in the future. So we're not anticipating those losses being worse sitting here in the third quarter, but it's hard to know whether they're going to be better or just further out in the future. And I think we'll capture that in our allowance math at the end of the quarter. On the commercial side, we've actually seen some better realized outcomes than we imagined. There's been some liquidations, for example, of retailers that we've had exposure to. And earlier in the COVID cycle, the question existed of how do you liquidate a realtor or a retailer if everybody is sheltering in place? And of course, that has sort of worked its way through the system, and those outcomes have been better, and the losses have been lighter than it was originally forecast. So some -- there's definitely some of the pushing into the future, but there's also some net better outcomes. And so I think we probably don't feel worse in -- on the commercial side than we did a quarter ago. So I think for the whole industry, it's probably a little too soon to say that things are better than previously forecast. They're probably not worse than previously forecast. And you could find -- we could find ourselves at a point in the cycle where people are allowing charge-offs to fall to the bottom line but not making much of an adjustment on the allowance overall, and the provision would reflect that. So we'll see where folks get to. But sitting here today, that's how it feels to me.

That's, I guess, interesting color on both the consumer and the commercial side. Just -- I think one of the things we kind of struggle with is you talked about kind of losses getting pushed out, maybe a touch better in certain areas than expected. But when you kind of think about the loan segments, I guess kind of when do you see kind of losses emerging? When do you see maybe losses peaking? And how long or thoughts in terms of just how the cycle plays out? Because clearly, it's a bit different than anything we've seen before.

Yes. So on the consumer side, we have to be able to call a loan 30, 60, 90 days past due before you get into the determination of whether you have a charge-off or not. And if we're allowing customers to defer without consequence, which under the CARES Act, we are in certain categories, and analogously banks are in other loan categories, it's going to push those loans out until, call it, 90 to 180 days past the end of the combination period. And that takes you right into next year, I think. So during that time frame, you can see what happens with the stimulus programs and the liquidity that they provide, a lot of which is still sitting in customers' accounts. And you can see what happens to unemployment and whether it gets better or worse and for whom and what that's going to mean for probability of default across the consumer segments. One point on the consumer side that I think is important is at least as we sit here today, the home price appreciation forecast is pretty favorable from a mortgage lender's perspective. If this was the type of crisis or cycle that came along with a big downdraft in single-family real estate prices, then loss forecasting might look different. On the consumer unsecured side, credit card in particular, it's going to be very highly levered to where unemployment goes. Autos also will be impacted by unemployment, and loss-given default will be impacted by used car prices, which are very strong right now. And then home prices are firm as people are, in some cases and in some markets, moving to the burbs to change their lifestyle after sheltering in place in denser locations. There's more to it than that, but that's happening. Low rates obviously plays a big part in it as well. On the commercial side, I would say that the middle market customer, which is a big piece of our business, these tend to be -- or often are privately owned companies, et cetera, people are -- they have a lot to lose. They have their legacy, their family's stake to lose and they run the companies accordingly. So very liquid and probably a little bit more risk off, and they'll go into a survival mode when they need to and if they're able to. And on the corporate front, as I said, it's hard to see where the insolvencies are outside of a few specific sectors because there's so much liquidity that people can push their maturity cane down the road, and that continues to happen. So we'll see what happens when stimulus abates and what happens with the trajectory of unemployment. But so far, it's supportive for most sectors in credit. It's tough in hotels. It's tough in energy, although not as tough as it was at much lower prices per barrel of crude. And it's tough in retail for sure. But beyond that, people are making a go of it.

And then I guess one thing we haven't really touched on is just maybe just update us in terms of how you're doing on the consumer modification front, maybe percentage of customers that have resumed payment on a regular schedule to date or who's still paying as agreed and just how that process has been played out.

Yes. So we've seen a move down in credit card and in auto from the last reported levels of deferral, way down in auto, way down in credit card. In mortgage, sort of tale of two cities. Our numbers actually look like they're up because we've taken in all of these early payment buyouts from the Ginnie Mae program. We're a big servicer. And I think I mentioned on the last call that for the underlying loans in those programs that go 90 days past due, regardless of the CARES Act requirement, end up being deemed to be bought back by the servicer because it's such an in-the-money option to do it. That from an asset cap management perspective, we found ourselves needing to buy them back so that we didn't have both the consolidated asset under accounting on our books and the cash on our books. So we used cash and bought the loans out. There's more than $20 billion of those loans on our books. So they sort of goose up what looks like the deferral program. But on jumbo loans, which are the single-family loans that are normally on our books, the number has come down. Although there's still a lot of people who took an original deferral and decided to take a free option to continue it a little bit longer. As I said, we don't think there's a big credit loss there because it's not necessarily a signal that we've got a borrower in distress and we've got great collateral in those programs. But maybe because for no cost, somebody can defer what's probably the largest payment in their monthly stack of bills, and we just add it on to the end of the loan. They've taken us up on that. But broadly speaking, I would say it feels good because on consumer unsecured, the levels of deferral have come down meaningfully.

And I guess one area we haven't touched on yet is capital. Obviously, based on a backward-looking earnings test, you were required to reduce the dividend in Q3. But Wells is still very amply capitalized, a lot of excess capital relative to its stress capital buffer that goes into effect in the fourth quarter. Like how are you thinking about capital management? And just maybe how do you think that plays out over the ensuing quarters against this kind of new uncertainty [ car ] backdrop?

Yes. So I think that -- well, first of all, we're going into another stress test right now with everybody else, and we'll see what that means. We haven't gotten the details on that yet, both what the scenario looks like or what the consequences or the uses will be for the outcome. And I think it's a useful exercise, but there's a little bit of uncertainty in terms of what it means. If you set that aside and assume that we come through that like we normally do, and we have the same stress capital buffer in place so that our regulatory requirement continues to be 9%, and we're sitting today at about 11% and -- or at the end of the quarter anyway at about 11%, and we -- our internal target is about 10%. The question on the dividend, at least in the near term is, will the existing restrictions continue? And I think most people imagine that they probably will only because the industry will be in the middle of this next stress test or the Fed will be in the middle of reviewing the results at about the same time that the next quarterly dividend determination would be made for most banks. So it's hard to imagine that it's a 1-quarter trailing 4-quarter limitation. And so in that case, if we're going to -- if it's going to stay in place, we're likely to stick with where we are, although we'll make that determination when we get there with everything known. And then so when that lifts, the smoke clears, we're getting through the cycle, we've got a better beat on what actual credit losses are going to be and whether as an industry and as a firm, we're just right or from an allowance perspective, too high or too low. If we still continue to have a big buffer of excess capital, my assumption is that a more attractive dividend will be part of the discussion. And then share repurchase will also be part of the discussion, especially if the company or the industry, but particularly the company, is trading in the proximity that it is now in terms of price to book. So I assume future capital management decisions will be balanced in that way. We'll reflect the amount of excess capital we have over both the target and the regulatory minimum. And we're likely to get back to something like what we looked at before as we were on a trajectory down toward 10%. But having said all of that, there's still a lot to know about where this COVID environment goes, what the ultimate outcomes are on economic growth, what that means for losses, et cetera. I'm sort of responding to the fact that losses aren't jumping off the page. Markets are very calm, maybe even too calm, and how we would plan if those continue to be true in the future.

So I guess -- yes, so there's certainly a lot of capital looking out that at some point gets deployed. I guess more nearer term, when you set the $0.10 dividend in Q3, I mean, did you have in mind that this rolling 4-quarter average could still be in place in Q4? Or is it possible another dividend reduction could be required just given you'll still be carrying a large loss from 2Q in kind of your trailing 4-quarter average?

Yes. The expectation is that these constraints would still be in place, but that next dividend determination will be made with everything that's knowable at that time. So I wouldn't want you to take my feedback as guidance on what the next dividend action is going to be like. That decision will get made with contemporaneous inputs and looking around, including what the trailing 4-quarter earnings are at that time.

Fair enough. We have a few minutes remaining, so maybe we'll just take a touch -- look at these ARS questions. But interestingly, the first was do you own the stock? 27% of the people said overweight or long. And if you think back to 2017 and 2018, that number was close to 50%. And then this year and last year, last year, it was 28%; this year, 27%. And so it looks like it stepped down and probably one of the lesser owned names out there, which obviously provides some sort of opportunity looking out. The second question that we asked was around when can Wells' $10 billion of expense efficiencies be achieved? The #1 answer was 2024, which I think fits nicely, John, into kind of the time frame you kind of laid out of what other large banks kind of went through. The next question is, when do you expect Wells' access cap to be lifted? I think at one point, people were putting 2018 or early 2019 as an answer here. This go-around, it looks like the majority of people -- or not the majority, but #1 answer kind of first half of next year and the second answer kind of second half of next year. Do you think it's next year, John?

It's a very good question. It's not in my control to know exactly when that's going to happen.

That's fair. And just a final ARS question was, when the new management team lays out its financial objectives, what do you think its ROTCE target would be? And the #1 answer was 15% or kind of a mid-teens level. I guess, John, we used to talk to 15.5% to 17.5% for Wells. I guess, final answer, do you think mid-teens is where this company could operate?

I don't think that's unreasonable. I mean for the whole industry, I think a couple of things that matter will be what does the yield curve look like? And also what do corporate taxes look like? We're all operating in a lower tax rate environment today than we were just a few years ago. And I don't think it takes a lot of imagination to imagine a higher U.S. corporate tax rate in the future, depending on where things go, and that will have an impact at the margin on the whole industry, but I wouldn't fail to account for them.

Great. Well, we're out of time, John. I'd like to thank you not only for your time today, but it's very nice working with you over the last several years in your role as CFO with Wells Fargo. And certainly, good luck in your retirement and reach out if we could be of any help.

Thanks, Jason. I appreciate it. Take care.