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

So good morning, everyone. Before we start, we're required to make certain disclosures about Goldman Sachs' relationships with companies we discuss. Those disclosures are available on the webcast page. So with that, I'm delighted to introduce our first speaker for our 2020 Financial Services Conference, who is Charlie Scharf, President and CEO of Wells Fargo. Charlie, I think, is well-known to many of you. He has a wealth of experience across most of the major businesses in financial services. Before joining Wells Fargo just over a year ago, Charlie served in senior positions at JPMorgan, followed by serving the CEO of Visa and Bank of New York Mellon. Charlie, thank you very, very much for joining us in what will hopefully be the first of many appearances as CEO of Wells Fargo.

So I thought, Charlie, we could start off with a broad question around the operating environment. And I appreciate there's a lot of uncertainty. But what is your assessment of the state of the economy today? And as we head into 2021, what's your base case for economic activity? And maybe you want to give ranges just given the uncertainty. And it would also, I think, be useful in the answer to touch on what you've been seeing over the last few months in terms of activity, both on your consumer platforms, but also on your corporate platforms as well.

Sure. Thanks, Richard. Thanks for having me. It's really great to be here and have the opportunity to speak with you all today. Listen, I guess I would start with what I think most people are experiencing, which is the world that we're experiencing today is certainly far, far better economically than we thought it could have been sitting here 3 months or 6 months ago. The government response has been extremely impactful, both from a fiscal perspective as well as a monetary perspective. And the banks have, I would -- operating normal course during -- even during that period of additional construction, whether it's in trading or lending that. And having said that, we sit here today, and we see the same thing that you all see, which is that the paths ahead, given the surge that we're seeing, will pose a difficulty for sure. There's no doubt that when we look beyond that, we feel far more confident that the vaccines will mitigate that. And then we'll need to see a beginning of returning back to normal even beyond what we've seen today and something which is certainly more even across the economic spectrum broadly across the country. Hopefully, this all happens quickly. I would say when we think about what that looks like in our own operating environment, we're more cautious in our planning. But I think it's certainly quite possible that you'll see a very quick recovery as the vaccines get rolled out, given all the pent-up demand that exists. On the consumer side, what we've seen is that the government stimulus has been extremely meaningful when you look at individual accounts. When you break it apart by affluence levels, higher savings and higher spending is what we've seen for the less affluent. Having said that, we've also seen that as these government programs have come to an end, the reserves that those less affluent customers have built up have been starting to decline. We don't see it as being gone yet. They're still in a better position today than they were going into the pandemic from a savings point of view, and we see that filter through our credit performance. The credit performance has been extraordinarily good, given where we stand. But again, as we know, the outlook is extremely uncertain. These government stimulus programs were meant to be a bridge. The bridge has ended. The surges are being seen in -- fairly broadly across the country, and the vaccine is on the way, but it's not clear. So we sit here today, and we can certainly believe that stimulus is necessary as another bridge, but there is an end in sight. On the wholesale side, we see very, very similar dynamics in our small business population and middle-market companies, especially those that had access to PPP. The large corporates have had access to the open public markets, as you all know, which has been extremely beneficial, and they tapped it in meaningful ways. Business activity, having said that, is slowing, especially for those where we have asset-backed relationships, where we've got a view into product sales. There was a huge amount of demand early on. But inventories are down and whether it's a combination of ability to get those supplies replenished as well as just those retail established being conservative in terms of demand. So the [ bed ] has been slowing, it's not bad or surprising. And we certainly see that in terms of lower loan utilization and slowing the loan demand. So as we sit here today, the outlook looks very similar for consumer. We just sit here and say, all in all, very, very good, far better than what we would have expected, but uncertain outlook. Although as we look towards that second half of the year, we feel far better about it.

So -- but maybe we can -- so that's a great answer. And perhaps we can now segue into your experiences at Wells and your priorities. And I think you've been in the job for just over a year, I guess, 14 to 15 months. And you obviously have worked at a number of financial institutions before taking on this role, which I think gives you very good perspective into what Wells does well and what it could do better. As you reflect on the last 14 months, can you talk a little bit about what you've learned? And perhaps talk about your priorities and how those priorities have evolved in the role.

Sure. I guess I would start with by saying, I think by my original opinions and theses that I came into the company with were right. I haven't been surprised or feel that I was wrong. But I would say that in terms of the things that I thought were either issues or opportunities, I feel they're even more extreme in terms of both the intensity with which we need to deal with those issues. We've talked about the regulatory, the risk and the control issues as being the one extreme. But the other extreme is the opportunity to build what I really continue to believe is just this amazing franchise that we have, both as individual businesses, but certainly as a collection. People know the regulatory issues. We've talked much about it. I tell everyone, you can all go read the 11 public consent orders that are out there. You can see the dates with which we were given those consent orders. I'm not sure that -- I want to say it differently. I think it took a while for people to really digest what it all meant for the company, quite frankly. But having said that, I've also said that the work that's necessary is clear in those consent orders. It's the work that most other banks across the world, certainly in the United States, have undertaken, and it's our clear priority. When I got here, I would say that wasn't as clear, surprisingly. We were focused on lots of things. We knew the work had to get done. But this laser focus on -- this is a gating issue for our ability to tap the value of the franchise and serve customers appropriately wasn't as clear. I think it's completely clear inside the company. We're better organized around it. We have better people. We've got specific experiences in dealing with these issues. And so we're working hard at building the right kind of foundations to deliver the kind of results that are necessary to put these issues behind us. It's hard to provide clarity to the external world in terms of how we're making progress. But I'll tell you, internally, we are extremely clear on what has to happen, where we are not meeting our expectations, where we're falling short. As you know -- I think I've talked about this a bunch. The organizational changes to get there have been hugely meaningful. The additions of people like Scott Powell as Chief Operating Officer; Lester Owens, Head of Operations, which, by the way, are 2 completely new jobs that never existed inside the company. Huge amount of change in terms of our risk managers, our audit staff, our control executives. And I think when you look at the numbers, something like 1/3 of the Management Committee, which is 160 or so of the company, is new to the company or new to job, many of which are from outside the company with very specific experiences. Our disciplines inside the company in driving the work are totally different. The weekly reviews, the monthly reviews, the -- just the way we go about it. So I feel great about the path that we're on, knew it had to get done. But it's still an awful lot of work. And just a second on -- just transition to the opportunities for a second. The strength of the franchise is still completely clear, when you look at not just the individual surveys that we do of customer sentiment, but also have conversations with customers of all size. And it's consumer, small business, middle market, all the way up to large corporate. I look at the opportunity to take the breadth and the scale that we have, and I really believe that there are few of us that have these ingredients to really serve customers in a way that are different than almost any other financial institution out there. And so we've got the opportunity to use these strengths that we have to run the company very differently. Historically, we ran them as separate businesses. We didn't leverage the infrastructure of the company. We didn't organize around the customer. And I would say that we probably weren't committed to using technology the way we've got to think about it going forward. So again, the thesis coming in being we've got to get the regulatory work done. It's extraordinarily important. It's the gating factor for our future. But the opportunity is still as meaningful as it ever was. I think those things are still completely true.

So I think you talked about strategic business reviews when you first joined Wells Fargo. How far have you got through that process? What stood out to you within those reviews? And as you think about the portfolio of businesses that Wells Fargo has, do you think it is the right portfolio of businesses? Or do you think you could see additional divestitures or exits from businesses from here?

Sure. So let me start with the reviews. And again, I think this is just a level of discipline in running the company very differently than we ran it before. I think I've said this in the past, which is that when I got inside the company, people talked about the historical way the company was managed. It was the federated model. It was a series of businesses that were either built or many acquired through acquisitions that ran fairly independently in terms of how decisions were made, let alone in terms of the -- it was optional to figure out how to work together and how to be fairly organic in terms of how it happened. We're taking a very, very different approach to how we run the company. We're running it as one company. These business reviews are an opportunity for all of us on the management team to sit and learn, make decisions, set goals, drive results at the level at which the businesses operate. We've learned a tremendous amount. You look at issues, you look at opportunities. It's an opportunity to sit there and say, do we have all of the right reporting? Are we looking at all the right metrics? Are we calling out the places where we're not performing as well? Our internal reporting is getting far, far better. And by the way, I think that will translate through. We're going to roll out new financial reporting in January for the company, which includes new segments, but also new detail on the performances of our businesses, which we hope will give you all a better lens into what that performance looks like, and hopefully, will be a meaningful step forward. And so as we think about where the opportunities are, I would say, when we look at all of the 5 businesses that report to me, the 5 business leaders, they're all critically important for the future of the company. So I don't see that as changing. But we are continuing to look at this -- the way we talk about it is continued pruning of who we are and what we do. We're clear on who our customers are. If we can advance the company with the product set that those customers want, they've got a place here. If they're good businesses, but they don't do that, they might belong elsewhere. And so I think there -- the way I describe it is don't expect these dramatic surgery in terms of the company, but there's some smaller product sets that we have across the company that aren't core to what we do, aren't particularly meaningful to the future of the company, and we're in the process of exploring those opportunities. But again, don't think about it as major surgery.

Okay. So on the last earnings call, you mentioned that you were going to give a strategic update in January. Is that still the case? And I guess, given the uncertainty around the economic outlook, do you think it makes sense to give targets and time lines at this point? Or should we expect more ranges? And perhaps, at this stage, would you be willing to talk about some of the milestones you would like to be judged on in terms of your CEO-ship at Wells Fargo?

Sure. Listen, there's no doubt that targets beyond the shorter term in this uncertain environment are extremely difficult. I mean we sit here today and we think about the first question you asked. And none of us really know exactly how the economy is going to play out over the shorter term. We're extremely bullish about what it looks like over the longer term, but we don't know what the timing is. And as you know, this environment affects not just business levels, but obviously, credit as well as the interest rate environment, which given our business mix, certainly has a meaningful impact. So the path for stronger and more consistent economic growth does remain unclear. And so what we're very focused on today is making sure that we've got a clear lens into 2021. We're finishing our budgets. We've gone through an extremely rigorous process beyond what we've done in the past. I talked last year when I arrived that we really hadn't done a detailed annual planning process in quite a while. It was more of a mathematical exercise than a business exercise. We've been engaged for months now in doing that. And coming out of it, we've got a very, very detailed view, certainly of expenses, both what's required for the regulatory control work, which we're going to protect that at all costs and invest however is necessary. Looking at our technology priorities and what our capacity is and what our future looks like there. But looking at where the business opportunities are. And as extremely importantly, opportunities to run the company in a better way, which will translate to increased efficiency and lower expenses. We're doing detailed analyses on the impact of different interest rate scenarios on our NII, not just on rate movements, but on terms of what it means to business activity levels. So it just kind of -- that all rolls up to the fact that by the time we get to January, we'll certainly believe that we'll be able to provide a pretty good view into certainly what NII and expenses look like for 2021. And beyond that, we're going to be cautious. We're certainly confident that the economic environment, when it strengthens, that we'll be able to deliver a very competitive return on tangible common equity, and we're certainly taking action to do that now, as you saw in our restructuring charge last quarter. We'll probably have something like that this quarter as we continue to position the company and drive those results for the future. And obviously, we've got the asset cap that people certainly talk about. So those things translate to just be very, very conservative in terms of giving too much specificity beyond '21. But we'll certainly talk about the opportunities as we see them and some real clarity, hopefully for '21.

Can we talk briefly about the consent order? And I appreciate it, it's not entirely in your control. But could you talk a little bit about the process from here? And from your perspective, has the pandemic in any way changed the time line in terms of getting the asset cap in particular lifted?

That's a great question. I would say -- and I want to start with -- because I know -- I feel like when I give this answer, that it's -- that people are always left wanting more. And I completely understand the desire for more information on this. Again, what I can say is what I've said consistently, which is we have to do the work. We are laser focused on doing what's necessary to build the right foundation for the company, which is what these consent orders are all about, including the Fed consent order. It's our job to do that so we run the company properly. And then it's, ultimately, we do it properly, satisfies our regulators, which allows us to be in a position to satisfy all of you and everyone else more broadly. I can't speak for the regulators. They'll be the ones to determine when the work is done to their satisfaction. But again, I can say it's our priority. I think there's no doubt that the pandemic has made everything more complicated. What I would say is there's no doubt, yes, it certainly would have been easier to continue to move forward on this as well as other things without the pandemic because I do believe that we'd be more effective if there was more close physical interaction in terms of how people work. But I'd also say that we've adapted extremely well at this point and we're moving forward. And so I think there's no doubt that it certainly made things more difficult. But we're operating extremely effectively at this point. We've got the right team in place, and I feel good about our ability to move forward on it.

So getting Wells Fargo back to pure efficiency ROE levels requires both revenue and cost improvements. When you assess the opportunity set for Wells, do you think it's credible that you can simultaneously grow revenues and cut expenses at the same time? And I guess one of the questions I often get is, do you think you can actually see a material improvement in the expense base at Wells Fargo without the consent orders being lifted?

So listen, the way I'd answer the question is, when we come into work every day -- and this is going to sound a little -- I don't, well, let me just say, we don't come in to work every day and decide are we going to focus on expenses today? Or are we going to focus on revenues today, right? We come in and we say, what do we have to do to build a better company? How do we build the right infrastructure? How do we serve each other, serve customers, serve our communities and all that kind of stuff? And so as part of that -- and by the way, part of the work that we need to do to build the right control environment is to simplify the company, to simplify how we do our business to make the company less bureaucratic, less reliance on expensive third-party resources so that we drive the right subject matter expertise. I mean all of this work to run a better company what I'm saying -- lowering the expense base is a byproduct of doing that. We don't come in and say, we want to actually -- our job today is just to lower the expense base of the company. It is how are we going to run a better place? How are we going to do the right work? So there's no doubt that we're going to be extremely conscious about ring-fencing all of the work and resources that are necessary to satisfy the consent orders. But none of that work has to do with asking the question, why do we spend the amount of money that we spend on third-party resources? Why do we have more layers than any company of this size? Why do we have more employees than companies that are dramatically larger and more complicated than us? Why do we have the less-efficient branch structure that other people have? So those are things that we're all doing. And we are very focused on a net basis, driving the expense base down of the company at a reasonable way, not beyond what is a smart thing to do and also being really, really focused on the future. So we're not talking about reducing things that in any way limit our potential to grow the company. This is about looking at the fat. It's about looking at the waste that exists in companies. It's about giving people more opportunity and more resources to invest inside the business. So yes, I think it's very credible that we can both become more efficient as well as focus on growing the company. Now having said that, because we're doing the work that we have to do, that many other banks have done already, we are behind the 8 ball. And so would I expect to see the kind of growth that other companies would see in the shorter term? No. But it's not one or the other. And it's a -- it's not purely sequential. But in terms of getting to the full potential of the company, that won't be seen until we do get this work behind us, but you should see progress.

As you digest what you've learned from the pandemic with, I guess, 90% plus of your employees working remotely, has it changed your thought process around what's achievable in terms of efficiency in the long run?

Yes. Listen, I think we, like everyone else, are learning about what's possible in this environment. As I said before, I think we've done remarkably well through an extremely difficult period. I don't think any of us would have thought that we could have 200,000 people working remotely and at the levels of efficiency that we have. But having said that, it is hard. And it's certainly -- I don't think it is the normal. I do believe that you lose things with people not being physically together. And so does it have to be for everyone all the time? No. And so I do think that we'll be able to use this as an opportunity, both to create some more flexibility for our employees, as well as the opportunity to reduce things like travel and become more efficient with space over time. But I don't think it is -- it's not -- we're not going to be at an extreme. We're not going to go back to exactly the way it was before, but we're certainly not going to live in a world like this. I think there are huge benefits of having people within close physical proximity. This doesn't have to be 5 days a week per se. That's a made-up number.

Okay. So let's talk a little bit about the revenue outlook. And I -- look, I think everyone accepts that not just for Wells, but for the industry, the revenue outlook next year is challenging given interest rate structures and, obviously, given lower levels of economic growth. But can you talk a little bit about your expectations for areas that you feel you have visibility, whether that's net interest income or fees even if it's for the first half of next year?

Yes. I guess I'd say we'll certainly give a little more context to this as we get into the earnings in January, and we still have -- the year is far from done. I think when you think about NII, we'll certainly -- I guess, I want to make sure that people are thinking about it properly that I wouldn't look at it in terms of the full year. I think you got to look at it in terms of where we are today, in terms of both balances as well as the rate environment. Hopefully, we'll give you some clarity as we look into 2021 as to what we expect we could potentially see in terms of balances and assumptions in terms of rates. But again, I just think the way to think about it is that the current run rate is the right way to think about the right jumping-off point. We certainly have a series of fees that are driven by asset levels and indeces levels. And the rate environment certainly drives a tremendous amount of the mortgage banking activity that we see. And so those things certainly look to be pretty consistent. But again, I think I'll defer in terms of 2021 until we get to January beyond that.

Okay. I mean longer term, it does feel as if low interest rates are going to be a feature of the U.S. economy for quite a long period of time. I think our economists have got the first rate hike in 2025. As the industry digests the ramification of the interest rates remaining lower for longer, do you think that they will revisit fee structures to try and offset some of the lost spread income on some of the consumer products? And to what extent do you think consumers will be receptive to some of those types of pricing changes?

My view is, I think -- I guess I can't speak for others. I would say I think people should be extremely cautious about thinking about it that way. I think deposits are extraordinarily valuable. And to think about the value of the deposit in terms of how much you're making this quarter in NII is completely the wrong way to think about it. And I think that's been proven as you look over, certainly, my career in terms of what the cycle is in terms of understanding the value of what that stable funding base means for, not just you as a company, but far more importantly, what it means for a relationship. And when we look at the value of those deposits, you certainly start to see the importance of scale and safety that the large banks bring. And so when you look at the deposit inflows that we see, it's customers telling us that they want to do business with us. They want to have a broader relationship with us. And it is an opportunity for us over time to serve them more broadly for a very, very, very long time. And I also think we should be really, really careful about thinking about, again, fees that will benefit you in the short term, which just don't fit into the context of the way we should be treating customers of all affluence levels. And I actually think it will certainly mean that we all need to start thinking even about existing fee structures. And for those that have the breadth of products and the breadth of capabilities that a Wells Fargo has to serve the least affluent consumer, all the way to the most affluent consumer and up into the corporate space, that is the -- that's the value of this franchise that we have. And we don't have to create a series of fees that will help us in the shorter time to create that kind of value out of the relationship because we've got the opportunity to serve customers in a very different way than most other financial institutions. And it's not going to be just one winner. There'll be a whole bunch of winners out there. But that's why when we think about what Wells Fargo is, the opportunities that we have I just think are extremely meaningful. But we have to look across the franchise and think in terms of the way the customer thinks about us. And the customer is not going to sit there and say, well, rates are low, so I'm really happy being charged a fee. Remember, they're also sitting there making very little on that deposit as well. And so just the mindset of how we think about things has to be very, very different. And again, a company like Wells can afford to do that.

So I guess, in some ways, 2020 was the first real-world stress test for the banking industry since 2008. Can you talk a little bit about what you've learned from maybe an underwriting perspective, from a risk perspective? Do you feel on balance that Wells Fargo got the risk-reward right in terms of the underwriting standards they had? And how do you see either risk metrics or underwriting standards changing going forward as a result of what you've learned this year?

Yes. I think it's a good question. I start with -- the answer to the question I think is, yes, in terms of the quality of the credit management of the company, but it's also something that we're going to certainly see the answer to as this environment continues to unfold. The way I've described it is, when we sit in a room with people and we talk about -- I go back to when I first got here and we talk about what we're doing as a management team, very broadly speaking, about getting all of this regulatory work done, it certainly -- it didn't feel like what was necessary for the work that we have. I think just the opposite when you get in the room with our credit folks. Whether it's on the consumer side or on the wholesale side. Credit risk management is deeply embedded in the company. It is a strong, independent function, but our business leaders just -- they were raised to think about credit, to understand credit as credit managers, and that's what they've done. And when you look at the majority of our products over a period of time, we have performed extremely well. When we look at the things that we've done to continue to further that effort in terms of just trying to be smart about getting in front of the curve in a series of products, I think we've done that. And I think we've been very proactive at the start of this to become a little bit more conservative on things like collateral values and credit scores. In mortgage activity, we've just made sure that we're focusing on customers that we know the most about. And so I think that, for the most part, our underwriting standards are slightly more conservative, but more getting back to normal course. And given the information that we have, we have the opportunity to look fairly broadly at the early measures of performance. But overall, I feel very good about the way credits have been managed here.

So there's -- we've got a few minutes left. And so there's a few audience questions. So let me take a couple of these. So I think this is an interesting one. Which is, from your perspective, given everything that you can see across the Wells Fargo platform, do you think the market is appropriately pricing credit risk today?

Listen, I'm -- in terms of how both underwriting and pricing in the actual marketplace as well as how they value banks, I'd separate into 2 different things. I think generally there is a clear view out there that we will get through the environment that we're in. And there's a high degree of confidence in terms of the government continue to be helpful to do that. I think that is very, very important to what we're seeing in terms of the way credit is priced fairly broadly. And it's a recognition of just how important monetary stimulus has been as well. So I think in the context of the continuation of those 2 things, I think, broadly speaking, that is the driver. And other than a couple of markets here and there, I think it's fairly priced in. In terms of banks overall, I think when you look at the way banks are valued, I do think that there's -- I'm not sure the world is completely adjusted to thinking about CECL in terms of what it means for bank earnings. The acceleration of losses has been dramatic. I think very, very early on, we all -- as we learned about how this could unfold, I think I'd certainly say from our perspective, we try to be as forward-thinking and conservative as we can be to make sure that we were capturing the embedded risk. As I said, things are playing out better than that today. Hopefully, there will be more government stimulus. It's necessary, not for us, it's necessary for consumers and small businesses and middle-market companies. And then we have the vaccine. So I think all those things play itself out. I think you could certainly see some meaningful strength in terms of how we're positioned, both relative to our reserve levels, but also our capital levels.

So there's a bunch of questions here on capital returns. So perhaps we can group these as the last question, which is, look, you've got in excess of $25 billion of excess capital. If the Fed was to lift the moratorium on buybacks, is share buyback something that you would look to do in 2021? And secondly, from a macro perspective as well as from a Wells performance standpoint, what do you think it would take for you and the Board to feel comfortable taking the dividend back to historical payout levels? So perhaps we can just group that and answer those together.

Sure. Listen, I think I'll repeat what you said and what I said before, which is our capital levels are extremely strong. And that's strong capital levels on the top of what we believe to be a fairly strong reserve position as well. And so those 2 things together in terms of that -- just taken together, really tell you the quality of the balance sheet that we have. And as you know, we have the asset cap. And so our ability to deploy excess capital using our balance sheet is constrained versus others, which just tells you even more in terms of just what that excess looks like. Listen, I think, certainly, we'll find out the results of the mid-cycle CECL process -- I'm sorry, CCAR process very, very soon. But I think for us, ultimately, we've got what CCAR looks like in terms of what that capacity looks like. But I also think that it's important for us to be very prudent and to have some clear line of sight relative to sustainable improvement in the economy fairly broadly. And so does that mean early, early in the first part of 2021? I think for us, sitting here today, I would say, I think that is less -- far less likely than not. But 2021 is a long year. As we've said before, the vaccine is coming, and clarity certainly could come. But that is going to dictate when we feel comfortable. And at that point, there's no doubt that there's substantial excess capital to be deployed, both through buybacks, but at some point, certainly increased dividends as we continue to increase the earnings capacity of the company.

Okay. Charlie, with that, we're out of time. But we really appreciate you coming. We would love for you to come back next year, and hopefully, we get to see you in person. But thank you very much for joining us today.

Thanks, Richard.

Thank you.