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

Wonderful. Good morning, and welcome, everybody. I am Susan Katzke. I cover the large-cap banks for Credit Suisse. Our next presenting bank this morning is Wells Fargo, and I'm joined by CFO, Mike Santomassimo. But look, there has been an awful lot of news flow around Wells Fargo in the last week or so. So we're not going to spend a whole lot of time on introduction. I think we've got a long list of Q&A to jump into. And by all means for the investors, please e-mail me any questions along the way. We'll try and weave those in. And hopefully, we'll cover a lot of ground over the next 30 to 40 minutes here. So Mike, welcome, good to have you back.

Thank you. Thanks for having me. And I look forward to a day where we can do it in person again.

You and me both, in Miami. So let's start here and just level set a little bit with the macro update, if you will and talk about kind of the operating environment. What, if anything, has changed over the last 6 weeks since the earnings call? We know the yield curve has changed, loan demand, deposit flows, market environment, a little bit of an update, please.

Yes, sure. Well, I mean, it's clear that we're seeing continued improvement across a whole range of areas and sort of data. And so I'll sort of tick through some of them, right? And you look at unemployment, which obviously is a big factor for our consumer business. And you look at 6 -- a little over 6% in January, obviously, well down from the peaks that we saw earlier last year. And that continues to get better. And you look at sort of -- dig into that a little bit, and a little over half of the jobs that were lost are back in most cases. And the bulk of what is still to kind of recover are in the industries that are most impacted whether it's entertainment or hospitality, restaurants, and geographically sort of look at that, and you say, "Where is it lagging most?" It's in the states that, like California and New York that are just opening up more a little by little now. And so I think that's all sort of encouraging. And as we sort of look at the efforts that we had, we're sort of proud of the work that we've done and really help provide the combinations to about 3.5 million customers as they sort of dealt with some of that impact as well as some of the work us and others are doing to help with PPP, and we're all in sort of round 2 of that as well. Last year, we did about $10.5 billion of PPP loans. We expect that to be a lot smaller this round, but we're in the middle of that now. You think about GDP forecast and growth that people are expecting. I think the forecast now, the baseline forecast are a percentage point better than they were just a few weeks ago or months ago. The baseline is looking for just under 5% growth in the U.S. for the full year. If we hit that, that will be the best growth we've seen since, I think, 1999. So another good encouraging sign. We're seeing vaccine rollouts start to pick up. We're seeing case counts come down from the peak. So all sort of encouraging. I think, obviously, there's some fear there that we start to see a reversion there and -- which causes more shutdowns, but it looks like, generally, we're sort of on the right path. You think about the impact that all the stimulus payments have had to help create that bridge for consumers and small businesses. And it's interesting, we're looking at -- we, obviously, are the -- we see a lot of that flow of dollars come through Wells Fargo for our customers that are impacted. And if you look at the last set of payments that were made just earlier this year, we saw roughly -- I think it was $12 billion, $13 billion, $14 billion of payments flow through Wells Fargo and about 60% of that is sort of left our clients' accounts already. Some of that spending, some of that's paying down bills, some of that's moving to investment accounts. But 40% of it is still there. And I think that's an encouraging sign as you sort of think about the economy opening back up and people having money to spend as the year goes by. And then you look at how that's translating to spending and activity trends that we're seeing. We're a very large debit card issuer in the U.S. and you look at the spend that's happening on debit cards right now. It's up kind of the mid-teens percentage growth year-on-year and sort of been that way all -- since the year-end. And we're seeing growth across the board in apparel, retail, home improvement, a bunch of different categories that are there while you're still seeing much, much lower spend in travel and entertainment and restaurants. And so I think that's a good sign that people are spending. On the other side, credit cards, and you can see this across the industry, we're not seeing that same level of spend on credit cards. Credit card spending overall is roughly up flattish to up 1% versus the mid-teens on debit cards. So people are being very cautious about taking on additional debt. And with that, they're actually paying down their credit cards at a much higher rate than we've seen in a very long time as they look to be sort of cautious in deleveraging. And so again, I think that's all good positive trends as you sort of think about the recovery taking shape later in the year. Equity markets, I won't spend a lot of time there, but equity markets are well above, like the -- I think it's 70% to 100-plus percent versus the lows that we saw. They're all up, for the most part, 3% to 7%, 8% versus year-end with still pretty low volatility, excluding 4, 5 days when we saw some volatility in later -- in January. Mortgage originations still growing year-on-year. While I think everybody thinks the mortgage market will be low -- the origination market and volumes will be lower in '21 than they were in '20, it's still a pretty robust market so far in the first quarter. And you're seeing Mortgage Banker Association bring up their full year volume targets a little bit even just so far in the year. And so we're seeing good activity there. I think one place that's still weak is commercial loan demand. And you can see this in the industry data that comes from the Fed, and we're also seeing pretty similar trends where quarter-on-quarter, there is still -- commercial loans are down, and the demand is still pretty weak for that really across the board for our clients. And then as you said, rates and the yield curve, depending on the day, it's sort of moving quite a bit, one way or the other. And we've certainly seen a pretty big steepening of the curve since year-end, 40 basis points, plus or minus, depending on when you look at it, in the 10-year since year-end, which is -- which I think is helpful to offset some of the weakness that we're seeing in loan demand. But with that, you look at spreads on credit products. And so you think about where you can reinvest in the securities portfolio. Spreads are tighter than they've been in a very long time and have gotten a lot tighter just in the last 6 weeks really across the board. So that continues to be a challenge as you sort of think about where you can reinvest. And then I guess just lastly, on deposits. There continues to be a tremendous amount of liquidity in the system, and we see that really across the board from our clients. Most notably, sort of seeing that growth in consumer deposits. And it's something that we're watching really closely as we have to deal with our asset cap that we've got in place as well.

Okay. So I'm going to hang on to the word encouraging that you used when talking about the underlying economy. I hear you on the reinvestment spreads. So let's talk about your guidance and get that out of the way. On the fourth quarter earnings call, 6 weeks ago, you talked about on the expense side, aiming for $53 billion in operating expense. And then on net interest revenue, flat to down 4% from the fourth quarter run-rate. So in the context of the macro update that we've just discussed as well as any kind of intended loan portfolio sales, et cetera, do you have any update to share on the full year guidance for the first quarter in particular?

Yes. No, I think that's a good question, right, with so many things moving around. And with the market backdrop we just sort of talked about, obviously, we're seeing weakness in loan growth, but that's so far being offset by the steepening of the curve. And so I think that's been helpful. So we still expect that net interest income will be flat to down 4% from our annualized fourth quarter run-rate. And obviously, we've also assumed, as we sort of gave you that guidance, the asset cap's in place. So that's unchanged. And then as you sort of look at the biggest swing factors of where we'll end up in that range and that we're looking at, it continues to be loan growth. And as I think all of the signs are sort of encouraging that we'll see more activity level as we go throughout the year. But I think that's the place we're most focused on. Because to get to the top of that range that we gave, we are going to need to see some commercial loan growth as we do expect some of the consumer loan categories to come down throughout the year for a number of reasons. As you sort of think about expenses, again, no change from our guidance. We still expect that we'll be about $53 billion for the full year, excluding restructuring and any cost to divest businesses. Yes, I would just say, keep in mind, for the first quarter that we typically have $500 million to $600 million quarter-on-quarter change for -- it's kind of seasonally higher personnel costs related to stock comp and 401(k) plan-type contribution, which is pretty normal, I think, for most people. We do expect that part of the student loan portfolio sale will close in the first quarter, and we expect it to all close in the second half. And if you think about that, it's really tranches of loans that are being migrated. So you may have some of it closed in the first quarter, some of it close in the second quarter. If that does close in the first quarter, we would expect to have some goodwill that gets written down of about $185 million. So I would put that in the category, the cost from business exits. Overall, there'll be a modest gain on the sale of the portfolio, but you will see a slight tick up related to the goodwill that will go away. And then just lastly on expenses that we're sort of keeping an eye on is, as markets perform well and activities are good in places like our wealth management business, we did call out an increase that we expected related to market-related revenue-related expenses. And so we're keeping an eye on that as that sort of -- as the year goes by, and we'll call out any changes to that view. But that will be a good thing because that means we're making more money in those businesses. So we look forward to that. As you sort of think about credit, I guess, is the last one. Credit trends continue to be really good. As I mentioned earlier, and performance is better than we expected so far on our modeling. And I think that's been the case now for a number of months. I think we definitely have more confidence and more clarity on sort of go-forward path than we did at the end of the fourth quarter, which I think is constructive. There's still some risks there that we sort of need to keep in mind. And as we sort of think about the allowance, we need to be reserved for a whole number of scenarios. And so we'll take that all into account as we sort of get closer to the end of the quarter with regards to the allowance that we've got there. And then just maybe really quickly, we've also been really active managing the liability side of our balance sheet. We redeemed and it reissued a number of preferreds, a little over $4 billion of preferreds in the quarter. So that should help both our interest -- our expense there are in -- with much lower coupons. And then we also tendered about $6.4 billion of bonds in the quarter, which not only lower interest expense but also provide a little breathing room under the asset cap.

Okay. You've been busy, but that's a good guidance update. We'll take that. And we'll take higher expenses when it comes with more revenue any day of the week. So let's now turn to the asset cap. And I realized you can't comment on last week's Bloomberg report. So let's talk about the asset cap in the context of your balance sheet, the NII guidance and the cost that Wells Fargo has borne by being under the asset cap, specifically the net interest revenue impact of operating under limitations. And maybe we can even touch on the concept of balance sheet growth beyond the asset cap. So let's just start and take a step back and think about kind of what happened over the course of 2020. To put it in context, that you put on significant liquidity in 2Q and 3Q, really to protect against the second round of drawdowns. And that was pretty costly for a firm operating under the asset cap and displacing the loan growth, which was obviously higher yielding. Your loan-to-deposit ratio is now down to 65%, which is well below the historical average. So at this point, were there to be quality loan demand, I assume that you'll have capacity to put that loan demand on your balance sheet. And let's talk about it in the context of the liquidity build and how much liquidity you think you may need to hold on to on the balance sheet.

Yes. It's a great question. And just to be clear upfront, we have plenty of capacity now to support clients for a loan -- for any of their credit needs. And that's clear. And I think we're also selectively adding securities as well into the portfolio, both high-quality liquid assets and non-HQLA assets or credit -- more credit-sensitive assets, although we're being pretty patient as we sort of do that. And so there's plenty of capacity to support clients. Having said that, I think managing the balance sheet has definitely been more challenging since the pandemic started. And if you go back before the pandemic, the asset cap really wasn't that constraining given where the balance sheet was pre-2020. And since then -- since it started and into today, we've had to make some really challenging decisions to prioritize capacity on the balance sheet. And the impact has been significant, right? And you can see that relative to others and sort of in our earnings. And as you sort of look at some of those actions, we shrunk our capital markets balance sheet by roughly $60 billion in the first part of last year. We worked with clients to move about $120 billion of deposits off the balance sheet to help with the asset cap constraints. And that was mostly or really entirely in the corporate investment bank primarily, but then also our commercial banking business as well. And there, we work really hard to make sure that as we made these decisions that we minimize any franchise impact. And we think we've done as well as we can in doing that. We also sold $30 billion of securities in the first part of last year to help provide some of that liquidity and that capacity, as you mentioned. So as spreads have tightened, since then, that causes some challenges. And then we also stopped taking on correspondent, nonconforming mortgage origination and home equity. And so all those impacts have been pretty significant. Now some of that we're turning back on, correspondent, nonconforming as an example. And so as you sort of highlighted, while others have been able to sort of increase and grow through this. We've had to make some really hard decisions. And you can see that in just our assets are down 1% in the fourth quarter versus the prior year versus competitors growing pretty significantly in some cases. You've seen loans down 6% versus sort of a mixed bag of results versus competitors. And you've seen our deposits go up 4% relative to much, much higher growth rates in most of our computers. And we had to manage with a buffer to the asset cap. And so those are -- those can be pretty challenging conversations and decisions that we've had to make. And we're very watchful now, as I mentioned before, with deposits being so -- liquidity being so sort of prevalent in the system and deposits being high that we've got to be on watch as we look forward. And so having said that, though, on the asset side, we've got plenty of capacity for clients and are really working with clients to make sure they understand that, and have seen good traction there. But again, there's a weak demand for a whole number of reasons.

Okay. So just to be super clear here, the cost really to you has been that prioritization and the creation of the buffer but at this point, I know how I think about it and I think about it in the context of your guidance is that the cost of complying in managing your balance sheet within the confines of the asset cap is really fully embedded in your guidance in the current macro environment.

Yes. No, as I said, we assume the asset cap stays in place, and a lot of those difficult decisions we had to make are behind us. But we are still working with clients now to make sure that we don't put ourselves in a position to violate the asset cap. And so there are still -- we still make trade-offs today. And -- but yes, it's all embedded within the guidance.

Okay. So let's tiptoe into forward-looking territory here. When the asset cap is lifted, were we to assume an environment like the current environment, is it fair then to assume that Wells Fargo's, your net interest revenue and your EPS because this really passes through right to the bottom line, would then benefit pretty maturely from bringing back even nonoperating deposits and deploying that extra liquidity into various forms of HQLA, similar to your peers?

Yes. I mean, look, right now, we're focused on the work to get the asset cap lifted. And that's where the real emphasis is for us is to really make sure that we do all that work that we need to do to put ourselves in a position to get it lifted. I think once that happens, like I think there's a whole variety of hypotheticals we could go through that would allow us to continue to grow or start to grow sort of the balance sheet. And I think, as I said, the difficult decisions we made, we did that with a lens of really trying to minimize the impact it would have on the ongoing franchise, and we think we did. So we do think that there's going to be demand available and opportunity for us to grow across a whole range of things and some of which you included.

Well, we look forward to that point in time, as I'm sure you do as well.

For sure.

So let's talk about in a world where there is loan demand and there's less constraint on the balance sheet. Strategically, when I think about optimizing the opportunity that exists for you over time and think about a world where there is actually more demand for a loan for loan portfolios, your portfolio at Wells, it's skewed historically to having a little bit more commercial real estate than your peers. You've got a little bit more exposure to nonbank financials than peers and you've got less in the way of credit card. So when you think about where you'd like to go over time with the loan portfolio mix, do you see that changing?

Look, well, first, I'd say, and you look at our nonbank FI portfolios, for example, we're really comfortable with that portfolio, right? And it's performed really well over a long period of time. And it's got a good return profile to it. So we're very comfortable with that. I think in the commercial real estate space, that's a place that we've got a lot of deep experience and have had a good -- really good credit track record for a long period of time and have a very good discipline there. So again, feel comfortable with the way we sort of approach that business. Our card portfolio is undersized relative to our broader consumer footprint. And when I say that, it's really underpenetrated with our customers that do other things with us in the consumer footprint. And so we do think there's opportunity to do more there while still sticking to our risk discipline and risk appetite relative to sort of where that is so we think higher grades or clients. And the team is working on that now pretty actively. I think in the commercial bank, there's more opportunity for us to expand the relationships that we have with our clients there. And credit will be part of that as we sort of look at the opportunity there. And then so I do expect that over time, it will -- the mix may evolve, but it will evolve gradually over time.

Fair enough. Okay. So let's move along now to asset sales. You guys kept me on my toes this week, with yesterday's announcement of the sale of the asset management business to the private equity firm. So with asset management, in particular, how about maybe sharing some additional detail here in terms of what was the actual revenue contribution, the earnings contribution? We assume that this is a fairly immaterial impact to EPS once you reinvest proceeds, but how about a little detail?

Yes. No, sure. And first, I'd say we were happy to get the deal announced. As you know, these things can -- are complicated. And we are looking forward to working with our kind of new partners that are buying the business as we are a big client, and we'll own a small passive stake in there, and we think they're going to be good operators of that business. And as you know, the asset management space is very much increasingly a scale business. That's going to require kind of significant ongoing investments. And so we felt like they were better owners of it than us. And as you sort of think about where we have scale in the wealth management business, to us, it wasn't necessary for us to own the manufacturing piece of it to do a really good job and be successful in the wealth management space. So for a whole number of reasons, it sort of made sense for us to look at it. The headline price was $2.1 billion, as you saw. And as you -- we expect it to close at some point in the second half. And as we get closer, we'll pinpoint that a little bit more. We would expect that there will be a gain that we would book when we close of somewhere between $500 million and $600 million pretax. The impact on capital will be a little bit bigger than that because there's some goodwill that's allocated to it that will go away when we close it. So you'll see that. And we'll give you kind of more specific financial details as we sort of get closer to closing and the impact that will have. But I think the way you characterize it as a small and immaterial impact to the bottom line, I think, is the right way to think about it.

Okay. And I guess, some use of proceeds would really just add to the growing pile of excess capital that's accumulating on your balance sheet.