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

Good morning, everyone. This is Gerard Cassidy with RBC Capital Markets. Welcome back to the financial institutions conference for 2022. We're very pleased to have Wells Fargo participating in our conference this year. As most of you know, Wells is the fourth largest bank in our country, just under $2 trillion in total assets. The company's market cap is -- and we were -- Saul and I were just talking about how the stocks are doing before the start of this fireside chat. And the market cap of $180 billion was as of yesterday so it's a little higher today. The stock trades at a small premium to book, about 1.1x book. And it has a dividend yield of about 2.6%. Saul Van Beurden has been with the bank now since 2019. He heads up the technology area of Wells Fargo. He's a member of the operating committee at Wells Fargo and has responsibilities of managing 40,000 information technology and security professionals to keep Wells Fargo, obviously, safe and running in their daily business. Prior to joining Wells Fargo in April of 2019, Saul was the Chief Information Officer over at JPMorgan Chase in their consumer and community banking area. Saul, thank you so much for joining us today.

Thank you, Gerard. It's great to be here.

Fabulous. Maybe when -- you are new to obviously Wells Fargo and probably new to many of the participants that are listening in today. Can you give us a brief background, your background? And then also talk a little bit how you came to Wells Fargo. And what are the current scope of your responsibilities at Wells Fargo?

Happy to do that, Gerard. And background, as you can hear my accent, I'm not native American. I come from The Netherlands. I'm a CPA turned engineer. So young in my career and early in my career, I found out I wasn't a CPA and I didn't want to become a CPA. I became an engineer. And from there on, I moved on the ladder of IT jobs, done programs, implementations, became an IT manager, IT Director, CIO. I did a long stint at ING Group, in those days, a large universal bank, global bank plus insurance company. Through the financial crisis, I stayed there. I ended my stint over there as the COO/CIO for all the retail and ING direct banks around the world. And in those days, the ING direct banks were the ones who are, let's say, a little bit younger in their career. That was like a neobank today. It was a full digital bank. It only had a call center that you never needed to call because it was all done online. From there on, like you said, I moved to Chase -- JPMorgan Chase, became the CIO for Chase. And then how did I end up with Wells? That was really there was a call and I picked up the phone. And there were some harsh conversations about the conditions to come over, and I'm not talking about comp or anything like that but really the mandate. And if you look at the responsibilities that we have today, cyber and technology are all together under the head of technology, reporting to the CEO, which was an important one as well. If you want to remediate or if you want to create speed, that is important. And if you look at the set of responsibilities, it goes from IT strategy; architecture; tech-led innovation; all feature/functionality development. In the old days, this was called application development; platform management; infrastructure; cybersecurity; cloud enablement. That's basically what the 40,000 people are doing each and every day.

Very good. When you joined the company back in April of 2019, Wells had a well-known decentralized approach of how they manage their company, and that is obviously changing. And when you take a look at the number of risk and control issues that unfortunately was around at the time, what were your immediate priorities when you came in? And how have you seen that change over the last 3 years?

Yes. It's a great question. And I remember the first days. It was really around remediation, to your point, of open issues. It was about stabilizing the platforms and the availability of platforms. It was making sure that we did proper investments in the infrastructure that was required. And that was the majority of my agenda in those days. And if you look at over the 3 years, how that has shifted towards something that is now way more geared around scalability, the move to cloud, resetting our data centers and not having our own data centers anymore in the future. I can talk more about that. And also the way we develop, in the old days you would call it, applications; today, we call it workloads or services, the reset of that. So I start to really be full time -- almost full time on that type of area while we are making sure that security and stability stays in place.

And when you came onboard back in April of 2019, were there any surprises? I know you went in with your eyes wide open, of course. But when you think back now in the 3 years, were there any "Wow, I didn't realize this" or "Wow, this is better than what I was anticipating?"

There are a few things. So first of all, I think the surprise was really around the enormous loyalty, passion and knowledge of the teams around the place. And Wells is really just -- it's a very nice bank. It's really nice people. And that's not always the case at banks, as we know. That's one. That's sometimes not the case. And then, 2, yes, the surprise in a less positive way. In my garden leave between JP and Wells, there was a large data center down type of incident, and this was in February 2019. It has been publicized, so some of you might know that. Well then, you start to see the truth behind the scenes, then you start to see the breakdowns. And that's when you know what you signed up for. Gerard, I'd like to be in a position, I call that, building a house in a swamp, where everybody is walking away from the challenge. I'd like to be on the spot, lead from the front, hire the right talent, get the right leadership in place, get the right plan and start to move on it. And really, I don't think this is rocket science that we are doing. This is all possible and doable.

That's very good to hear. Maybe moving over and if you could talk about the 6S Strategy for running the bank and why it's so important as you look to the future for Wells.

Yes. There are a few things. When you lead a large domain, you can do it in a couple of ways, and we have chosen for the model to have a very articulated strategy that is measurable so we create what I call a sense of purpose, why are we doing it; a sense of direction, where are we going; and a sense of belonging, how can I contribute to it. And we made sure that everything that is measurable is getting into the performance objectives of our own people and the leadership of technology and where needed, across the bank. It's important to have a strategy on technology these days because I think the future of a bank is really defined by the way you embrace and apply technology. And if you look at the disrupting forces in this industry, it is driven by new players or existing players that are applying technology in a different way. If you look at the 6S Strategy, to give a little bit of -- shine a little bit of light on what do we mean with the 6Ss. So when we started, we basically created a strategy that is scaled around these strategic pillars that we call the 6Ss. And we have 3Ss around the defensive play that we need to have really good in place to survive as a head of technology. It's around the skills, making sure that you can attract, retain the right talent. 2 is security. I don't need to say more about cybersecurity and the threat levels on that. And then 3, stability. Those 3Ss, skills, security, stability, if you do that well, you have your defense in play as head of technology. The second series of 3Ss are around offensive and -- offensive play. So that is around scalability, how can you make sure you have workloads that can spin up and spin down to the needs of that day or the moment of the day instead of having idle capacity as you have ramped to a peak level. You create more variable cost and less sunk cost as a consequence of that. Speed is the second S in the second series of the 3Ss. It's all about taking out hand-offs and automate more in the group of IT and technology but also across the bank. And then the third S is the measurement of success. It's the S of success where we measure NPS of our customers and clients, employee engagement. Because we can do all the other 5Ss well, but if customers, clients or our own employees don't like it, we're still missing the point.

Right. Very good insights there. I want to follow up on something you did say about keeping and retaining the talent, hiring the talent. And you've obviously been in this sector, the technology sector, in financial institutions for years. How tough is it today vis-à-vis your experience of finding the right people, being able to afford them because of the competitive pressures from outside the banking sector where these technology people can get hired possibly for greater compensation?

Yes. No, it's a great question and the question of the day, you could say, for many people. I think that there are a few ways to look at it. It's definitely harder than ever. So let's start here. But I like to look at not only attrition, which is, for us, modest and I'm definitely not in panic about attrition, but what's your ability to acquire new talent as well. So how much is the net-net gain or loss of people? And as long as you can net-net gain on the job families where you want to grow, which is, for us, software engineering, you're still in the right -- on the right side of the balance, if you want to say it like that. The second way of looking at it, and we have done a lot of research internally and with the help of external companies, to really figure out why do software engineers sign up for a bank, right? Is it -- what drives them to sign up for it? Because when you start to understand that, you can start to manage it, right?

Yes. Right.

So we have found out that the technology that they are able to work with is important. It's the #1 thing now. If you know that we have the trading area, a digital-native app, the payments area where we do trillions of wires in total dollar amounts each day, it all matters what they do and technology matters for the bank. So the level of technology that they can apply, the challenges in technology is one. The second reason that they sign up is the people. Are the people jerks over there or not? And like I already said about Wells, we are just nice people. We have certain values. We live up to those values, and we allow people to be their whole self at work, wherever they are. The third reason is leadership. They check me out on where I stand on ESG, sustainability, Black Lives Matter, Russia, Ukraine. Any social type of issue, they want to know where do you stand, what are your values. And they check me out on LinkedIn what are you doing, who are you. My own team, looking at the team as well. So the third one is leadership. And fourth is pay. It's only fourth but it's important to keep them. Not too high it appears really. The other 3 things are more important. Now if you have that balance with each other, then you start to be able still to attract the right talent, you can offset the attrition that has went up for everybody in the last, let's say, 6 to 9 months but not to a level where I start to be panicking or anything like that or where we see that we are not able to hire back anymore for the people who have left the bank.

Got it. I'm glad you didn't say you had to have foosball tables and things like that.

I've learned how to give a neck massage, if that helps.

Very good. Can you share with us -- the amount of spending on technology is enormous for your organization as well as your peers. And can you share with us how much you are spending on that? And then outsiders like us, technology is important in making investment decisions. And we're starting to hear more about an X dollar amount is being spent, but then we find out 1/2 or 1/3, whatever the number is, is spent on just running the bank. And then the remaining amount is trying to change the bank. And maybe you can give us some color about what you guys are doing at Wells.

Yes, I will. And I can be more explicit than in some of the closed sessions that you have. And so thank you for allowing me to be more open about it. If you look at the total spend that we have on technology, and it depends on which scope you take, it varies between $9 billion and $10 billion. On the high end is when you include business process outsourcing contracts with a big heavy IT component; is when you start to include the data analysts that we have across the bank that are sometimes included in the IT budget, some other banks don't. But if you do an all-in type of calculation of the total IT budget, it will be that $10 billion number. If you look at -- what I use is more $9 billion to $9.5 billion as a type of budget that we apply yearly on technology. There is a whole discussion about should you invest more or less, and I can talk about that if you want me to. But if you look at the mix between run and change, it's the majority of the cost that is still on run in our situation. But there is a caveat to that. I will explain that in a second. So as we came in and we started to find out the remediation that we had to do on the infrastructure, building out resiliency environments, building out cyber resiliency environments, building out network, building out other things, you will see that those things are all CapEx-driven. And here, the CPA starts to talk to the audience. CapEx driven flows through depreciation to the run side of the calculation. If you take those investments, because, honestly, these are investments, and you would add them to the change side of the mix, we will be close to a 50-50 type of comparison -- ratio between run and change. So all the remediation efforts are floating to the run side of the bank because of the infrastructure is seen as run, and I see it as investments to make sure that you have a future-proof bank.

Yes. Very good. Very insightful and helpful there. And to kind of follow up on your comment, it was going to be my next question, about -- what kind of metrics can the outsiders or the investors like myself use to determine if a bank is spending enough on technology or spending too much, to your point a moment ago? What would you suggest we should kind of use to capture that metric?

It's the $1 million or the $1 billion question by now. If I look at -- the absolute amount is almost becoming a badge of honor here in the industry where I outspend you and I outspend you. I have a question for you. If I spend $2 of investments and I get $4 as outcome, whether it's revenue or cost decrease, and somebody else is spending $4 to get the same outcome of $4, what do you think is the best? So it's not about the absolute amounts that you put into it. It's about the outcome. We measure outcome in 2 ways. And maybe to provide reference to the audience here, Gerard. One outcome that we measure is we have over 3,000 what we call agile scrum teams that we measure every 2 weeks on outcome in terms of velocity, productivity. And when you start to see that you can push up velocity or productivity, you get more scope, more bang for the buck. So if you start to look into how do these teams work and how can they be more efficient or effective or the combination of the 2, you start to get more outcome for the same level of investments. The second way of looking at it is every road map, every product that we have that is getting developed through these teams is having a financial business case that is getting plotted into the budget. So we start to track is the revenue indeed pushed up by new credit cards that we have launched? Do we see balances grow? And if not, why not? And what do we need to change in the iterations that we are doing to get more bang for the buck? And the other way around, on costs, we see how the cost savings are playing out. We put it in the budget. You look every month, every quarter and every week at the spend and you see whether the costs are coming down as a consequence of the investment, yes or no. So for me, that whole idea of it's about the absolute amount that you put into technology is, for me, honestly, meaningless. It's really about the relationship between your outcome, both on the P&L side as on the velocity, the productivity of your teams.

Very good. Very helpful. One of the $64,000 questions over on my side of the screen here is we're asked all the time, and I'd love to get your view as a technologist on this question with a CPA background, too. Investors always are suggesting to us," How can the smaller banks compete against giants like yourself and your peers in an economies of scale business, especially when it comes to spending on technology?" And as you just mentioned, your budget is around $10 billion. That's bigger than some of the asset sizes of some of our smaller banks in this country. So from your perspective, again, as a technologist, what's your answer of how they can compete? Or maybe they can't and over time, they'll just eventually get merged away.

It's a question that is based upon a couple of assumptions that I will share with you and our audience. There was a wise German writer called Goethe who said in German like [Foreign Language]. In the constraint, you can show your master skills. So it's not necessarily bad to be small because when you're small, you're constrained. And when you're constrained and smart, you can outsmart large budgets. But it's based on the assumption that you're able to hire the best talent who can outsmart with a small budget the bigger budgets of the bigger banks. And that assumption, I dare to say, is hard to verify, to make that a positive type of outcome because it's really harder for the smaller banks to hire that talent given the pay and the comp levels or the type of technology that they can apply. But it's not necessarily a bad thing to be small. I just want to make that clear. The second thing that you start seeing happening is that these smaller banks become LEGO type of banks. What do I mean with that? They start to have the different LEGO blocks of IT solutions with third parties that are helping them to create that cost per unit that is low. Therefore, you need to outsource. And you have 7, 8 core solutions that create your bank, and you have a kernel of those core solutions and then a whole circle of fintech solutions around it. And if you do that right as a small bank, you can actually be pretty nimble and quick. But again, you need to have the talent to be able to outsmart that implementation of that model. And when I go back to the ING Bank direct bank days. That was a very simple architecture. I always explain it to higher people in the organization, like 8 applications were running the digital bank. That was everything. That's how simple it can be, and we run on thousands of applications this big bank. I don't know what is more beautiful, but it's way more simple to run a smaller bank than a larger bank. Then the third thing where the small banks really are falling short, I believe, is in the innovation power and to do it in the broad breadth and depth of all things that are coming at us from a technology landscape. They are just simply not able to keep up, so they need to rely on the vendors that they have outsourced to. And the vendors are only doing it when you're willing to pay for it. So if you don't watch out, you come into a perfect stuck model. This is a very long answer to say I think the chances for a smaller bank are smaller and less to be successful over time than for a large bank, but I don't want to dismiss the fact that a small bank can be very smart if you hire and are able to hire the right talent.

Right. Got it. Very good. Maybe pivoting back to Wells Fargo for a moment. Obviously, you've already talked about what you've been working on when you first got to Wells back in 2019. So you've been inwardly focused on risk and control work. Has the company fallen behind from a competitive standpoint? And if you think it has lost -- because, again, of all the work you have been doing, can you catch up where you're as -- very similar or the same as your big competitors? Or maybe not -- maybe you haven't fallen behind and you've been able to work both internally and go on the offensive as well.

Yes. I'm pretty bullish about this in terms of the question and the answer. In terms of -- Charlie has always been clear, the first priority for us is remediation and coming through on regulatory commitments. Nobody takes that away. And while you are doing that as priority 1, there is space for priority 2. It's building the franchise of the future and making sure we invest in the current franchise not only to make it competitive but to make it a better bank than the other banks. The beauty of a bank that is perceived to be behind is that you get this challenger mindset. You know what I mean? We will show you something. So if you look at where we are and what we have announced now, the new app, we announced it 10 months ago. It's launched 2 weeks ago, and the rollout is almost completed. Native app in 10 months is record-breaking. I tell that here not to be arrogant about it. That is record-breaking. Big compliments to product teams and the technology teams. We are going to announce the virtual assistant, Fargo, which will come later in the year, full conversation model, not a chatbot to get rid of you as fast as we can but a full conversation model to help you as best as we can. We are investing in the payments domain. We are investing in the lending domain. We are investing in the HR domain. We have been investing in the risk domain. We're investing in the technology domain. We're investing in the personal loans domain. We have announcements, the debit space where we just did the announcements around overdraft fees, picking up ACH payments, direct deposits that come in 2 days early instead of waiting the 2 days. All those things we are doing while the priority #1 remains the same, regulatory remediation, but you have to have the investments to make sure you build the franchise of the future and keep the current franchise going. So no, we haven't fallen behind. I don't feel that, no.

Good. Okay. Good. That's good to hear. There's always been a lot of chatter around core banking systems. You touched on it with maybe the smaller community banks and smaller regional banks and the challenges the big banks have like yours, migrating away from dated systems, legacy programming languages like COBOL, for people that remember that, and FORTRAN, of course. How are you approaching those issues at Wells?

Yes. And just to put some color to that, 44 of the 50 largest banks in the world are still running on first-generation core banking environments; meaning, to your point, COBOL applications with mainframe. Just to put it in context, that's where we are. And that means it's apparently pretty hard to migrate away from a core bank environment given the impact it has on the total bank. So the core bank is account management, transaction processing of accounts and product and pricing. And that subset of functionality, it's easy to find yourself a new solution, and we will find ourselves a new solution like the other banks are doing. It will be cloud-based. It will be one of the modern technologies. The way you migrate it, Gerard, will define success. If you start to migrate and convert all the old legacy way of doing things and way of offering products and way of calculating fees and way of calculating overdrafts into the new system, you created the new legacy day 1. So you have to find out a migration path where you have a new core bank environment next to your existing core bank environment where you don't entangle too much because, otherwise, you suck in the new environment into the old world and it becomes as slow as the old world. That in itself is exactly what we are doing at this point. We're doing the research. We're doing the POCs, the proof of concepts, as we call it. We are thinking about what is the smartest migration path before we start to announce things or before we start even to do heavy investments. This is the thinking you need to do upfront to be successful in the end.

Yes. And in that answer, last fall, you announced that new multi-cloud strategy with Microsoft and Google. Why did you go with a multi-cloud strategy with 2 different partners? What do they each bring to the table for you guys?

Yes. I think it's 2 reasons: one, risk. Don't put all your eggs in 1 basket. So that is operational risk. The second reason is, as the Brits say, different horses for different courses. So Google has a different offering on very advanced, intelligent workloads that are data heavy, so really complicated workloads. They have a great offering. And I know Microsoft will be offended if I didn't say they have that as well, but their commercial offering is not as good as the Google offering. So for us, it's really around different horses for different courses. We will use, like we announced, Google for those type of workloads they are really specialized in and have a great offering. Where -- mainstream workloads, routine type of workloads will all go to Azure or Microsoft. That's the reason why we have 2 different public cloud providers.

Got it. And what are the main benefits moving over to the cloud? And when do you see -- when you can start actually moving applications into the cloud, when do you see that happening?

Yes. So there are 2 ways of looking at this. There's public clouds and we also have private clouds. What we are doing is we take Google and Microsoft Azure also in our private cloud environment, and we are already migrating workloads today to our private cloud, which is always a bit easier. From April, May, Q2 this year, we will do the first migration of our workload to public cloud, which is -- again, we announced this in August. If we are able to do this in 9 or 10 months, another record-breaking thing because you have to agree with all the different parties in and outside the bank that this is okay, it's safe and it's secure because that's constantly -- secure from the start is what we have been saying, is what we constantly are emphasizing to the teams. The benefits, Gerard, to your first question, is really all around we can go faster. So if a developer needs a development environment, tip of the fingers, it can be created. If the developer needs a test environment to do volume testing, performance testing, whatever it is, tip of the fingers, it's getting created. If you look at the hosting costs of cloud versus your own data centers, over time, you will see those costs coming down. But it comes with investments, and it comes with a hockey stick, as you can imagine. But that's the second reason why we are doing it. So first of all, developers, providing them more speed; secondly, getting more variable costs at a lower total cost level than we have today where it's more sunk cost at a higher cost level.

Got it. Can you also talk to us -- you've been talking about innovation obviously at Wells Fargo. How willing are you guys -- how willing are you to partner with some fintechs to increase functionality and build out your capabilities? Is that something you guys would consider going forward?

Yes. So 2 answers to the question around innovation. Fintechs, yes, we are working together with many fintechs around the industry. And we believe that if there is a point solution that is already on the shelf developed by a fintech company that is providing a solution to a problem that we want to solve for our customers or clients, we will do so because we can provide the distribution to that fintech company and they have the solution for us. It will be domain by domain where we make that decision and trade-off where we can also build our own things. And I'll give you an example. A trading algorithm in the trading space, we will not necessarily use something of a fintech that has a great algorithm because that's the recipe of the chef in the kitchen, right? That's our IP, if you want to call it like that. The digital stack, really, our IP to do a couple of things. But using for Fargo, like I said, the natural language processing algorithm that we are using, it's just something that we use from Google that they provide as an API to any company but we tune it to our needs. So I think -- there's somebody who's trying to call me here. But that's what we are doing, Gerard, and this is how we are looking at innovation.

Got it. We're running out of time, but I do want to ask one last question. You hired a new chief information security officer. And can you talk about the threat of cybersecurity to the banking industry? And how are you managing that threat at Wells against -- or managing that risk and challenge at Wells Fargo?

Yes. And it's a question that is often asked, to be clear. So I want to make clear that everything that is going on today is something that we prepare for. So whether it's Russia that can do retaliation efforts to us or it's something else, another state-nation actor that can try to take a bank down, we are always prepared for that. And we put more measures in place if the threat level is going up, but those are all capabilities that we already have. I think it's not about Wells Fargo in terms of security and cybersecurity. It's about the industry. Nobody tries to outcompete any other bank because we know that the weakest link is another bank. It can become our problem as well. So what we do is there's a massive platform where we work together. The heads of cyber defense, I say it as a joke often, they speak more with their peers at other banks than with their spouses at home because it's really like that collaboration that they have with each other. And that is combined with the federal agencies, combined with the large infrastructure players, how we keep the perimeter of the U.S. -- that's where it really starts, perimeter of the United States, how we keep that protected with Overwatch and making sure that we already stop things at the borderline of cyber instead of coming into a company. Nobody can dismiss any chance that anything can happen one day, but we are best protected as you can imagine.

Yes. No, that's great. And we've run out of time. We've gone over, which has been great. The content has been fabulous. So Saul, thank you so much for joining us. It's really been useful for all of us. Thank you very much.

Thank you, Gerard. Have a great day.

You, too.