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

All right. Thanks, everybody, for joining us this morning. We are delighted to have with us today Mike Santomassimo, CFO of Wells Fargo. Thanks so much, Mike.

Yes. Thanks for having me. Great to be in person.

So we had a couple of themes we wanted to address, no surprise, loan growth, credit, deposits, the usual aspects. But I thought I'd kick off by just asking a few questions on loan growth. To follow up on what Charlie was mentioning last week, we suggested that loan growth is decelerating a bit in 2Q. And I wanted to understand what you're seeing on the ground, what's driving that and where the opportunities are.

Yes. And thanks again for having us. Look, I think we are seeing just a continuation of what we've seen for the last couple of quarters. So we haven't seen that deceleration yet, but we would expect at some point that might happen. And really, it's been pretty broad-based. I think almost every category or major category of loans is growing except for maybe auto, but I think that's a -- that appears to be an industry-wide phenomenon, at least if you believe the Fed data. And so when you look across the commercial bank, we're seeing some increased line utilization, still not quite back to pre-pandemic, but a little bit more each quarter. So that's good. We're seeing some clients invest, so that's requiring some more cash. Some were on the sidelines on investing. And so it is a little bit of a barbell in terms of what you're seeing from some clients. Building inventory, supply chain, all the sort of same themes, I think you're hearing from others in the commercial bank. We're seeing good credit card spending, which is helping balances there a little bit. People are definitely out spending. You can see it in New York City, try to get a restaurant reservation these days. It's not the easiest thing in the world. We are seeing lower spend from a debit perspective, at least slower growth from a debit perspective, and you're seeing a lot more spend on the credit card side. But people are paying -- payment rates are still pretty high on the credit card. So it's really broad-based across. And -- but at some point, as the economy starts to slow from the increase in rates, we would expect at least pockets of loan growth to potentially moderate.

Okay, but not yet. Not yet. How much is home equity an opportunity for you?

Yes. I think as you know, we -- back in, I guess, middle of 2020, we stopped offering new home equity lines. And it's certainly something we're looking at. But you got to be really careful and prudent as you sort of look at the environment we might be heading into when thinking about home equity. And so it's something we'll continue to think about and look at, but it's not a huge focus for us right now.

Okay. And then on card, I know your card loan growth, you've been saying has been outpacing the industry, which is already pretty hot. And I'm just wondering, what do you see the drivers are that's driving that loan growth as well as how sustainable it is?

Well, if you go back to the end of 2019, we brought in a new team to run our card business. And at that point, we didn't feel as though our product lineup was competitive just from the offering that it provided. Our service wasn't where it needed to be, some of the operational elements like line assignments and other things weren't quite where we wanted it to be. And so we brought in a new team. And I think what you're seeing in part is some of the benefits we have from all the work they've done over the last couple of years. We've worked really hard to improve the service, the operational competes of it over the last couple of years. We launched 2 new products last year, our active cash card, which we think is a leading cash back card out there, and I think we're seeing good traction there as well. And even in that product, the quality of the borrowers that are both applying and getting approved is better than we modeled, better than what we were getting before. So from that perspective, that's actually working quite well. And then we launched our Reflect product in the fall of last year. And so I think we're getting the traction from some of those products that maybe others don't have given the maturity of where they are. And so I think that's something that should continue for a bit as we continue to see more people use those products.

Okay. So this is a multiyear opportunity.

Well, I think we're not done yet in terms of the offering. And so I think you'll see us launch more products as we go over the next couple of years. I think we're not -- I wouldn't say we're sort of fine-tuned yet on a lot of the things that we want to continue to improve there. And so I think there's more opportunity for us to continue to grow it. And the card space is an important piece of the payments wallet that I think we feel is very important as we look forward in providing the consumer product suite that we want to be able to offer.

Now, I wanted to dig in a little bit on some ESG announcements. I think back in May, just a month ago, you set emissions targets for oil and gas sector and power utility sector for your emissions attributable to your financing activities. So I just wanted to understand how you expect those targets are going to be impacting your loan growth given that you're a fairly sizable lender to those industries?

Yes. Well, first, ESG and the E part of ESG, obviously, is very in focus right now for a lot of stakeholders. And we recognize that the climate crisis or climate issues that we have are one of the most important things that we're going to need to play a role in improving over time. The other side of that is that we also need reliable energy sources and the demand for energy is going to continue to grow, particularly as you electrify more things. So you really need to be balanced. And as playing our role in -- as a big financial services company, we really need to find the balance between those 2 things. and be there to support reliable energy, plus continue to help where we can in terms of the transition that needs to happen. We've already been a really big investor and lender for renewable energy projects. I think something like 12% of some of the renewable projects over time, we've been part of in the U.S. primarily, and we'll continue to do that. And then we'll continue to work with all sectors to figure out how we can play a role in helping them finance or make the transitions that they all need to happen. Now when you step back for a second say what's the opportunity there, it's hard to -- there's lots of predictions out there, but a lot of folks are estimating trillions of dollars over time are going to needed to be invested to help make transitions across all the different sectors of the economy. And we will certainly hopefully play a role in that. And we're investing in teams, our investment bank, our commercial bank. We already have, as I said, a really strong renewable energy practice. And so I think the opportunity for all of us to play a role should be significant over time.

So it's a net positive to loan growth?

We'll see. I think it's hard to call exactly like in what period that's going to contribute. But I think given the amount of investment that's needed, I think that should be an opportunity for all of us to play a role.

All right. Before we leave loans, I just want to touch on credit because obviously, inflation is rising and there's concerns that it's going to be hitting certain pockets of customer base, maybe deep subprime or levered commercial. Can you give us a sense of what kind of probability of recession is in your reserve ratio today? How are you thinking about reserves going into 2Q? And any changes to your credit box?

Yes. Look, I'll let others sort of talk about probabilities of recession. Like that's a -- it's a tough thing to pretend like we all have this crystal ball for. But I think as we think about the allowance, we really need to be prepared for a whole number of different scenarios. And as we think about -- and this is probably pretty similar to what others do, too, but you think of what's your baseline view, do you have an upside case that might be relevant in some environments. And then you have multiple downside scenarios that you need to be prepared for. And that's the way we've gone about it. And we need to be prepared for a number of those different scenarios, and we feel like we are. And we've had a pretty significant weighting on those downside scenarios for a while. And I think you can see that in our allowance coverage, which is maybe a little bit higher than some of the others. And so we still think there's significant risk that's out there. And as you sort of think about the allowance for. In the short run, we've had a number of quarters now, a few quarters where we've had big releases. I don't expect us to continue to have those releases. But I think overall, we feel good about our ability to sort of think about multiple scenarios and how that incorporates into our allowance. Now when you think about credit, credit is still really good. Performance has been really good. And I think that's the case across a lot of the bigger financial institutions. And -- but our -- but that's probably somewhat because of our client base is -- aren't the ones where we have a lot of credit to that are going to be most impacted first. And so I do think over time, you're going to see the impact of inflation and higher rates impact consumers and some corporate clients. But so far, it's been really good in terms of the performance, and I think that will be the case this quarter, too.

Okay. And just to put a finer point on the reserve comment, no more releases or no more big releases.

Well, I think we still have work to do for the quarter, but I wouldn't expect releases at this point, given some of the uncertainty that's there.

Okay. Just wanted to turn to balance sheet management, the whole discussion around asset sensitivity and then move into just how you're thinking about deposits, deposit betas, that kind of thing. Your asset sensitivity is well above peers. And we know from the 10-Q that you put out that you've got a pretty nice uptick in 2022 NII from 100 basis point parallel shift. I think it's something like 13% NII or something like that. How do we think about the asset sensitivity in year 2 and year 3? Or said another way, how do we think about that second or third 100 basis point parallel shift benefit to you?

Well, it's probably a pretty obvious answer, right? I mean I think as the further rates go up, the less sensitive you're going to be to them, right? You're going to have higher betas on the 200, 300 wherever it sort of ends. And so I think you'll see that asset sensitivity decline as rates continue to increase. But I think as you say, we're pretty well positioned to be in an environment like this and benefit from it. And you'll see significant improvement over the coming quarters in both NIM and NII, which I think is -- will be good to see.

And the question on deposits here has to do with QT, right? So as the Fed embarked on QT and drains liquidity from the system, we're kind of looking for where we should expect deposit growth to slow dramatically or outflow. You have had less deposit growth than peers given the asset cap. Can you just give us a sense as to how you're thinking your deposit flows are likely to pan out here?

Well, as you say, like the -- we've seen less growth because we've had to manage with an asset cap over the last couple of years, and that's been constraining on the deposit side. So what that's -- what we've had to do because of that is remix our balance sheet and our deposit mix. And so a few years ago, we were at just over 40% of our deposits being in the consumer business. Now it's close to 60% at the end of the first quarter. Our -- and those are our least rate sensitive, as you know. And then as you sort of think about the spectrum of deposits, the most rate sensitive on average are in our corporate investment bank, and that's gone from close to 20% to 12% at the end of the first quarter. So we're set up pretty well as we go into that where we've had to manage off some of our most rate-sensitive deposits and seen growth in our least rate-sensitive deposits. And so we'll see how that progresses over the coming quarters. As you think about QT, I think that's the question everybody would love to know the answer to, right, exactly how that's going to impact industry deposits. I think there's reasonable people on both sides of that spectrum to say, you're going to see some declines in industry deposits and some say maybe you'll just see a slowing growth rate of deposits. And so I think that's something that will play out over the next 4, 5, 6 quarters, I think, as QT really starts to take hold. And I think given our balance sheet, we feel pretty well positioned, but we're going to have to -- as rates get further and further, we'll have to be competitive on what we pay as well, but we feel good about it. And so far, things have played out the way we've thought and given our constraints, we can be a little more patient, I think, on pricing and how we pass some of that on to clients.

So the tension then comes from the loan growth side, which has been pretty strong. And how are you thinking about funding that?

Yes. I mean, look, we have room to continue to grow our loans, and that's going to be first priority as always. I don't think yours banks to anything other than that, right, that you're going to be -- trying to be there for your clients first, and that's where liquidity is going to go. So we've got -- the offset will be securities and other assets. And so we feel good about being able to be there to help support clients and loans.

Okay. I just wanted to pin the room for questions in case there are any. Feel free to raise your hand. All right. I'll be asking for questions later, too, in case you have any, let me know. All right. I wanted to move towards fees. First, well, there's a couple of different fee categories. I thought we'd touch on deposits, trading investment banking, mortgage banking, those are kind of the biggest for us.

How much time do we have?

So on deposit fees, I know you changed the NSF OD fee changes, fee charges that you had recently. Could you just give us a sense as to the customer reaction, and how we should be thinking about how quickly those changes are going to get reflected in revenues?

Yes. So the elimination of the NSF fee, non-sufficient fund fee and a couple of other smaller fees went into place in the beginning of March. And so you'll see the full impact of that in the quarter, in the second quarter. We said that's about $700 million on an annualized basis. And so you'll see that on an ongoing basis. Clients like when you don't charge fees and so -- but it's still pretty early. So I think you're not going to hear a lot of complaints I think the things that we're looking forward to later in the year are some more of the enhancements that we announced in January to fully implement a 24-hour grace period for clients to kind of pay back their overdraft without being charged. And then we're also working to give customers early access to their payroll. And so those things will come later in the year. And so I think those will be well received as well.

Early access to payroll means the 2-day early?

Yes, 2 days early, yes.

Trading and investment banking fees [indiscernible] 18% year-on-year in 1Q. Just wondering how things are trending this quarter?

Yes. Look, trading is a relatively small piece of the pie for us, but I think we're experiencing what others are experiencing. And so you're likely to see trading up a little bit from last year. And we'll see how that progresses for the last few weeks of the quarter. And then investment banking, the industry wallet continues to be down, right, given what's happening, the volatility that's in the market impacting ECM and equity capital markets and as well as some of the announced M&A activity. But the pipeline still is good. Conversations are good. It's just in times of volatility like this, you're going to see certainly the fee wallet would be a little bit lower.

How about mortgage banking?

Yes. I mean, look, we've seen quite a -- I think I saw print yesterday at 6% mortgage rate. And so I think you've seen quite a shift from the beginning of the year in terms of what's happening in the mortgage business. And as you would expect, you're seeing the refinance volume fall significantly, no surprise. You're seeing -- you're still seeing some activity in the purchase market, which is good, but affordability does start to become an issue as rates continue to increase. I think all big mortgage providers or all mortgage providers are still in this process of rightsizing capacity for what everyone expects to be a smaller market. And so I think you're going to see, as we talked about in April, you're going to see some spread compression continue, and you're going to see a significant decline in revenue. And I think that could be down close to 50% from -- mortgage banking income down close to 50% from the first quarter.

Q-on-Q?

Q-on-Q?. Yes. And so I think -- but that's probably no surprise given what we're seeing in the market, but that's certainly what I would expect.

Yes. We were hearing that gain on sale was going to be down a lot again in the quarter.

Yes. I think that's right. I mean, as the industry rightsizes capacity. And while we're on fees, I mean the other thing that as you sort of think about modeling for the quarter, this is not an environment where you would expect gains in the private equity and venture space that we have experienced over the coming -- over the last number of quarters. And so that will certainly have an impact in the second quarter. There could be -- as in any quarter, there could be some impairments as part of that. But I think the -- I wouldn't expect gains there as well. But I think when you think about the overall fee side of things, while there's certainly some headwinds that we're running into right now, I think you have to keep that in context of what's happening in the overall revenue line and the significant impact we're going to see from growth in NII as rates continue to move up quite substantially, which will be, as I said, significant.

Okay. Just 2 other things on fees. Wealth probably has a little bit of a pullback as well due to market?

Yes, as we've talked about a number of times, our -- a big chunk of our advisory assets are priced in advance based on quarter end. And so as you have movements in market valuations, both on the fixed income side and the equity side, you'll see the impact of that in the following quarter.

And then lastly, last quarter, you had a [ contra fee ] on customer remediation. Just wanted to ask how we should think about sizing the risk of more of that coming through.

Yes. It's a hard thing to size with a lot of degree of accuracy. As we said over the last couple of years, at least I've tried to be clear, these things can be really lumpy. We've got a lot of work that we've been doing to put some of the issues of the past behind us. And that -- and unfortunately, in some cases, it takes a while to get through all the work. These things are complex. You've got to go back a number of years, you got to do a whole bunch of really hard to get at and detailed analysis. And so you have sometimes these lumpy operating losses. I think it's likely you could see some lumpiness in the second quarter as well, but I do think you need to keep that in context of the $51.5 billion of expenses that we laid out for the year, which we still feel good about.

On expenses, maybe you could help us understand where the opportunities for improvement is in delivering that expense dollar level, which is obviously down from last year.

Yes. I think there's opportunities everywhere. I don't think anybody walks into the company and says, like we're optimized to that in this part of the company or this function or this business area. And so I do really think that we continue to embed this in the way we are operating the business. And I think there continues to be significant opportunity to make the place more efficient. And I think you've seen us hopefully execute on that for what we laid out back in, I guess, now January of 2021. We laid out an $8 billion program there. That grew to $10 billion this past year. We've executed $4 billion in 2021. We think they'll be over a little -- a little under $3.5 billion this year of impact, and there continues to be more that we're doing to get at the efficiency opportunity that we have across the place.

Just because one of the questions we get is, hey, if branch counts are going to be falling less, right, because you're more optimized than where is the driver of the expense dollars.

Yes. I mean branch count is just one relatively small piece of it, right? I think as you look to optimize the staffing in the remaining 4,900 branches or whatever the exact number is now, or the operations teams or the businesses. So I think the actual physical branch count is important, but not the main driver. And then when you look at just the office space we have, we continue to have a significant opportunity to reduce our office space as well, which we are continuing to work through.

And what about the legs on this? There was some question as to how many more years you're going to be able to reduce expenses. Is that an opportunity for you next year as well?

Well, I think we certainly go into the planning for next year with a goal of having it be down. And I think that will be a function of both the timing of the expense saves and the efficiency program, the investments we need to make, inflation and all the other factors. And we'll provide an update as we get later in the year, but we certainly go into that with the goal as we plan, but there are a lot of things that will play out between now and the end of the year, that will give you a better view on.

Okay. Any questions in the room? Just want to make sure we're addressing. Anybody? Okay. Securities portfolio management. Well, that's a mouthful. I wanted to move to capital and how you're thinking about managing the capital stack. And really, the question here is on well know the whole AOCI question that was hit clear in 1Q. I wanted to see how are you doing as we move into 2Q on this?

Well, I think I've decided to give back my Bloomberg license because it cause us too much stress throughout the day. But the -- but the -- look, I think the -- we certainly have all had to deal with the impact of rising rates, and how that's impacted capital. I think as you would expect in the quarter, we, as many others have done, have done, taken action to continue to proactively manage that. You can do that in a number of ways, move more securities to held to maturity, some hedging to impact -- to limit the impact of AOCI. You can do some remixing of your portfolio on the margins to help, and then you can also impact the RWA levels that you have. And we've done all of that to continue to proactively manage it. But you certainly as you prepared for this conference last week, this time last week, your view on where rates are was very different than they were like yesterday, right, or this morning. And so -- so it's an ever-evolving topic, as you would imagine. And then the other place is. And I think we've sort of talked about this briefly in April on the earnings call, but we -- quarter-to-date, we haven't done any buybacks, which probably no surprise to people in the environment. But unlikely we would do any this quarter just given the volatility that's there, that's just prudent, I think, prudent management. And I think having said that, though, I think what we laid out last summer was that over the 4 quarters, including this quarter, we would do $18 billion of buybacks, and we did that. And so we feel good that we executed on the plan that we had. And I think we are still relatively well positioned in this environment that we're in.

Okay. I guess my question on this is the move as of today, right, is pretty similar to the move we got in 1Q. The Agency RMBS is already duration extended, right? There's no negative convexity left in your book on that. So maybe there's a little bit less hit there that you have to deal with. So is it fair for us to expect something similar to 1Q's AOCI hit in 2Q?

You tell me where rates are going to end up on 6:30, and I'll tell you exactly, but I -- so I think the what we -- what this quarter has proven out is like there's been a lot of volatility, right? We were I think yesterday, 1.70 basis points off the low in some part of the curve, when we were -- it's moved 50 basis points like multiple times up and down. And so I think that will be a bit of a function of where we are in the quarter. But like I said, I think we've done a bunch of stuff to mitigate some of the incremental impact in the quarter. And we came into the quarter with a good buffer. And so we feel good about where we'll end up.

Okay. And then as we move into next week, we get CCAR results, and I would assume that what you're expecting there is already baked into your target CET1.

Well, we'll as you all know, we'll know shortly before you know, not far. And so it's -- the unveiling happens next week, which we're all looking forward to. And as I've said a number of times, I think it's possible our stress capital buffer goes up, given the scenario that we had to deal with. And we're well positioned to deal with it.

Yes. I mean your regulatory minimum today is what, 9%?

9.1% when you include the buffers, right? So the regulatory minimum is 4.5% and then you include all the buffers and that gets you to 9.1%.

But your target is 10%.

Well, what we said our -- what we managed to, we have a 100 basis point buffer to -- on top of the 9.1% in this case. And then we'll keep -- we've been keeping a 25 to 50 basis point volatility buffer on top of that. And so we'll manage somewhere in that range. as we go throughout. And so if the buffers, the mandated buffers change, we'll evolve our target.

So I did want to touch on outlook. You've got your full year 2022 outlook, a couple of line items there. The NII being up mid-teens year-on-year, expenses of $51.5 billion for the full year of '22. Could you give us a sense as to how that outlook looks today? Any changes?

Yes. We feel really good about the NII outlook. You can certainly model scenarios where that could be better. But as we've said, those expectations on rates keeps changing, right? We'll see what happens tomorrow, right? I keep getting my days confused tomorrow. And so I think that there's certainly scenarios where that could be a little bit better, and we'll give you a better -- a little bit deeper dive on that on earnings, but we feel really good about that. And on the expense side, as I said, despite what could -- we could definitely see some higher operating losses, but that's all in the context of still feeling good about the $51.5 billion. So...

And then what about the longer term on ROTCE. I know you've reiterated in April, the near-term target of 10% ROTCE in the longer term of 15%. Can you help us understand how you think that is likely to traject to get to 15% and the drivers there?

Yes. And if you go back to when we started this conversation 1.5 years -- almost 1.5 years ago now, we were at 8% and so we laid out a trajectory to first get to double digits, which, again, we feel really good about that happening this year. And as you look past there, what we laid out back then was a little bit different now, right? And so what's most different is the trajectory of rates. And so I don't think we need the asset cap to be lifted to get to 15% given where rates are projected to go. And so we feel like 15% is a reasonable target as the next step in the journey of improving returns. And -- but over a longer period of time, we're still going to need -- it comes back to the same drivers, like we're still going to need to manage our capital well. We're going to need to execute on the efficiency program. We're going to need to get the benefit of the investments we're making across all of the businesses that we've talked about over time to keep that going. And we still feel really good that our businesses should have returns that are very comparable to our best-in-class peers.

So 15% higher rates but not a recession?

Well, I think tell me exactly how the recession is going to play out. But look, I think the -- I think we feel good that we're going to continue on that journey and rates certainly, from where we were 1.5 years ago, help us get there faster.

And is this kind of a 3-year time frame, 5-year time frame? Is it ranging it?

Once we get to the -- once we feel like we're at that sustainable 10%, which is coming relatively soon, then we'll lay out more detail around the 15%.

Okay. All right. So lastly, just a little bit more of an outlook here as you're thinking about over the next 12 months, what's the most important thing for you to accomplish?

Well, look, I think our most important priority continues to be to execute on the risk and regulatory work that we've got to do, and that does not change. Again, we feel good about the progress we're making, but I think that there's still a lot of work to do there. And then it's just the basics, right? We've got our efficiency program to execute, continue to execute on. We're making investments. We've got into. So I think it's all the basics that you would expect across the different priorities that we've got.

Great. Mike, thanks much for joining us.

Thank you for having me.