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

Okay. So I'd like to welcome everybody on my behalf to the 33rd Goldman Annual Financial Services Conference. We're delighted to have our first external speaker, who is Charlie Scharf, President and CEO of Wells Fargo. I think Charlie is well known to everybody here. He's got over 3 decades of experience working in the financial services industry. He had senior positions at JPMorgan, followed by serving as CEO of Visa and Bank of New York, and I think you're now in your third year as our CEO of Wells Fargo. So thank you very, very much for joining us.

Look, I thought we could start off with a broader discussion just about the macroeconomic outlook. And I know there's a lot of unknowns. There's a lot of uncertainty. But what's your base case for economic growth next year? How are you thinking about the path for interest rates from here and inflation? And in your answer, I think it would be really interesting to hear what risks you're most focused on, outside of credit normalization.

Sure. Well, thank you for having us. It's great to be here. Listen, I think we would probably say the same thing that you hear from others, which is it's an interesting time because we're going into this slowdown which is clearly happening just from a very broad position of strength, broad meaning across companies of all sizes and individuals of all sizes. But this constant set of conversations about is there going to be a recession or not, from our standpoint, is kind of irrelevant in the sense that what we do know is there's going to be a significant slowdown. There's no question about it. When you look at the tools that the Fed has, how powerful that they are, that don't fight the Fed is in fact something that people should just take at face value, especially when they're not competing against fiscal policy. So our case would be, a slowdown, if you asked our economists, we'd say probably a couple of quarters of a relatively mild recession during 2023. But in our planning we would say we're expecting a fairly weak economy throughout the entire year and hopeful that it'll be somewhat mild relative to what it could possibly be but time will tell. In terms of the things that we think about, obviously credit is high upon the spectrum. I know we'll spend a little bit of time talking about what we're seeing in terms of our customers on the consumer side and on the business side. But credit is #1. And we think a lot about making sure that we are protecting franchise deposits, franchise customers as we go through this period of changing betas on the deposit side.

I mean, just as a quick follow-up, how has your economic view changed in any way over the last 3 months?

No. I mean what we -- listen, what we see is very consistent, which is there is a slowdown happening. There's no question about it. When you watch CNBC and Bloomberg and read the newspapers, it can be a little bit confusing because the slowdown is uneven across industries. When we look at our own consumer spend information and we talk to the companies that we bank, there are some that are doing quite well, and there are some that are struggling more. And the fact is people bought a lot of goods exercised a lot of the freedom they had in discretionary spend over the last couple of years. And those purchases are slowing, and you're seeing significant shifts to things like travel and restaurants and entertainment and some of the things that people want to do. Net-net-net, the growth is shrinking that we've seen in card, albeit there's still growth Debit card spend is about flat with transactions being down a little bit, offset by inflation. So average ticket size is up a little bit. So all in all, if you just took a snapshot of where we are, it's still quite strong relative to where we could have been at this point. But it doesn't change the belief that these return to normal trends that we see will continue, and some individuals and companies will be more impacted than others.

And then in terms of consumer and corporate balance sheets, have you seen any noticeable changes over the last few months, especially, I guess, on the lower cohorts in terms of liquidity on consumer balance sheet?

I would say the one thing I think which has surprised me is the fact that it really hasn't changed all that much. And it just does speak to the strength with which people went into this period with. And so we have seen certainly more stress on the lower end consumer than on the upper end consumer. On the corporate side, again, it's much more industry-specific. But it hasn't spread as quickly as we would have thought, and it hasn't deteriorated as quickly as we had thought. -- albeit there is a -- there is a continuing trend of balances coming down and spend levels coming down. So again, as we think about what will happen, it's hard to see anything that will stop those trends from continuing. And as long as there's not some material acceleration, it certainly should be all manageable, albeit as we think about where we are in this point in the cycle, we will see normalization.

Okay. So let's talk a little bit about your priorities, your 3 years into the job. Can you talk a little bit about what you feel you've achieved so far? Maybe give yourself a scorecard if you want to, but you don't have to.

It's dangerous. It's compensation time.

But I think what would be more interesting is to talk about what your broader priorities are now that you're 3 years into the job, outside of obviously dealing with the consent order that we can talk about shortly.

Listen, I feel great about the progress that we've made. I mean I would say we as a management team, and I particularly, are our own biggest critics. So I could make the list of all the things that we would have wanted to have done sooner and all the other things. But the fact is the company is just run entirely differently today than it was 3 years ago. Now a lot of that just has to do with the turmoil that the company had been through and changes in leadership. So the fact is when you look at the management team, we have, I forget what, 13 or 14 out of the 17 operating committee members are new to the company. And I think every one of the others who've been at the company for a period of time are in a different role, and roles that they're extremely suited to. We run the company as one. Those of you that have followed Wells Fargo might have known that used to talk about the federal list model, which basically meant that businesses could do whatever they want as long as they were performing well, which might have worked at a certain period of time, but totally ignores the benefits that we get as working as one Wells Fargo across the company. So we have significant initiatives to leverage the entire franchise and work together, that is what just several of us have as a differentiated value proposition in this country, which is why I feel great about our competitive positioning. The way we're dealing with our problems from the past are also entirely different, and I'll put those into 2 categories. Number one is just thinking broadly about our responsibility to serve communities and individuals. And we do have historical things that do continue to come up that you read about, which we're still working hard to put behind us. But in terms of how we're acting and how we're behaving, we come in every day really working hard to do the right thing and serve a broad set of kind of individuals and companies, which I think will continue to increase the reputation across the company. And our work on just fixing the infrastructure relative to the risk and control. The amount of time -- you referenced talking more about it, I'd just say the amount of time that it's taking us is certainly a statement of how much work there was to do, but we are making a significant amount of progress, albeit we're not perfect. And there is a lot to do. So you look at all those things and then probably, other than the risk of control work, the second most important thing is what are we doing about building the franchises. And I think there was a 4- or 5-year period where it wasn't the focus of the company. We were focused on our financial results, but it was really less about growth of the company. And today, when we look at it, we look at all the different lines of business. Every one of them has opportunities to grow. Every one of them has an initiative in place we can go through and talk about each of them if you'd like. But the focus on getting our historical problems behind us as well as investing for the future and building off of the great market positions we have is -- I would say there's an energy and enthusiasm in the company that certainly wasn't there 3 months ago, and it's because we're bringing things to market.

So look, I appreciate you can't say much on the consent order because it's confidential supervisory information. But maybe you can talk a little bit about how your management team's approach to dealing with the consent order has evolved since you've been at the company.

Sure. Listen, I mean, the consent order is -- first of all, we have multiple consent orders that all relate to the same series of things for the most part, which really relate to internal controls built out consistently and effectively across the company. So aside any individual consent order, our job is to build the appropriate infrastructure for a company of our size and complexity. And I would say that what we've been doing since I've arrived at the company is just accepted that responsibility as a management team, understanding that we have to do all that's necessary. So we, as a team, spend significant amounts of time every single week going through all that work, making sure it's on track. And our involvement means that everyone in the company has to be involved. So I probably -- I think when I first got to the company, I said I was probably spending, 2/3 to 3/4 of my time on that. It's less today, but not significantly less. I'd probably say it's 50% to 2/3 of the time. And again, it's not just about fulfilling the consent order which people are focused on. It's us as a management team making sure that we're running the company in a way that those who own the stock or those that we can influence across this country would expect us to. So we're held to very high standards as we go forward and complete this work. And as we do this, I think we'll certainly come out a better company, but I think we will come out of this with controls that should be amongst the top of the companies out there. And so that's just a fact of life of what we have to do.

And then maybe you can just talk a little bit about the management team. I think there's obviously been very significant changes in the management team at Wells Fargo over the last 3 years. Where have you got to in terms of getting the right people in the right roles? And how do you go about building a cohesive culture? And what do you want the attributes of the firm's culture to look like?

So here, too, in terms of how we run the place and the way we work together, our operating committee is a -- we are one cohesive group. We meet at least twice a week and once a month for an entire day. Everyone participates. There aren't fiefdoms across the place where people just talk about their own areas. There is, I don't want to say, confrontation, but there's a candor which we expect from the entire company that didn't exist at the company before. We are a very polite place. No one was ever expected to push each other in meetings. It was always done a little more privately. And we all understand that we all -- our success will be dictated by the success of the company, not any individual business. Everyone on the operating committee, at least 50% of their compensation is based upon the performance of the entire company, not just their individual performance or their business performance. And ultimately, if something doesn't work right, that will override everything else as well. So everyone understands that. And so -- now by the way, it's a very collegial group of people. So if the people on the operating committee here, they would talk about how well people get along, how much they respect each other. And out of that becomes the natural things that we all should be working together that we never focused on before. So take our consumer bank and our wealth management business. They were run completely separately. And just look at what some of our competitors have done, and I've had -- elsewhere when you look at the affluent customers that exist in your consumer branch and we were treating them the same way as we were treating every other customers, not leveraging the strengths that we had in our Wealth Management business. And now we've launched something entirely new in Wells Fargo Premier to take a lot of the competitive benefits that we have, we're having one of the biggest wealth management business in the country and working in partnership between the two to serve our customers better. When we look at the opportunity to serve our commercial banking clients with investment banking products, I've mentioned this before to some of the of the folks that have followed us since we got here when we got -- when we looked at the company, we saw that we were doing extraordinarily little corporate investment banking product through our commercial bank. And all you need to do is look at what a Goldman has done or a JPMorgan or some of the others and you say, obviously, there's huge potential. And so we looked at the amount of fees that our customers, our customers, not customers in the markets where we are. We looked at our customers and what fees they're paying to the Street, and it was something like $4.5 billion, and we were getting paid a tiny portion of it because we never focused on it. Our bankers didn't have a license. There was never a strong partnership between the 2. That's changed dramatically. And that's a significant opportunity. And I mean we can go on and on and just talk about these lines of businesses that we have are artificial boundaries. We need to have them because we do need product expertise running a big distributed sales force is very different than running on the consumer side is very different than running a more centralized investment banking business. But these opportunities to work across the company are extremely significant and related to how we think about the company. And as I said before, when we look at competitively what we have, they're really -- we believe -- I mean we do have a lot of strong competitors and we've got a respect for a lot of people, but there are really only a couple of us that have all of the things that we have, which, if we run the place properly, should ultimately benefit our customers and want them to do more with us. And so as we think about our opportunities to increase the returns of the company and become more efficient, yes, we've got opportunities just on the expense side, but just getting more fee-based business out of this franchise is something that is a meaningful opportunity today that everyone rallies around because when we look at our results and we see what we're doing, it's just -- it's incredibly obvious.

Okay. So let's talk a little bit about the revenue picture, both in the near term, but also as we think about '23 and '24, NII, obviously, has been a very significant driver for revenue growth, obviously, for you, but for the industry more broadly. Deposit betas, though, are increasingly coming into focus and your deposit betas have been amongst the lowest in the industry, partly because of your -- partly because of the changes you've made in terms of deposit funding but also because of your skew towards consumer. What are you seeing in terms of deposit betas at the moment? And given that Fed funds is now at 4%, how are you thinking about the evolution of deposit betas as we head into 2023?

Sure. So just for those that don't follow us regularly, it's just important to note that we actually entered this rising rate period in a different position than we probably otherwise would have in a way which has benefited our deposit business. Because we have an asset gap with the Federal reserve, we actually had been limited on the deposit side with the strong inflow of deposit and the cash that came along with it. So really, over the past couple of years with all of the liquidity that's existed in the systems, we've actually had to be fairly choosy, mostly on the wholesale side, almost entirely on the wholesale side, but not entirely about limiting nonoperational deposits. And so as we enter this period, it's -- what we said is we would have expected our deposit betas to be less than others have seen because they haven't had those limitations, and we have seen that. As we sit here today, we've obviously been strong -- significant beneficiaries from rising rates. But there's no question that as time goes on as we sit here today, betas will increase. And I would say not just because of the competitive environment out there. We're not looking at using rate in a way to significantly attract new customers. But we are looking at rate as a way to make sure that we're protecting the franchise value inside the company. And so there is a deep analysis that you need to do about how much can you get away with in terms of not passing on rate in the shorter term versus what do you lose in the longer term for just not treating customers properly. And so we're working hard to find the right balance because as rates go up, most customers should get paid in a way that they weren't pay before. And we spend a lot of time looking at the data as to how customers are reacting at different affluence levels, at different deposit concentration levels. And so that's a very long way of just saying we do expect betas to go up. So when we look at our own NII, even we certainly would expect next year's net interest income to be higher than this year's net interest income but I wouldn't take the fourth quarter and analyze it either, and we'll go to spend more time at our fourth quarter earnings call and talk about that. But I wouldn't -- we wouldn't look at it like -- I mean I look at it like it's a natural progression of passing on a portion of the rate increase to those that are really franchise customers of ours.

What about the loan growth picture? I mean that's obviously, again, been very strong this year. I think your loan growth is up 6% year-to-date, I think you've talked about loan growth moderating in Q3. What have you seen in Q4? And what are you expecting for next year? And do you think there'll be more of a bifurcation between consumer loan demand and corporate loan demand over the course of the next year?

Well, I think, first of all, overall, it really, really is driven by what we see in terms of the strength of the economy or not. I would say we are not significantly pulling back in any way, shape or form in a wholesale way in any one of our businesses. But we are trying to be smart at looking at any kind of credit on the fringes of our credit envelope just to make sure that we're being smart because you can't sit here and say that you expect a slowdown to occur and not to take that into account as you think about what you're willing to underwrite. And so that's probably a relatively small reduction in the volume relative to what we would have done in the past, but I think it's something that's smart, we think, over a period of time. And like I said, for the most part, it's going to be driven by what we see in the economy. On the commercial side, we're still -- what we're seeing is our customers are nervous. They're nervous about the ability to continue to pass price on as inflation continues to increase their cost of goods sold. They are nervous about the liquidity in the marketplace, nervous to the point of just wanting to ensure that they have liquidity and that they've got the appropriate lines and the ability to borrow from us. And so again, I would describe that as a continuation of what we've seen, not a marked change but not something which has surprised us. So we still continue to see some demand there. And we see demand on the card side where we just have new products, which continue to attract extremely strong credit prospects because of the value propositions that we're offering today.

So maybe we can talk a little bit about the fee side of the equation as well. So wealth management, investment banking, mortgage, obviously, several important initiatives in all of those. Can you talk about either the revenue opportunities or challenges you see in each of those businesses heading into next year?

Yes. So let's put mortgage aside from wealth management and investment banking as you described it. As I referenced earlier, I think, first of all, let me just start with our corporate investment bank. We think the Corporate Investment Bank for us, first of all, has been, I should say this, this is not a material change in strategy. We were a very strong corporate investment bank, which is important to our company. When you look at our results, we break it out as a separate line of business, and you'll just see how important it's been. We have just not spent a lot of time talking about it for a whole bunch of different reasons. But it's a core part of who we are, what we've been, and we've been very selective about expanding the product set in which we choose to compete, meaning that we have a core set of customers that are predominantly U.S.-based. They are global, so we do have a set of global capabilities, but they're very focused on serving that customer base for the most part. And we've made the shift from using our own balance sheet to being a meaningful representative for them in the public markets. And so that means building an M&A franchise. It means corporate bond underwriting, it means equity underwriting, and you see that in our results. So the opportunity for us is to be clear about we have the interest continuing to grow that business in a way that takes advantage of the risk we're already taking to get paid more for it. So as we think about what we should be in the corporate investment bank, we're not talking about any material changes to the risk profile. But again, when you look at the fees and what we get paid to the amount of risk that we take relative to others, it's just not what it should be, and that's opportunity. And that's -- I would say we're bringing a sharper point to that in terms of how we run the place and what the opportunities are that we have in front of us. So I think you put all those things together, add to that the middle market opportunity that we have. And we feel great about our prospects to build the business, not in an exponential way, I would describe it as a very linear, well thought out, focused on certain industries and certain products where we have incredibly strong relationships and people want to do more business with us. Wealth management is another place where I would say we've gone from defense to offense. To be fair, the business was -- actually of all the businesses that we've had was probably the most impacted by our name being in the newspaper, much more so even in our consumer business in a lot of ways because of just the knowledge that that customer base and our advisers have and the sensitivity to things being written about us. And so as our reputation has improved and we brought in a new team there that totally understands the business, that is working to invest properly in the business. I think if you were to talk to our advisers, they would feel very different about what we're bringing to market for them and the products and the things that we're building for them. And you can just see that in terms of a bottoming out of our adviser count and our ability to recruit advisers from the outside that we wouldn't have been able to recruit a couple of years ago. So we love the platform that we have because we've got a platform within the bank branches which is significant and underpenetrated. We have our adviser platform where people are Wells Fargo employees with a full product set. We have an independent channel that we have but hadn't invested in historically as people have become interested in becoming independent. And that's something that we have capabilities in, and we have our digital platform. So I think when you look at those different pieces we have, people we compete against have some of those, but not all of those. And so the opportunity to invest and build all those platforms, and we love the wealth space, and we love the platform that we have. Mortgage is just an entirely different creature, just running a big mortgage business inside of a large bank is very different than it was 10 or 15 years ago. The people we compete with are very, very different. The home lending products are important to our customer base. but it is a very, very difficult business to run really well over a cycle. So we're committed to it, but it won't look like what it looked like in the past. And you see that reflected just in the natural downsizing that we've seen as we've gone through these cycles. And so while it's important to us, I would not expect that to be something that we would put on the pages would be something significantly different or significant opportunities, albeit it will still be important to us but in a very different way.

Okay. So let's talk about expenses. I know you're going to give a detailed update in January. But bigger picture, how should we think about the trajectory of some of the broader categories of expenses. And look, how is your thought process about the long-term efficiency ratio for the firm evolved over the last year?

Yes, I think it's -- so certainly as time goes on, I think we get a much clearer picture of what we see is, what we have to do, and what the opportunities are. There's no question when you look at our business and our company that we feel that the company still is far less efficient than it should be, even though we continue to deliver on the savings that we said we were going to deliver. And so that's both on a gross basis. But we've also seen net decreases in expenses as we have created efficiency, but also continue to invest in the place. So as we look out over, I'd say, first of all, over the shorter term, we are not looking to save any money when it comes to the risk and control work that we have. And just as a side, that's added billions of dollars to the expense base, billions. It's not incredibly efficient, but it's incredibly important. And our commitment there is to spend whatever is necessary to get the work done as quickly as we can at the highest level of quality that's possible. Now again, we're not just throwing money up against the wall. We're trying to be very smart about adding it where it can pay off, but it is a significant draw of our expenses. The second is on the technology side. And I'd say -- we are fighting -- we've been fighting very hard and continue to fight very hard not to use technology in the shorter term as a place to drive just our efficiency ratios lower. There's no question in our minds that we will get much more efficiency out of technology as we continue to build out all of our digital capabilities and migrate things to the cloud. But in the shorter term, we need to invest both in our product capabilities and in the infrastructure to both be competitive but also over the long period to get those saves. So in those first 2 categories, as we look out over the longer term, there should be saves there, but we're not close to talking about what those are. Then you take everything else inside the company and there's no question that we're still incredibly inefficient. And that's where we're getting both the gross and the savings that translate on a net basis to what we see fall to the bottom line. In a very -- as high as attrition has been over the last year, 1.5 years, it's actually made our job somewhat easier relative to being able to just rightsize lots of areas of the company. We have a lot more focus on the efficiency of our branches. We're probably several years behind what others have done in terms of just looking at the efficiency of their branch network, not just in terms of the numbers of branches, but staffing inside those branches. When we look at just the processes inside the company, when we look at things that we've created, we still see the ability just to drive expenses downward. And what we've said is we certainly hope and we'll give an update when we get to the end of the quarter, that on a net basis, that continues to trend downward -- albeit we still have some of these lumpier legacy things, which are going to come through and will all those things out as they do. And there'll be a point at which revenue should help those numbers as well because as I said, there's no question when you look at just -- not just our revenue growth, but just the mix of revenue and how much we're getting paid, we're not where we should be. So we put all those things together and just from a management perspective and we think about what we can impact, we kind of put the interest rate increases to the side. We understand that credit losses are going to go up and let's not fool ourselves. We spend a lot of time focusing on what we can do to impact the company. And the things I mentioned, we think, create a very, very strong platform for increased efficiency and stronger growth that we've really not seen from the company over the last 5, 6 years.

You mentioned credit. So let's talk a little bit about that. Obviously, credit losses at 30-year lows. We really didn't see much of a deterioration in the third quarter. So a couple of things. The first is, are there any specific portfolios that you're monitoring more closely today? What are the leading indicators that you're watching perhaps the most closely? And maybe you can talk a little bit about the sensitivity of the allowance of some of those risk factors and how we should think about the reserve builds.

So listen, I mean I talked before about some of the things that we're doing, predominantly on the consumer side about just tightening up around the edges which, again, I think is just you'd expect us to do, and it's a smart thing to do. But again, what we see is still extremely strong credit performance on the consumer side with an expected level of normalization. But I would describe it as you do need to -- if you're looking at the graphs of delinquencies and what you do need to make change the scale to really see it, but it is very, very clear. And again, there's nothing in there that would suggest that it's -- the curves are turning in a more negative way. It's a consistent return to normal, and we'll see where that gets to. When we think about our most significant exposures on the wholesale side, I would say, first of all, we're trying to be diligent about looking across all of the different pieces. There's certainly some inflation-sensitive industries that we've been very aggressive in trying to get ahead and working with clients on. And for us, we spend a lot of time looking at our own commercial real estate exposure. When you look at commercial real estate, I would just encourage everyone look beyond the headline number. Not all commercial real estate is the same. You need to look at the type of commercial real estate. So huge difference in residential versus commercial versus office. Office is the most stress, but there's also a huge differentiation in office depending on physical location, meaning city by city, location within the city, the -- whether it's an A property, a B property, a C property, and then the structure of transactions will certainly dictate loss content over a period of time. And so whether it's LTVs or other structural things that we have in place. So office is showing deterioration in terms of just what you're seeing in terms of things like occupancy trends like that. Hopefully, we've been thoughtful about it relative to how we think about it in our allowance. And what it translates to in terms of losses over a period of time, I think, will be very uneven across the industry, the industry defined very broadly as large banks, much smaller banks and nonbanks because people have very different types of exposures.

Okay. So we've got a few minutes left, so maybe we can talk about capital. You're actually in a position of excess capital, which is different to some of your peers. Can you talk a little bit about how you're thinking about redeploying that excess capital either in terms of redeploying it back into the business versus returning that? And then perhaps you can comment on how you're thinking about how your capital requirements could evolve over the next few years? Obviously, there's been a few speeches from Michael Barr suggesting that requirements could go up. How does that factor into your thinking in terms of the appropriate level of capital to run this today?

Sure. So as you mentioned, we do have very strong capital levels. We have significant buffers on top of the buffers that the Fed has out there. But we're also just trying to be, quite honestly, very, very conservative relative both to our position as well as what we see in the world. And so again, what we said on the third quarter that we are trying to put some of these historical matters behind us. I've pointed this out multiple times, it's lumpy. We don't control the timing of it. And we certainly would expect there to be some more of those things in the future. We don't think they impact the ongoing earnings power of the company, but we certainly want to -- those things shouldn't be a capital issue for us. And so just being smart about not making it an issue or not even having it be a concern for people we think is important. We live in an uncertain environment. And so I've talked about what we see in terms of a natural progression towards a return to normal and then a downturn, but you never quite know. And again, we just want to be conservative when it comes to capital. And we read the same things that you read. And so there's no question that there is an ongoing debate about whether banks have the appropriate levels of capital. We certainly feel like we have more than enough capital, but ultimately, it's not our decision. And so we just don't want to be in a position where we need to just react in a way that surprises everyone if those things come to pass. So I think we're just trying to be very smart about managing our current capital base. Making sure as we think through the future and how we want to position the company that if there are changes to capital rules that we're not impacted in a way which surprises people. So I wouldn't call it -- it's not a concern in any way, shape or form, it's just trying to be prudent. And so we still generate a significant amount of capital. And so we'll be able to deploy that in terms of increasing dividends and buybacks. And it's just a question of just making sure that we sleep at night really, really well and get through this period in a way that capital never has to be a question.

Okay. I actually think with that, we're out of time. So Charlie, thank you very, very much for joining us. And hopefully, we'll see you again next year.

Thanks, everyone.

Thank you.