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

So good morning, again, to everybody in the room. For those of you with us virtually, I'm Susan Katzke. I cover the large-cap banks for Credit Suisse. And our next presenting bank this morning is Wells Fargo, again, this year, a top pick in the bank space, given both the progress and the increasingly clear potential for this bank to materially improve the returns that you generate. I'm pleased to be joined once again by CFO, Mike Santomassimo, year 3 in this role at this conference. So we're going to jump right in. We've got a lot of ground to cover over the next 40 minutes here.

And let's start really by level setting around the macro. Let's talk about the operating environment and what, if anything, has changed in your view around the macro in the 4 to 5 weeks since earnings.

Yes. Well, thanks again for having us. Great to be here in person again. Look, I think the data -- and you can see it again this morning, the data has been quite mixed. You've got a really strong job market that continues to outperform probably where everybody expected it to be. And then you've got some weakness in a lot of other areas, particularly as you look at sort of the industrial or even consumer side. And so you're left with what's going to really happen. You can see the CPI print this morning, again, was a little bit higher than what was expected there. But I think what you're seeing underneath that is you're seeing what you would expect. You're seeing some slowdown in many different sectors. And so we would expect that to continue across the different portfolios we have. Now overall, things are in still pretty good shape. You're seeing good performance in the consumer and the commercial side. But you're certainly seeing a lot of mixed data, which I think is -- people are having a hard time digesting to see what that really means for the macro across the rest of the year. And I think we're seeing lots of interest rate volatility still. Every time -- I know it feels like we talk about that every time at one of these -- in these sessions and in earnings and other things. And every time you think it's kind of stabilized and you got a direction, things change. And we've seen that again just in the last few weeks. And so for us, we're still thinking that it's going to get worse. And as we go throughout the year, we've got to be prepared for a whole bunch of different scenarios of what that means.

Okay. And so as you prepare for the scenarios, I'm curious when you look at your customer behavior, when you look at whether it's consumer spending or commercial borrowing and line utilization, what are you seeing from your clients right now?

The spending data is still really healthy. If you look at debit card spend, it was up about 3% year-over-year in January versus, I think, December, it was more like 1% up. And so good activity there. The beginning of the month was a little stronger than the end of the month. We'll see how that continues, if that continues. And it's really driven by the same drivers we've seen over the last number -- last couple of quarters. Travel and entertainment is up a lot in terms of where people are spending their money. And so I think that excess savings that was in the system is -- continues to be spent through what we're seeing. On the credit card side, we're up at almost 20% in the month year-on-year. Again, some of that may be outperformance given our new product lineup that we've got. So the industry may be a little bit different. And it's really across the board in categories that we're seeing. So the consumer side, people are out there still spending, and you can see that in your day-to-day life. Try getting a restaurant reservation in most cities these days, right? It's really hard if you want to do something last minute. And so I think we're seeing people out there. On the commercial side, in our commercial -- in the commercial bank, line utilization has stabilized now probably for 3, 4 months, at least. So we're not seeing this big increase in utilization. Where we're seeing still good activity is on growth of new customers and some new facilities that are out there for customers. But we're not seeing a lot of utilization changes in the commercial banks and similar in the corporate investment bank, where we're not seeing a lot of activity there. Obviously, we're going to have certain portfolios like commercial real estate are going to be impacted a little bit differently. But overall, the consumer side is still pretty healthy in terms of activity, and the commercial side is pretty stable.

Okay. And so just to be more clear, in terms of the macro in your central case, that you would still be looking for a mild recession at some point this year.

Yes. I mean, whether it's going to be a recession, mild, not mild, it's like -- that's a hard thing to really get right. But what we would expect is things are going to continue to get a little worse. And you see that in small ways as you look across the different portfolio. But we would expect it to get worse throughout the year, and that will have an impact both on the consumer and the commercial side.

Okay. Fair enough. So let's then take this operating backdrop to the kind of hotter topics, if you will, of NII resilience, operating efficiency, consent order remediation. And we'll start with NII resilience. So kind of along the lines of deposit flows, mix and beta, we know from the H8 data that deposit balances industry-wide are down first quarter to date. And clearly, all deposits are not equal. How is your deposit growth tracking? And how have the flows in consumer, commercial, wealth kind of differed and progressed in your portfolio?

Yes. What we're seeing is what we expected to see, right? And it's a continuation of what you saw at the end of last year. And as rates have gone up so much, you're seeing normal behavior. And it's different across the different portfolios. And as you said, the H8 data would say, in aggregate, the system is down a little less than 2%, large banks a little more. We're tracking in line with that. And if you go across the different businesses, we're seeing the most percentage of -- most rate-sensitive deposits in our wealth business moving. And so I'm sure most people in the room and on the webcast are doing similar things, whether you're buying T-bills or money market funds. And so you can -- you're seeing a continuation in the wealth space of those deposits moving into cash alternatives. And we can see the activity where they're moving from cash to those alts or they're taking risk out of other positions, and they're adding it into cash alts today. And so we're seeing that continue into the quarter. On the consumer side, it goes back to what we were talking about a little while ago. It's, first and foremost, spending. People are consistently out there spending some of those deposits. You see there's always a consistent amount that's going into other providers, whether it's Internet banks or other alternatives. But it's changing a little, but not super significant. The biggest driver is spending on the consumer side. And on the commercial side, we're seeing a little bit of stability there in the balances, both in the CIB and in the commercial bank, where you're seeing more stability on those balances overall. And so deposits are largely tracking the way we thought they would track at this point.

And with that consumer spending, I gather, that means you've got more noninterest-bearing deposit runoff.

For sure, and you're going to continue to see that. And now if you look at where we ended the quarter last quarter, we were at about 34%, I think, of noninterest-bearing as a percentage of the total. And if you go back a few years, we were probably more in the 25%, 27%, 28%, high 20 percentage point range. And so I would expect over a period of time, we could track back to that, which again is what you would expect to see, I think, given what we're seeing in terms of the spending and also just the overall trends. And so...

Well, that's good. You answered my next question, so going back towards 25%. But if I think about kind of how you progress back there, having not had as much excess deposit inflow as you manage to keep your balance sheet within the parameters of the asset cap, I assume your migration might be slower than others who had all of the excess come into play.

Yes, we'll see. We'll see how that progresses, right? And I think the -- when you look at the -- it's really a function of what you're going to see from both the competitive environment, the rate environment and sort of what the spending data looks like that. But the pace, we'll see and how that compares to others. It's hard to predict, but it could be.

Well, so if we switch from mix to beta and pricing in the competitive environment, I'm curious in that interest-bearing component. Would you expect your beta to outperform? And how are you thinking about how you want to retain and build consumer deposit balances? How competitive are you willing to be?

Yes. Look, there's a lot that goes into that. And outperform, underperform and sort of I try hard not to make predictions of that because it's all relative to what you think. But the -- what we've seen happen so far is the commercial side of the deposit, the beta has been pretty high for a couple of quarters, and that will continue. But we're pretty comfortable that we can compete effectively for those deposits where we want to. And we're really focused there on core operational deposits that help support a lot of the business that we do with those customers. And so we feel good with our ability to do that pretty effectively. On the consumer side, you really didn't see pricing move until the fourth quarter, which again is kind of what we expected to happen. And where we're focused there is first thinking about what the right way to handle our client base is over a longer period of time. And I think you'll see, so far, the betas have probably overperformed where we had modeled they would be. And we'll see how that progresses throughout the year. And I think a function -- that's going to be a function of what we see in terms of spending levels, competitive environment and a whole bunch of other factors that go into it.

Okay. So let's switch from deposits to loan growth and talk about the demand that you're seeing and really the health of the demand that you're seeing.

Yes. I mean, the loan growth demand really has moderated quite a bit. And you can see, depending on which angle you look at the Fed data on, like it's sort of flattish to down a little bit quarter-to-date. End of period through the last week or 2 is certainly down across the industry, and I think that's what we're seeing as well. And when you go talk to clients about it, I think there's certainly a number of them that are continuing to invest through the macro environment we're in. But certain others are also sort of hunkering down a little bit and being a little more -- a little bit more conservative as well. And each of the portfolios is operating a little bit differently. We're seeing growth in card. We're seeing shrinkage in auto. Some of that is the returns that are in that portfolio just aren't very attractive. Some of it's credit tightening that we've been doing. And the commercial bank continues to grow, as I mentioned before, really because of new client growth and new facilities, not line utilization. And so it's moderated as we thought it might. You really -- we really saw outsized growth last year, particularly in the first and second quarter, and it really has been much more moderate since then. And so that's what we would expect to see right now.

Okay. Fair enough. And then in terms of pricing on the commercial side, in particular, I know that's been an area of discussion, pricing getting any better?

It's a bit -- a little bit of an odd area of discussion, honestly. But the shorter answer is like it's -- not much has changed. And I think it's still a pretty competitive environment for the clients -- our target client base. And so we're not seeing loan spreads move much at this point. Obviously, it's a little different by portfolio where you see a little bit of -- you might see a little bit of expansion in certain portfolios. But overall, in aggregate, it's not moving that much at this point. And I wouldn't expect it to move significantly just given the competitive nature of the environment we're in.

Okay. So let's go to guidance, because I know that's really your favorite topic.

Yes.

So if we consider deposit flows and loan demand, and I know it's early in the quarter, we're only halfway through, you guided to no material step-down beyond the cost of day count for NII in 1Q '23 relative to 4Q '22. So are you still comfortable with that statement?

Yes. Yes. No, at this point, I think we're tracking to where we thought. The day counts are close to a couple hundred million dollars. And so if you adjust for that, we're in that neighborhood. And so we're pretty close to that. So I think that's still the case. And then when you broaden out for the full year, we're still comfortable with our up 10% guidance that we gave.

Okay. Perfect. So before we close out this side of the balance sheet, let's talk a little bit about earning asset composition because we did loans, we did deposits. But on cash in the securities portfolio, where do you see those settling out, assuming the asset cap remains in place for the duration?

Yes. I mean, I think if you take out some of the noise that happened during COVID, particularly on the cash side, our -- the percentage of cash and securities has been pretty consistent over a number of years. And so that's probably -- if you look at the historical averages and you take out the excess that we saw in cash, in particular, we're -- that's probably not a bad way to think about it. Our first priority is, of course, being there for clients and really helping support them, and that means loans. And then to some degree, securities will be the outlet for what we think the excess liquidity that we have. And -- but as a percentage of the overall, thinking about it in terms of what those historical averages have been is probably not a bad way to model it.

Okay. And because it's always a lot of fun to go to this next question, I'm not sure fun is the right word, but what do you think your balance sheet would look like without the asset cap in terms of that mix of loans, of securities and actually also of trading assets, which has been a business that was shrunk in part because of the asset cap?

Yes. You know I like the what-ifs. But I think the -- you have to start with the actions we took during COVID, in particular, to make sure we manage under the asset cap. And really, there were 2 things that we focused on mostly. First was deposits, and we pushed a lot of deposits, particularly in the commercial and corporate investment bank side off. And those were our most rate-sensitive deposits. So that really helped position our balance sheet pretty well coming into the rate environment, which we're seeing the benefit of. On the asset side, really, we shrunk the trading assets and shrunk the markets business, in particular. And so I think those are the areas that we had to take some action on. And so I think as we progress, we'll see how those grow. And once we get to the point where the asset cap is lifted, it will be somewhat of a function of what the environment is like, too, where we see those opportunities. And then we'll see how that progresses. And I would just caution everybody. When we get to that point, it's not a light switch kind of moment, right? So this will -- whatever the end state looks like, it will take some time to get there. But we think there'll be opportunity when we do.

Okay. So let's switch gears into operating efficiency. Your guidance is very clear. $50.2 billion is the starting point for 2023. And I think you and Charlie have been very clear about savings opportunities, efficiency opportunities, your determination to invest and to improve upon your efficiency ratio, which we've seen you do year-to-year. So on the efficiency ratio, there's been a lot of improvement. Are you thinking about -- do you want to share some thoughts on where the efficiency ratio ought to go in time?

Lower. But I think if you look over the last few years, the efficiency ratio is an important output. But where we've been really focused is getting the absolute dollar of spend down and to where we want it to be. And then I think -- and the efficiency ratio, obviously, it will be a function of where we get the expenses. But also, there's a revenue element to that as well. So we've been focused on getting absolute dollars of cost out of the system and then really embedding the disciplines that we want into sort of how we operate the place every day. Because over time, like that's going to be what's most important is that people come in every day thinking about how to make the place more efficient, how to make sure we're making the investments for growth and that the efficiency ratio will take care of itself over time. I think when you look at where we're going to continue to get savings, it's all the places we highlighted in earnings. And we still think, as we go through this year, there's still a lot of opportunity to get more efficient over time. And it just takes a little bit of time to sort of get there. As you sort of -- whether you're automating, you're consolidating, you're -- there's lots of -- and we're exiting real estate, there's a whole -- it's really across the whole company where those opportunities still exist. And we still very much believe that our businesses should operate -- should be as efficient as their best peers. And obviously, ultimately, you'll see that not only in the efficiency ratios, but you'll see that in the returns of each of the core businesses. And we think we'll -- but it just takes some time to get there. As it goes to this year, we feel good about the guidance we gave. But I'd also say, as you look at quarter-to-quarter, sometimes that can be a little bit different. We still have seasonal cost in the first quarter. Generally, it's around $600 million from fourth quarter to first quarter. And so you got to sort of keep some of that in mind as you do the modeling. But we still feel as confident as we have around there's more opportunity to get more efficient and the efficiency ratio will continue to improve, hopefully, over time.

Is there a level that, that efficiency ratio has to get to, to sustain a 15% ROTE?

It's just one piece of getting to that 15% ROTCE. And we've made -- we feel like we've made a lot of progress to sort of get to -- from where we started this conversation back in the fourth quarter of 2020. But it's one piece of it. And I think we've got to continue to execute there. And if you look at what we've done in the efficiency program, we said we would deliver about $10 billion of gross saves. For '21 and '22, we delivered $7.5 billion. You add in the $3.2 billion that we said we'd deliver this year. So we've exceeded what we said we were going to do there by the end of the year. And so we've got to keep on it while we continue to make the investments that we need to make to grow each of the underlying businesses. And so it's one element of it, but we've got to continue to do that. We've got to continue to optimize the capital we've got, and we've got to get some of the benefit of the investments we're making.

Fair enough. And just to stay with efficiency and optimization as part of that for one moment, on home lending, are you making the progress that you had anticipated? And where are you in terms of the market for the MSRs? Is there a market for the MSRs right now? And what's the benefit of shedding those assets?

Yes. I mean, it's still -- we're very -- it's only been a short amount of time since we made the announcement, right, so in early January. And so -- and there were really 2 pieces of it. First is we announced we would exit correspondent, and we're largely done with that. We've got some pipeline still to work through over the next few months. But for the most part, we're not taking in any new activity there. So that's largely completed. And that's going to have a very small impact on ongoing revenue in that business, but it certainly helps reduce some of the complexity that's there. On the servicing side, that's going to be a longer journey as we do that. And really, the goal there is to simplify the servicing environment that we've got, which we think over time will actually improve the profitability of that business quite significantly. And so that's really the goal. And then for MSR, we've said we're going to shrink that. And we'll -- there certainly is a market for MSRs and the right portfolio of loans underneath it. And so we'll see how that goes, but that will take some time to work through.

And I gather with that being done that in terms of kind of the core franchise of Wells with asset management gone and Corporate Trust gone that this is it?

Yes, for the most part. I think we're -- in any company, you're always looking -- continuing to look at some of your businesses and make sure there's nothing else that you want to do in terms of optimization. But when we started this journey, the focus was really how do you make sure you're focused on what's important for your core client segments that you're going after. And that's really what drove the simplification of Asset Management and Corporate Trust. And I think at this point, we feel like we've got all the pieces we need to continue to compete effectively. The only thing we've talked about in the past is our rail business that we continue to optimize. But overall, we've -- we'll continue to look at the overall business mix, but we feel comfortable with where we are.