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

We're ready to go. Thanks, everyone, for joining us today. We're happy to kick off the conference in this room today with Wells Fargo. We have CEO, Charlie Scharf, joining us. Charlie, thanks for coming back this year.

Thanks, John. Great to be here.

I thought we'd start off talking a bit about the operating environment. Maybe you could kind of give us your view of the current economy, a lot of challenges out there. How well do you think the economy can sustain higher rates? We've got ongoing QT, debt ceiling negotiations? What's your take on things?

Sure. Well, listen, I would say -- can you hear me now? Here we go. Listen, I mean, from what we see, things still are probably far stronger than we would have thought they would have been at this point in the cycle. There's still a fair amount of cash in deposit accounts. Consumer spend is holding up. Debit card spend is kind of flattish. Credit card spend for us is up roughly 10%. It's slowing slowly, which is what we would expect. But again, still, you're not seeing any meaningful declines or any acceleration of that. Credit quality still continues to be extremely strong. Again, some deterioration with no real acceleration there. So overall, things are actually relatively strong versus where they could be. Now we're all looking out to what happens as the environment continues to be impacted by higher rates. But to this point, things are still okay.

And in terms of the banking environment, how have the events since early March impacted the operating environment for Wells Fargo. Is there anything you're doing differently in the last couple of months around liquidity, capital, given what's happened since March?

Sure. Separate out from the environment that we were living with during that -- during those several weeks where it was not business as usual. We were very much reacting to what was going on. Our business was very stable, but we were really -- you have to be concerned about how much contagion could take place. We very much agree with the facts that there were a few banks out there that had different business models that were far more concentrated. [Technical Difficulty]

He's going to swamp you out, I think.

Okay. There we go. Thank you very much. That there were a limited number of banks that had those kinds of issues. Certainly, when we looked at our business model, a broad-based business, broad deposit base, higher percentage of insured deposits, operational deposits from companies. It's just certainly different. Having said that, you do need to look at what's going on in the world. And I think anyone who's not relooking at their own liquidity assumptions is making a mistake. So we're very actively looking at liquidity assumptions that go into all of our modeling. We think we're conservative with how we run liquidity, but it is easier to move money today than it was the last time there was a crisis. So I think we're reacting to that. And I don't think it will have a meaningful impact on us. But I think when you look across the industry, it certainly will have an impact. And as higher capital is coming, not just for us, not -- but for a broader range of banks, I think that will certainly be an impact and certainly could impact lending availability in the environment.

Talk a bit about Wells Fargo. You've been at the company several years. Can you give us a sense of the broad transformation underway? How is it going? Where are you in the journey? Is it going according to plan so far? And what are some of the successes you could point to?

Yes. It's hard to know whether it's going according to plan because you don't really know when you're new to a company like this, that has the kinds of issues that we had when I got there, it's hard to exactly know what the plan is until you get there and figure it out. We've been very, very clear that we have a lot of work to do to build the operational risk framework of the company, which would be appropriate for a company of our size. That takes a long time to do. We've got a new team in place. We have new disciplines in place. We have plans that are detailed and we're executing according to those plans. So on the one hand, I feel very good about the progress that we're making, and I feel very confident that we have the ability to get the work done. Having said that, when you just step back and say how long has it been since these issues surfaced and how do regulators feel about that, it's been a long time. And so we live with that hanging over our heads. The opportunities to grow the franchise if we actually can get those issues behind us, are bigger than I thought they were primarily because we've just been operating under a very, very different mode and the franchise is still exceptional. So while everyone has the opportunity to spend their time growing the franchise, we haven't, not just because of the asset cap per se, but because we've been focused so internally on a bunch of issues. So when we think about what our opportunities are in the future, we think our franchise is as good and as strong as anyone here in the U.S., which is the most enviable market to be in. And over time, we'll have an opportunity to leverage that franchise differently than we have over the past certainly 8 years or so.

So this year, in your shareholder letter, you talked a bit more about your risk and regulatory work. For those that haven't had a chance to read that, could you talk about how that regulatory work is progressing? What are some of the challenges you're still working to address?

Yes. I tried in my shareholder letter, just because it's very reasonable for people to sit there and say, why isn't the work done, right? Some of these issues have been outstanding for a long time. Some going back to 2011, why isn't it completed? And I just tried to lay out, listen, when you come to a company like this, when I got to the company, we had 12 public consent orders, which is extraordinary in terms of just the number of consent orders and the amount of work that has to go in to get that work done. I don't think -- we weren't as organized as we should have been. We didn't have the sense of urgency to get the work done. We didn't have all the people in place who were capable of getting the work done. And so it just takes time to build the team, to build the plans, to build the processes before you are in a position to just focus purely on execution. And so as I said before, I feel great about the team that we brought in. When you look at the operating committee at 17 members, I think 13 are new to the company since I've been there. When you look at the senior team of a couple of hundred, 80% are new to their roles, most of which are new to the company. Hiring people that have had experience in doing this work. When I look at the plans we have, the disciplines we have in place, we're executing. But we're also very, very clear with people that we're executing a lot at the same time. It's hard to be perfect on everything in terms of execution. And until the work is complete, we're either at risk of the regulator saying taking too long, or until the work is complete, we'll still have gaps in our control infrastructure, and we can still discover things. But we are well along on the path to execution.

And we're seeing the regulatory landscape and the enforcement landscape is obviously evolving as we speak. We saw the OCC just recently put out a new enforcement manual and saying it's going to step up. It's activities and maybe even restrictions it puts on banks that it feels aren't living up to its expectations. How did that strike you and what it might mean for yourself and other banks?

Yes. I mean, again, for those that who look at banks and haven't seen that, I would encourage you to go look at it. It's a big deal because the regulators certain, I would say, pre SVB, First Republic Signature Bank, were taking a look at bank's ability to put these issues behind them. And now since that, I think it tells them that they believe the direction that they were going on was absolutely right, which is they need to be in the position to force companies to focus on this and to be clear about their ramifications. So we have the asset cap. We have a growth restriction. And in a lot of ways, people who cover banks saw that as something kind of coming out of nowhere did expect to see that. And now what the OCC is doing is they're making very clear if you don't close issues, you can expect things like that and they were clear about additional actions that they could take. And so I think not just for us, but just for the banking industry in general, it says an awful lot about the actions that regulators are willing to take that they didn't necessarily take on a broader basis historically. And for us, given the fact, as I said, that we do have these outstanding issues that we do have to execute. We tried to be very clear in all of our filings that until our work is done, we're still at risk. We're at risk of execution, even though I feel good about our ability to execute, it's still a lot to do. And we're at risk that there are things in our control environment that we'll find that we'll have to fix, and we have these long-standing dates. And so I just think it's instructive to look at that to understand what the risks are.

So turning to some of the key industry issues. Obviously, investors are very focused on net interest income and the key balance sheet drivers around that. Earlier this year in April with first quarter earnings, you reiterated your guidance for growing net interest income of 10% this year. How is the degree of difficulty around that changed with -- we've got -- whether it's loan growth, it's slowing, deposits that are outflowing and reprice, -- maybe talk a little bit about those things.

Yes. I mean I would say, listen, it's only -- it's a month later since we have had that conversation. So we don't have a lot more information other than we still continue to feel that, that is the right way for us to think about what NII would be for the year. There are offsetting pressures out there. Loan growth is not extremely strong. We've also been proactive about taking some measures to just reduce originations for marginal borrowers, both on the commercial side and on the consumer side, which we think is the right long-term thing to do for the franchise. But at the same time, we would expect rates to be higher for longer. But again, that's an assumption, which might or might not turn out to be the case. And our ability to hold our pricing is also a very big assumption, which we continue to be able to do. We do have promo rates out there, but we're going to be very conscious of making sure that we're not losing what we think are franchise balances because of rate.

On the loan growth front, [indiscernible], the senior loan officers are both really pointing to a slowdown, is that both demand-driven and supply-driven with banks tightening up, would you say both sides contributing to that?

My own -- it's hard to know, obviously. I think my own take is more demand-driven initially. And certainly, more recently, some of the tightening does have the impact. And again, the tightening, it's twofold. One is just banks being just more conservative as they start to see the marginal borrower struggle a little bit more than they had 6 months ago. I think that's just good business to get smarter about that. But certainly, coming out of these events over the last bunch of months with the -- some degree of clarity that more banks should expect to have higher capital requirements. There's certainly a buzz around the market that banks are trying to be proactive, not wait for the rules and focus on RWA.

And how about on the deposit side? It seems like from the industry data, the deposits were down 2% or so this quarter. What are you seeing at Wells Fargo in terms of flows and mix changes?

We're not seeing any major changes from what we've seen. I think what we see is very similar to what the other big banks see. There are -- the smaller banks appear to be more aggressive with rates than the larger banks. But at the same time, as I said, we want to make sure that we're being fair to consumers and paying up for those balances where we should as opposed to losing them. But the trends are very consistent with what we've seen overall with no acceleration or deceleration.

So how about expenses? Improving efficiency is a big part of the thesis on Wells Fargo stock. Can you talk about the confidence you have that there are still opportunities to reduce expenses? And where do you see those at Wells Fargo?

Yes. So put into -- to separate our expenses from efficiency for a second, efficiency ratio because the efficiency ratio is the outcome and impacted both by expenses and also by revenue, obviously. Our expenses, we've been very, very focused on spending whatever is necessary to spend on the regulatory items. I did put in -- I think it was my shareholder letter that since 2018, we've added 10,000 people to do the regulatory and risk work, added approximately $2 billion in cost to the run rate. And at the same time, we've reduced our net expenses. So we've obviously saved substantially more than that. We still believe there's significant efficiencies around the company, both in terms of just eliminating duplication, eliminating complicated processes. When we sit around as an operating committee, we -- that's what we talk about. We talk about the fact that even with all of the reductions that we've made going from 275,000 people to 235,000 or so, there's still a huge amount of inefficiencies in how we run the place. And at the same time, we have some structural things in the business, which will improve efficiency over a period of time. Mortgage business is one of them. Our mortgage business is a material detractor to the efficiency in the consumer segment that we have, the business decision that we've made to downsize the business to focus our originations much more than we have in the past, will actually improve the efficiency of the company and by the way, improve the profitability of our business, which probably would surprise people. That's a multiyear journey as we downsize, we very quickly downsized the originations platform, but it will take a long time to downsize the servicing platform. And so that will help us both reduce expenses and our efficiency for the next bunch of years, and it will take a period of time to do that. We also have opportunities in other parts of our business where we're doing more to drive the digital platforms that we have that enable our customers to do more themselves, which our competitors have been doing for 5, 6, 7 years. We now have the tools out there in place, so we can do that. So that will help us drive efficiency. And then when you think about the efficiency ratio, again, we think about ourselves versus our competitors, if you look at -- just take deposits as an example, in terms -- as a proxy for profitability in the branches, we've barely grown our deposits in our consumer business relative to what our big competitors have done. And so that's both a combination of the focus that we've had internally as opposed to externally and just a little bit of the asset cap. It really has impacted our wholesale businesses more. So as we get better controls of the company, we earn the right to go back and figure out how we take this wonderful platform and grow it the way it should be growing, that, too, will help the efficiency ratio over a period of time.

So really, the last couple of years, it's been measured in absolute -- externally, we've measured it by the absolute expense dollars, but that will morph into an efficiency ratio kind of metric in terms of how you define?

I would say, not immediately. I mean we would -- we still expect to see control of our net expenses. And so again, very careful not to predict beyond when we do our plans because we want to have the ability to spend whatever we need to spend on the risk and related stuff. But we would -- I'm just in the -- we're still focused on that net number in the next couple of years, but over a longer period of time, there should be growth that we should see, which enable us to be more competitive with others out there.

That's fair. So let's talk a little bit about revenue growth opportunities and where you've been investing in the businesses. As we think about the capital markets business, investment banking, trading, you've shown some good growth in trading results the last couple of quarters. Is that a combination of cyclically good environment plus the investments you've been seeing? Is there a mix going on there?

Yes, for sure. Well, certainly, the environment speaks for itself. But -- and I would say, when you look at the mix of our business and one of the things which has been very conscious in the company is just diversifying our trading businesses away from just credit-focused businesses to look at things like FX rates and the equity business to some extent. We are not focused on taking significantly more risk in those businesses. So it's a question of allocating the risk appetite that we currently have, but also very focused on growing the customer flow part of the business. And so when we look at these businesses, we obviously will do better when there's volatility in markets. But our -- what we're really tracking is are we trading with more counterparties on a more regular basis that really form the basis of a customer-oriented trading business. And that's what the team has done. So there's no question that we benefited from some of that work that they've done in building the customer flow. We've also benefited from a reorientation to a more balanced business, and we've seen that in our results. And certainly, the market has helped.

Yes. It's harder to see on the investment banking side, where obviously, market conditions have been tougher but are you making progress there? You've hired people, you build out teams in the investment banking side? Is there some underlying growth there?

Yes. I would say our -- the thoughts on our investment banker. In some respects, I want to say that it's a slightly different focus, on the other point, it's really not, which is we had a very, very strong corporate banking franchise. Put aside the investment bank for a second, when you just think of like who we serve in the Fortune 500, whether it's through our lending products and through our treasury services products, we are right there with any of the big banks out there. Are -- the fees that we make are substantially less because we've been so focused historically on the spread parts of the business. So when we look at what we've been doing within the Investment Bank, it's just recognizing that we -- to continue to serve them, it's not just using our own balance sheet, it's using the public markets as well as the private markets and providing advice. And so we've been very, very focused on looking at returns on capital in those businesses to see relationship by relationship, where we're really getting paid for the risk that we currently take. We're looking at where we have strength in our franchise because of the lending or the treasury services relationships that we have. And it's in those places that we're actually continuing to build out the expertise within the Investment Bank portfolio so we can put ourselves in a position to have a higher returning business, which ultimately makes more money. The receptivity from our client base is extraordinary. Our client base, they understand how important we are to them. They recognize that we have to get paid appropriately across all the things that we do with them to continue to support them the way that we have. And so they're actually very supportive of us continuing to build our capabilities. So we have had the opportunity to make some really what we think are outstanding hires in the M&A space, TMT space, financials, health care, very, very focused. We have a plan on exactly where we actually want to add because it will leverage the strengths that we have. And you're right, going back to your original question, the environment, it's a tough environment to actually see those results, but we're investing here over a cycle. It's a very targeted set of resources that we're using. And we feel very good that it will pay off in a reasonable period.

Okay. How about on credit cards, you've rolled out a bunch of new products. Where are you in that journey? And how has the growth been relative to your expectations in card?

Yes, I feel really great about what we've been able to do there. And again, this is an example where -- it's a combination of just being really clear on strategic focus, understanding what our shortcomings were and then just executing. And so we were very clear when I got to the company that the card business had to be a more important strategic focus of the company. When we look at the ability to continue to serve our consumers on a broad basis, both the unsecured lending product, but probably more importantly, being in the middle of the spend of that relationship is extremely important. And so we had a reasonably sized business, not the scale of others, but it was a reasonably sized business to grow and it wasn't a strategic focus. So we said it's going to be. So therefore, then what do you do to do that? And we looked at what we had, we had subpar products that were branded with a competitor's product, American Express, who's terrific. But as strong as the brand is, the success of Amex is also because of all the things that they do to support that brand. And getting an Amex card at Wells Fargo doesn't give you access to those things. So from a competitive position, it just didn't make a whole lot of sense. And our economics were not appropriate for a bank of our size. So we recognize that. We worked with Visa and Mastercard to come up with new arrangements. That's then allowed us to rethink the products that we have to develop products that are now competitive in the marketplace that we think are some of the best out there. And you've seen a little bit of marketing, but you don't see us going and spending a crazy amount on marketing. And what we do is you get positive selection because you have a really terrific product out there. So the first thing we launched was a cash-backed product, the best product in the marketplace, 2% cash back on everything, no limits, no -- nothing you need to do to change categories or anything like that. And it's really attractive. And so the credit quality of the customer has been terrific. The spend levels are terrific, which is why we've seen outsized spend versus what other people have spent and we feel great about that. And we've launched a Reflect Autograph, which is both a rewards product as well as a lending product. and we're going to continue to launch more products. So it's very basic in terms of what we do, and it's like anything else. If you launch a great product, and you've got great support behind it, it wins in the marketplace. And so we're on the journey. You -- we would expect to see continued growth, but very much along the lines of what we've seen based upon our ability to have a competitive product, not competing on price, not competing on credit or anything like that.

And in terms of growing unsecured credit as the economy slows, what do you say to the concern about that? Is this the right time to lean into unsecured?

Yes. I would say it all depends on who you're lending to and how you go about doing it. So as I said, when we look at the credit quality, we've not changed. When we launched the product, I should say, we did not change the credit parameters that we were underwriting to. The selection that we were getting was more positive because of the quality of the product. When we look at the credit tightening that we've done, we have tightened credit in the card business, looking at places where we're starting to see some early weaknesses. So we're proactively managing where there's more potential risk in that portfolio and focusing on the higher credit quality borrower where we have more expertise.