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

Okay. Great. Thanks, everyone. I have a disclosure to reason that we'll get started. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. With that out of the way, I'm delighted to kick us off here in this room today with Mike Santomassimo, CFO of Wells Fargo. Mike, thanks so much for joining us.

Thanks for having us again.

So I did want to kind of go through the balance sheet first, if you don't mind. There's been a lot of questions here about deposits so far in the conference. And maybe you could give us an update on how deposit flows are trending this quarter, a little context around maybe deposit betas, retail versus commercial versus wealth that kind of thing?

Yes. I'd say in short, it's a little more of the same in terms of what we've been seeing over the last couple of quarters. And if you sort of break down each of the businesses, I think we're largely trending in line with -- in aggregate, we're largely trending in line with what you're seeing in the H8 data. But by business, when you look at the corporate investment bank and the commercial bank. Those deposits have been pretty stable for the last couple of quarters. So that's -- it's good to see, and I'm sure we'll dig in some of the beta questions later. But and then on the wealth side, you're seeing -- you're definitely seeing more movement into cash alts. The pace has certainly slowed over the last couple of months, but you're seeing still a little bit more moved into cash alternatives, which is again, to be expected. And then on the consumer side, the driver there continues to be people spending. And so I think it's still very healthy in terms of the activity levels we're seeing. We're not seeing big behavioral changes in people moving deposits around either within our accounts or outside. So overall, it's a little bit more of the same in terms of what we've been seeing. So which is good to see.

Now on deposit betas, as of 1Q '23, at least we calculated your cumulative deposit beta was somewhere around your cumulative IB deposit beta was somewhere around 27%, which was one of the lowest in our coverage group. So just trying to understand how you're thinking about deposit betas from here for the rest of the rate cycle. Where do you think it peaks out.

Yes. I'll give you a little bit of a view by business because I think that will help you sort of maybe form an opinion on what you think might happen. But in the corporate investment bank, those have been the most competitive from a pricing perspective now for a while. Again, that's largely to be expected, but for that type of client base. And that will be -- that will continue to be the case. We're not seeing accelerations of trends in any way, but they'll continue to be competitive as we go. We're not seeing big shifts in like custom pricing or other behaviors there. And I think we feel really good about being able to compete for the operational deposits that we want to compete for. And as I said just a minute ago, those deposits have been roughly kind of stable the last few quarters, which is good. The commercial bank is a little less competitive from a beta perspective. And again, there, we haven't seen the shift at any real significant change over the last few months in terms of behavior there. And so it's not -- we're not seeing this pressure build in any way on pricing. And then when you start looking at the consumer side of the business, we moved pricing on the consumer side last year, at the end of last year in the fourth quarter, and we haven't seen big shifts in pricing at all there since then. So overall, similar to what we just talked about on deposits, a little bit more of the same in terms of what we've been seeing over the last few months, not big accelerations either way.

Now Charlie did mention recently that you've barely grown deposits in your consumer business, and that's relative to what peers have done. Is that something that matters to you? Is there any -- is that the outcome you're looking for?

Well, I think you have to remember kind of what we've been focused on for the last few years, and we've been a little more inward focused, working on all of the risk and regulatory remediation, plus we've had the asset cap to deal with at different points in time. Where it's been more constraining over the last few years. And so we haven't been out there in a big way, marketing, like maybe others have done over the last 3 or 4 years, and so that's what you see when you're not being as proactive there. Having said that, we've been focused at the same time at improving our digital capabilities, and you've seen that kind of roll out over the last 1.5 years and it gets -- we make it better every single quarter. We've been continuing to work on some product simplification and experience for customers. And so while we haven't been out there proactively marketing in a big way, we've been working on all of the capabilities we think are going to be really important to stay competitive with folks. And over time, we'll do more and more proactive marketing. And I think we've started to do more of that this year, and I think you'll see that build over time.

So last question here on deposits is what about deposit durations? Are you thinking at all about that differently? Or...

Well, I think everybody, anybody that's in a position like mine at a bank these days needs to be thinking about those types of things. But again, we're not -- I don't anticipate us significantly changing our point of view. When you look at each of the different kinds of deposits, the durations are a little shorter on commercial deposits. They're a little longer on consumer deposits. And I think you need to be really thoughtful in different rate environments and how those durations change. And a lot of that is embedded in all of the work that we already do and have done for a long time around remodeling that stuff. But I don't anticipate wild swings in terms of perspectives on that. I think that's not a great place to be if you start having to have to do that in a significant way. And so I don't anticipate that, but it's something we continue to think more about.

Yes, just because it has implications for how you invested in the assets. So that's where that comes from. Moving on to liquidity. Recently, I think Charlie was mentioning that you're reviewing your liquidity assumptions. And so I wanted to follow-up on that statement and understand what you meant, what he meant by that, what you're doing because you're LCR ratio is already very high at 122%. So trying to understand how you're thinking about that level?

Yes. In addition to what we have to do for the LCR or the NSFR, orther the -- the regulatory caps, we also do a whole bunch of modeling inside the firm, you call those internal liquidity stress testing. And those models are very granular and look sector by sector, deposit type by deposit type, business by business, et cetera. And you have to sort of really and you're using these models to look at different scenarios that sort of stress the liquidity of the firm. And given the environment, we all just went through over the last 3 months or so, again, everybody should be sort of looking at those models and say, okay, did I get it right? Is there something changing in the environment that might influence how you think about that. And again, I don't anticipate significant changes there, but you have to reflect in an environment like this to make sure you're getting it right. For us, a lot of the experience that we use is actually real experience from the Wachovia issues back in 2008. And I think the big difference between what we saw there and what we saw now is the velocity of deposit outflows that some of the banks saw in March. And so you have to reflect on that and say, okay, should I tweak things or turn the dial a little bit here or there. But I think we feel really good about those models. And the Wachovia experience was actually quite severe when you really dig into it, but you do need to reflect on it to say, okay, should I tweak something at all? But I don't, again, I don't significant changes there, but everybody should be looking at that.

So should we expect, therefore, a little more HQLA in the mix?

Maybe, maybe not, but it's not significant in terms of changes.

You're on it. That's what you want to reflect.

Yes. Well, I think that's -- everybody should be. Again, if you're running a bank these days, like that's part of the job is to take the experiences that you're seeing around you and really think about it reflect on it and make sure you're incorporating what you need to and sort of the way you're modeling things.

All right. Let's turn to the loan book here, the asset side of the balance sheet. Sequential loans were flat in 1Q '23. I just want to understand what your positioning is here. Is there an opportunity to lean in? Or is demand just so weak that there's we should expect that loans could go negative Q-on-Q this year sometime?

Well, I think the H8 data would say, loans are kind of close to that right now, right, when you look in aggregate across the industry. And so I think that's certainly a possibility. In an environment like this, it's not really prudent to sort of try to expand your aperture and your credit box in a significant way and try to go get share. It's just not, it's not a real great way to manage. And so I think for us, we've got a pretty well-defined risk appetite, and we're going to stick to that as we go through an environment like this. But as you look at each of the portfolios, you're definitely seeing a little less demand in some cases. But you look at auto, we've done some credit tightening there, and our originations are down, plus you're seeing a little demand shifts happen. So originations are much lower than they were a year ago in that business. We all know what's happening in the mortgage and housing market in terms of that impacting sort of the volumes there. And then on the commercial side, there is still some demand on the commercial side in certain sectors. But in aggregate, it's not likely that you're going to see big growth in loans.

Maybe you could help us understand how card is going for you? Because I know you've been leaning in there a little bit. Is anything you can share with us with regard to consumer spending that you're seeing in card payment rate and is that at all a bright spot on loan growth?

Yes. I mean I think the card business is going really well for us. And as we've talked about maybe in other forums, we started -- we knew we had an opportunity when the management team got there to do a much better job running that business. And so the new management team came in, at the end of '19. We've launched 5 new products in that time period. We've seen really good growth in new account originations across those products. Still early days in the card, in the cycle that you go through when you're launching new products, but we've seen really good activity. And if you look at what's happening in April and May, card spend is up double digits, close to 10% in April and May. And some of that is a result of the work that we've been doing and getting the new products out there.

That was your own book.

That's our own book.

Year-on-year.

Year-on-year spend. That doesn't always translate into evolve, but that is the point-of-sale volume that's increasing. So we would expect a little bit of growth in the card outstandings as we go. But and so we actually feel really good about that and it's performing well.

Okay. Great. And then just lastly, on loans before moving to securities, anything to speak to about loan spreads or loan betas?

It's still a little early. In terms of looking at spread widening, you're certainly seeing a little bit of widening across different portfolios. I think if you go in the middle market business, you're really not seeing a ton there. It's still a very competitive space, lots of demand for those clients. If you look at the asset-based lending and leasing in a commercial bank, you see a little bit more spread widening. You see in some portfolios in the corporate investment bank, you see a little bit of spread widening but it's not massive at this point, but you're starting to see a little bit of it.

Okay. And then on securities, is there any change to how you're thinking about duration or composition?

Not a lot. I think we feel really comfortable about where we are. And the securities portfolio for us is an outlet for liquidity when we don't have enough growth in loans. And so that's certainly part of it. We've spent the last few years repositioning parts of that portfolio. In 2021, we sold corporate debt allocation that we had. We've upgraded some of the CLO exposure in there over the years. And so we feel, so we've spent a lot of time working on that portfolio. And at this point, we feel really good about where it's positioned.

So then turning to asset sensitivity, putting this all together, are you tilting a little more asset sensitive because net-net, card growth is up or.

Well, I think in aggregate, as rates continue to increase, you get a little less asset sensitive as rates get higher, but we're still asset sensitive at this point. And you can see all, we'll obviously update all of the numbers in the Q when it comes out.

And then just on NII, maybe you could talk a little bit to how you're thinking about that NII outlook in a higher-for-longer environment compared to a sharply lower rate. That's obviously the 2 tails that people are thinking about.

Yes. I mean you got to be prepared for both, right? And being asset sensitive. As rates rise, you still get some benefit as rates go up. But the longer rates stay higher, you're going to see deposit pricing increase with that. So there'll be some offsets as you go up and you get less and less benefit and then on the downside, you really need to be thinking about how to protect yourself there as best you can, but there are no perfect solutions there.

Hedges?

Yes, sure, sure. We've done a little bit of hedging. Rates have been very volatile over the last -- so that's probably the understatement of the year, but rates have been very volatile over the last number of months and quarters. And so as we think we've got good levels to put on some swaps, we've done a little bit.

And maybe at this point, you could give us an outlook for what you're thinking about NII at earnings, you guided NII to be up 10%, I think, year-on-year in 2023, given what we just discussed how has the outlook changed at all if any?

Yes. And maybe I'll broaden that a little bit because I know that you have a few outlook questions. So maybe I'll just kind of cover it once and be done, but the -- when you think about NII, as you said, we said up 10% in the beginning of the year and reiterated that in April. We still feel very comfortable with that number. And as we said earlier in the year, we were hopeful there was going to be upside in the second half, depending on where deposit pricing and deposit levels ended up. And I think as more time goes by, we're more and more confident there'll be some upside to that. And we'll put a little finer point on that as we get on earnings in the next 4 weeks, but we do expect there to be a little bit of upside there. And then the other point I know everyone is interested in on the allowance and expenses, and so I'll cover those as well. On the allowance side, I think as you look at what's happening in the quarter, the economic scenarios aren't really changing that much in terms of the different scenarios that we've got to look at. A little bit on the margin. So that's not really driving increases or decreases one way or the other. And so really, there's 2 things that we're thinking about for the quarter and our work is not quite done yet, so I'll give you some directional view of where it may go. First, as we talked about card, we are seeing some outstandings in card growth. And so given the way CECL works like it or not, you're going to book some upfront as card as your card outstandings grows, that will certainly be a driver there. And the other piece is commercial real estate and particularly office that we're spending a lot of time on, and as more and more time goes by, you get some more information and we can refine some of the dials in the models. And those -- as you refine those dials, you'll have to likely reserve a bit more to hopefully get ahead of whatever losses could come over time. And so when you look at that in aggregate, we booked about a $650 million allowance increase last quarter. It could be a little higher than that. It could be closer to $1 billion depending on where it all shakes out. And so, and hopefully, that helps us get ahead of things a little bit in terms of where that may go. It doesn't mean you lose money necessarily. But given the way the accounting model works, we'll have to -- there are likely to be a little bit of an increase. And then lastly, on expenses. As we look at the work people are doing across the efficiency agenda, we feel really good about all the activity that's happening. The disciplines are there. We continue to execute well on all of that stuff. The one point that we're thinking about now is that attrition has slowed a little bit. And so in order to get some of our efficiencies, we may have some additional onetime expenses like severance to make sure that we hit our run rate that we want to get to by the end of the year in terms of people. So that's something we're thinking about now. And then the other piece is we're having some opportunities to accelerate some savings in places like our property portfolio, our office -- our own office portfolio, and so there may be a little bit there. And so that could put a little upward pressure on the $50.2 billion, but it's -- but we feel good about the core efficiency work that's happening there. And so it's just a matter of like can we accelerate some of the things that we're trying to do to get the run rate where we want given attrition slowed? So I think in aggregate, you look at the allowance and you look at expenses and you look at the likely upside on NII. So that's how I would think about overall where we are at this point.

Got it. And just one follow-up on your point on the work you're doing on your own real estate. You're talking about potentially exiting and taking some lease charges this year to prepare for a better run rate next year.

Yes, exactly.

Okay. All right. While you're on the topic of credit and reserving, maybe you could just talk a little bit about what you're seeing and thinking and doing with regard to standards? Is there any incremental tightening going on? And maybe talk a little bit about how you're working with the consumers that are in a little bit of a tougher spot to 660 and below.

Yes. Look, we've been on the margins tightening in different portfolios for the last 1.5 years or more. And that's an ongoing discipline that I think we've talked about a number of times in different forums. I'd say it's all still on the margin. Generally speaking, that we're sort of where we're looking to do that. But as you get more info, where there's risk pockets and different combination of risk factors, then you're going to look to do that. In some markets where you've seen more price depreciation in the mortgage market, you're going to have LTV caps that you put in place and in the auto business, looking at different risk factors. So I think there's a number of things that we've been doing and that we'll continue to evaluate as we go. But I'd say, for the most part, it's still somewhat on the margin. We still feel really good about core credit underwriting box that we've had for a while. On the consumers that have less -- the FICO is less than 660, it's a relatively small piece of the consumer exposure that we have. But I do think those consumers are definitely feeling more stress than others. And I think that's just to be expected given the cumulative impact of the inflation that we've seen over the over the last few years. And you're seeing definitely the divergence in payment rates and other factors that are driving that. Obviously, we continue to look for ways to support clients like that. We've introduced new products like Flex Loan. We've worked on many of the things we're trying to do around early pay day and some of the overdraft changes that we've made over the last 1.5 years. And so we'll continue to try to do that.

And one area we get a lot of questions on is on the nonbank financial exposure that's in your C&I book. I think it's around 1/3 of C&I loans. And I realize the capital call lending piece is relatively low risk, and that's about 1/3 of that book. So maybe you could speak a little bit to the credit quality and the rest of the book there, commercial finance, real estate finance, consumer finance?

Yes. I mean, look, so far, it's been performing quite well. We've got really good attachment points in that portfolio. We've got very experienced teams, very low loss history over a very long period of time. And as you pointed out, about 40% of that is to asset managers with the biggest piece being capital call or subscription finance facilities, which perform -- have performed quite well. Another 1/3 of that is kind of commercial finance, some of the asset-backed lending that we do, including the corporate debt that we lend against. And we feel really good about the team and the way they do the underwriting there. And so far, it's been performing really well.

And then just lastly, you touched on reserves going up earlier in your comments about the outlook for the quarter. And the question here is on commercial real estate exposures. So when you're thinking about the reserving you're doing this quarter and the SKU, I would expect as to the commercial real estate book, which already has a coverage ratio of around 6%, I think, as of 1Q. So we're now looking forward to that going up a bit, I would assume as we go into 2Q?

Yes, I think that's likely going to increase a little, but I think that's normal given what we've been seeing like in that market. Now keep in mind, the book has performed quite well actually through the first quarter. But as Charlie said and other, and we've said over and over, like we will see some losses in that portfolio. And the accounting construct really, you got to -- you really think as you get new information and how that impacts, what you think the life losses could be. And so that's likely to be one of the drivers that brings it up, as I said earlier.

And in your office space, you've got, what, 80% in Class A, right?

Yes. Yes, on the commercial loan, in the corporate investment bank, about 80% of it is Class A. I do think, and I said this on earnings, I do think you have to keep that in perspective, right? So that's one data point. You have to look at all the other data points around the Class A building. Is it new? Is it occupied? Is it renovated all the other factors that go in, where is it? Have to go into sort of the calculus around how you think about each of the underlying properties that you got in the portfolio?

Okay, great. See if there's any questions in the room. All right. I'll keep moving on. So do you want to just talk a little bit about fees. You've got some pretty important fee lines here in deposit services, trading, mortgage banking. Can you give us a sense as to how you're anticipating these fee line items are likely to be moving?

Well, I think a lot of the -- if you take each one of them piece by piece, on the deposit side, a lot of the changes, we made on overdraft and nonsufficient fund fees and things like that. All are in the run rate, have been in the run rate now for a couple of quarters. And so really, what's going to drive that are activity levels that we're seeing across the consumer base and activity has been pretty good overall. The mortgage market is the mortgage market. So I don't anticipate that changing in the next couple of quarters, but we'll see as rates go, and it's been pretty -- it's pretty depressed relative to where it's been for a while. On the trading side, we'll -- it's obviously somewhat dependent upon what's happening in the market, but we continue to feel good about the investments we're making there. In places like rates and FX, where we've been just systematically investing in those businesses. And so we feel good about the performance there. And you saw some of that in the first come through in the first quarter. And then the equity markets have been helping support what we're seeing in the advisory fee line as well, which is a big driver for our wealth business. So we'll see how that ends the quarter.

In banking, I know you recently made some strategic hires, including a new Co-Head of M&A and Head of Financial sponsors group. So I just wanted to understand how far along you are in your plans to add headcount to banking and where you're seeing some opportunities of growth. Obviously, right now, the environment is a little light year-on-year. But maybe your additions will change that for you specifically?

Yes, a little late. That's probably the most optimistic somebody who's talked about investment banking fees in a while. But the look, I think, as you know, you have to really think about investment banking over a long period of time and you need good consistency of high-quality coverage and good people from a product perspective. And that will drive fees over a period of time. The investment banking business is an area that we've talked about for a while now where we felt like we've got good opportunity to do a much better job covering not only our mid-corporate middle market clients, but the large corporate space where we play as well. We brought in a new leader last year. I think May of last year, we had a new leader join us Tim O'Hara. And then we've just been systematically going through each of the areas to make sure that we've got the right people in the right places. And we've been really, really pleased with the quality of folks that we've been able to hire from really across a number of firms including the roles you mentioned. And so I think you'll see us continue to just systematically make sure we've got all the right people in the right places. And then over a long period of time, we'll see the -- we will certainly see that fee pool recover at some point and hopefully, we'll be well positioned to participate there.

Okay. And then on mortgage banking, obviously, the correspondent, you've exited, [ ED ], it's already done and in the run rate of revenues? Or is there still some pressure there from that exit?

No, I mean, correspondent is largely done. There's a little bit of volume that will come through in the second quarter, but largely done.

And anything with regard to how your mortgage banking strategy is going to go forward from here? Anything else that you'd want to highlight?

Yes. I'll just kind of remind people like where -- what we did. So in January, we announced the exit of correspondent. And then we also talked about simplifying our servicing book, which means making it smaller over time and less complicated and really refocusing our efforts on our consumer and wealth clients primarily, there'll be more than that, but like primarily our consumer and wealth clients. And just providing a really high-quality experience and then making sure that we get the scale benefits on the servicing side. I think over time, that business became too complicated. And so our goal is to be have a really well-run business with a great experience that's high returning and drives really good relationships across those businesses. And so that's the plan. On the servicing side, it takes time. That's not something you transform in a day. And so that will happen over a period of time. But as you said, the correspondent work is largely done.

Okay. So let's move on to expenses, an area that investors are very focused on with Wells. I think Charlie mentioned recently, there's still a "huge amount of inefficiency" across the bank. Maybe we could unpack that statement a little bit and see where are those efficiencies, how you're addressing them and time frame for execution?

Yes. When we started this journey back a couple of years ago, it will be almost 3 years at the end of the year. We knew that there was a big opportunity. And I think we laid out some goals, and we'll exceed those goals by the end of this year in terms of the gross savings that we've got. And as you mentioned, we still think there's a real big opportunity to drive more efficiency. And I would say there's almost no place in the company that's done and that is as efficient as it should be. And so I think to varying degrees, there's work to do everywhere. And I think largely, that will be the case for a while, right? This is not something that you solve in a quarter or 2 or even a year. And so I think this is and so what we've been equally focused on over the last couple of years is embedding the disciplines that we want to see come through from all of our management teams across the company to really every quarter, every month, they should be looking at, are they executing on their investments? Are they driving the efficiencies? What else is next? How do they continue to unpeel the onion. And so and continuing to do that. And so I think it will be something that just is a continuous effort that happens over time. But I think we feel really good about what we've been able to do. We've taken our headcount from a peak of roughly 275,000 to around 240,000 last quarter. That's a significant change over just a couple of year period. We're continuing to work on all the third-party spend. And so I think we feel good about that there's more to do, and it will just happen over a period of time.

And that's at a time when you were also increasing, what, around 10,000 people for regulatory and risk work.

Yes. And that's about $2 billion a year, as Charlie mentioned in his letter, a shareholder letter. So we've increased the spend that we've got there. And by the way, we continue to make investments across each of the businesses. You highlighted the people in the investment bank. We're also making investments in our digital capabilities and consumer and the commercial bank. And so you really have to be able to do both as we go forward.

All right. So 2 last questions, one on capital, one on strategy. On capital, you've got tightening loan standards, you're exiting some businesses, right, the MSRs shrinking. It seems like you're freeing up capital. You've got CET1 already well above regulatory management buffers. Can you give us a sense of room size to increase buybacks potentially from 1Q '23 pace?

Well, I think first priority for capital is always to support clients, right? And so we do want to make sure that we're always in a position to support clients as they need it. So that's always going to be the first priority. And then you have to look at all the things happening around us. We're in the -- we're weeks away from CCAR results. We've got Basel III finalization coming at some point. You've got -- and so there's a lot of things that you've still got a bit of an uncertain economic environment. So you do need to keep all of that in your thinking around what you're going to do for your capital. But as you said that we come, we ended the quarter in a very good place. 160 basis points above where our reg minimum plus buffers is. As we've said a couple of times, earnings a couple of weeks ago, we have been in the market buying back stock this quarter. And so we'll make the decision on a quarter-by-quarter basis as we go.

And what about the dividend. Your payout ratio is in the low 20s and pre-COVID, was 35% to 40%.

Yes. I think we've talked about that a little bit. I think over time, we would expect the payout ratio to be higher than where it is today. That's got to be on what you think a normalized earnings number might be. And ultimately, it will be a decision for the Board, but it is an area that we spend a lot of time on.

Okay. And then lastly, as you think about how not just the next 12 months, but beyond, as you get out of the consent orders. I'm not asking you when that's going to be. But as you exit from those, how would you think about leveraging the franchise differently?

Well, I have to start with. Our first priority is like the risk and reg work. And that's going to be the case until we're done. And I think we're -- we continue to do everything we can to execute well on that. And then I think for each of the businesses, we've got plans across every single one of them to continue to make sure that we've got the right people, we've got the right capabilities and that we're systematically sort of investing across them. We've talked about the investment bank. We talked about cards. We've got our wealth business where we've been making investments in the commercial bank, making sure we've got coverage in all the places we want and the product capabilities in all the places we want. And so each business has a plan to continue to not only have really great products and capabilities, but grow over time. And I think that's just -- that will take some time to see the results, but I think we feel like those plans are becoming more in focus for each of the businesses.

And as that happens, we could see the growth rate in those businesses accelerate potentially?

Well, that's a big what if, right? So I think there's a lot that would go with that in terms of what the economic environment is and everything around it. But hopefully, assuming conditions are supportive, we would hope to be able to take advantage of the opportunity in each of those businesses over a period of time.

All right. Great. Mike, thanks so much for joining us this morning.

Thank you.