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

Okay. I think we're ready to start. It's my pleasure today to welcome Wells Fargo to [indiscernible], very excited to have you and have the opportunity to learn more about what's going on in the consumer business. Wells Fargo is one of the top three banks in the country, $1.9 trillion in assets and branches across the country, nearly 4,500 branches. So we're very excited today to be able to host Kleber Santos. Kleber is the CEO of Consumer Lending and a member of the Operating Committee at Wells Fargo. He's been at the bank since 2000 and previously spent more than 15 years at Capital One, where he was President of Retail and Direct Banking. So please give Kleber big warm welcome joining us and making his introduction to us at that.

Thank you so much. Thanks so much for inviting me. I'm sorry if I don't make eye contact on that side. I will try my best -- like, there's some logistical like issues here. But just one quick point of clarification. I joined Wells Fargo 3 years ago. I think you said 2000, I'm not that old. So I have been -- so just one -- a couple of things about me and then about my role at Wells Fargo. As you have mentioned in your opening remarks, I run consumer lending at Wells Fargo that we externally report consumer banking as one segment, but we manage into fashions. I run the lending side, and there's a counterpart. So who you may have met, he was the CIO of the company. Now is the head of the branches and the deposit side. So those two things are managed separately inside -- in an integrated fashion, but separately inside Wells Fargo. I've been with Wells Fargo for 3 years. Prior to that, I was with Capital One for about 16 years, 5 of which I was running the other side of the balance sheet, the deposit business at Capital One. Prior to that, I was with McKinsey for 5 years. I was a consultant. Please don't hold that against me. And within Wells Fargo, consumer lending is what you expect to be. So all of the consumer lending and asset classes, home lending, auto finance, credit cards, personal lines of personal loans and retail services like private label, which is a relatively small business. That's what is under my umbrella.

Great. So Kleber, can you kind of give us the state of the health of the consumer from your vantage point, how are they holding up? This been a higher rate environment, higher inflation environment. Health of the consumer?

Yes. The consumer -- there are forces there opposing forces at work in the economy as it relates to the consumer as all of you know and is well documented. At one hand, you've had 500 basis points of Fed funds raised in the past 12 months or so. and that does transmit itself in terms of cost of credit, higher cost of credit. And it is quite a jump of 500 basis points, and that manifests itself in higher auto finance rates, higher credit card rates, mortgage rates are now at 8% or so, and that creates a lot of stress for the consumer. On the other hand, you see unemployment levels being really, really robust, like the employment. The job market is still quite, quite robust. So I think what we see in our portfolio, not unlike with some of our competitors see is a consumer that is still holding up, like the payment rates in card, for example, are still significantly higher than prior to the pandemic, which is obviously very good. And what we see now is just a gradual, very predictable deterioration in our credit metrics. But that is not uniform across all consumer types. You see a middle-class, upper middle class, affluent consumer. They still have a lot of money from all of the stimulus during the pandemic. and they are performing quite well. You see the more lower income or the more challenged credit segments that when you're seeing signs of stress. And that's where deterioration has mostly come from and we are obviously acting quarterly like to that phenomenon. And then the only other thing that I would mention that is interesting in the secured space, we are actually enjoying a couple of tailwinds, at least one of which has been a bit surprising to us, but we'll take it. One is used car prices have held up extraordinarily well, something that has happened during the pandemic with a adjustment of supply for the reduced demand has created like a very robust used car market and us got prices. They have declined year-over-year, but there is still fairly robust, and that manifests itself in lower severity in our auto charge-offs, which is really helpful. And then home lending, like this interesting phenomenon that mortgage rates are obviously at a decade high at 8%. One would expect that in that backdrop, there would be less demand for homes, and therefore, is depreciation. But we haven't seen that, like, and it's relatively easy to explain in hindsight that the high mortgage rates have created dislocations both in demand but also in supply like if you are -- if you have a -- if you're locked on a 2% or 3% mortgage rate, you're going to hesitate tremendously before you sell your housing, you buy a new house at 8% mortgage rates. So the net impact of that is home price appreciation each of the cycle, and I certainly did not predict that -- and that has created almost negligible levels of losses in our home lender portfolio. And we'll see if that's sustainable or not, [indiscernible], but at least in 2023, has been a tailwind for us.

Great. Kleber, I thought we could go through the businesses that you're responsible for. Maybe we could start with mortgage. There's been a lot of adjustments to the mortgage business at Wells Fargo over the years. You've exited the correspondent business and selling some of the service portfolio. Can you kind of talk about what the strategy is going forward in mortgage for Wells Fargo?

Yes. And that has been -- that has gotten some media coverage when we made the announcement last year. So I believe all of you are in one way or another familiar with the strategy, it's relatively straightforward. The mortgage market has evolved over the past 10 or 20 years in ways that we don't believe is as attractive as it was for previous administrations in the company. And we don't believe it provides the level of sustained risk-adjusted returns that we would like to provide to our shareholders. And therefore, like what we are trying to do, we receive value in the mortgage business for us is as a product that deepens well existing relationships. And both our checking account holders, obviously, wealth management, there is real value there. There is real value in offering products, and you see benefits on credit in other products, you see benefit in the beta's on the deposits, you see benefits on attrition levels on the deposit side. So in that sense, this strategy is to rightsize the mortgage business make quite a bit smaller for us from what it used to be historically and focused primarily on serving our own customers. and that is our approach. Obviously, we need to meet our CRA requirements, minority lending that goes without saying, but the primary objective functional is it should be a leading mortgage player. It is to be an effective mortgage lender to our own customers. For that reason, a corresponding channel doesn't really fit that strategy. So we have announced that we are shutting it down and that work is complete, like that we no longer have a corresponding channel. It is signed, sealed and delivered that part of the strategy. also have reduced the origination footprint. Again, we don't need to -- we are not chasing market share. We are trying to focus on our own customers. So we made some adjustments in the number of mortgage officers that we had that has largely played out. We still have like maybe we are in the seventh inning of that. And we're also trying to reduce the size of our servicing portfolio. And that one is a multiyear journey. Like we are making progress. We have sold a few tranches of our servicing MSR book, but we still have a couple of years in front on us. It's market dependent, It depends on a variety of factors. So we are committed to see it through, but it's going to take a few years to get there.

Okay. Maybe one will take credit card because that's of the areas that has been highlighted as a real opportunity for Wells Fargo to grow. And there's been a lot of changes, I think, with new cards introduced. Can you kind of just talk about where you are in that journey of introducing product and selling the product?

Yes. Unlike the mortgage business, we do like the risk-adjusted returns through cycle returns in the card business. So it is a business that we are trying to grow, and we are making investments. And there isn't really a single silver bullet, like we are -- we believe -- I believe that, that business was underinvested at Wells Fargo manifesting itself on the overall size, on the penetration in our own customer base. So we are making investments like across the board. We are investing in products, marketing, marketing capabilities, advertising, fraud line assignment, credit risk management, like you name it. Like -- so we have trying to lift all the business, frankly, make it or competitive, make it more robust. And I think we are succeeding. We still have ways to go but I think we succeeding, the business is growing, I believe it is one of the fastest card business -- business is growing business in the Unites States, may be the fastest one. Again, we are not chasing the speed, but just as the outcome of some of our investments, we have a steady diet of new products. We have introduced over the past 2 years a 3 new products, and you should expect that type of innovation and product introduction to continue. And the growth is going to be obviously dependent on the economy. We are incredibly prudent in this economic environment, lots of uncertainty. So we are not trying to grow at our cost as we -- in fact, we are paying maniacal attention to credit metrics. But it still in that backdrop, we believe there is room to grow.

And how much today is like the new kind of new products in the portfolio of the total at Wells?

It's a significant portion, like, I won't get into specific numbers, but a different notion of our portfolio is the -- what we call the front book. The new products over the last 2 years or so. And then within that, which I suspect is a natural next question of the new portfolio, the majority are our own customers, like we still have, like obviously we have a very large customer base in savings checking accounts, et cetera. and it's a natural synergy to offer those products like credit card products to our existing customers, but increasingly, we are getting new customers to the bank. So the credit card business is still modestly bringing net new customers to the company just very healthy and good thing as well.

Okay, I think you mentioned that payment trends -- repayment trends are still below the pandemic. But you see those -- are they starting to normalize?

They are. Yes. I think the theme consumer credit is this gradual deterioration on credit metrics coming out of the pandemic. For all the reasons that we have discussed obviously like some segments in society don't have as much stimulus money as well and there's some signs of stress and interest rates, the cost of credit has gone up, so that gradual deterioration is very consistent with what we predicted with our own forecast. Payment rates in credit card, in particular, they're still higher than they were in the -- during the pandemic. Those of you that are not in the [ whit's ] of the inside baseball of the credit card business. The payment rate is basically the percentage of your outstandings that you're paying off at a given month. So one minus the payment rate is what you are evolving. And obviously, high payment rates suggests a very healthy consumer that is revolving too much and that, and that is in the in signs of distress. Historically, we expect payment rates for the overall book to be in the low 20s like 20%, 22%, now it's in the high 20s. So it is still -- that's why the consumer is still holding up despite the Fed funds and the cost of credit going up. How long that persists, time well tell. Given the economic uncertainty, we are being particularly prudent in underwriting until we get more clarity on how the economy is going to shape up.

Maybe we'll move to auto, that's another business that has gone through a lot of change at Wells Fargo. Has that stabilized at this point? Do you see -- is it the right size? Do you see continuing to grow, shrink? what does auto look like?

Yes. This -- obviously, we have reduced our originations quite a bit in auto as well. And that is a combination of our strategic repositioning in auto and I'll talk a little bit about what that means. But also our being prudent, like our decision to be prudent during this economic uncertainty. So I wouldn't declare that our current levels of originations is at a steady stage. Like I think if the economy and when the economy improves, we probably will we originate like a bit more than we originated out, time will tell. The auto business is another one that we believe there is opportunity but it requires investments. I personally -- my assessment coming into the business is that you didn't have the sophistication in credit underwriting capabilities that is required, like the auto finance business is kind of a secured like business because you have a collateral have an auto, but it's kind of unsecured as well because you -- as you can imagine, you drive off the lot with a new car and immediately you get 15% to 20% depreciation. So one needs to be careful that collateral isn't as steady as a house, for example. So I believe that you need to be very good in credit underwriting in order to deliver the type of risk adjusted returns that we aspire to deliver. So we have been making lots of investments in talent, technology, data, developing a test and agenda in auto. And in the meantime, we have become more prudent like in credit underwriting until we believe that we have the credit capabilities. That journey by the way, is not a 5-star journey, like we are probably. We already have much better credit capabilities than we had last year, and we believe that by end of next year, we'll be in pretty shape as it relates to the ability to really understand and discern a good from a not-so-good auto finance loan. And then the size of the originations will be dependent on the economy, like if the economy improves and if we develop more confidence in the economic outlook, will become more constructive. And until that time, we should be pretty conservative in auto.

Okay. Great. Kleber, maybe we'll just talk about the personal lending. That's a very small business, but again, another area where you've made changes it's evolving with some new products. How has the performance been there that is not secured. So again, kind of tends to be higher risk. .

Yes, our person leading to a point, it's quite small. And it is a primary super prime book. Like we really don't have any appetite to take credit risk in personal lending. Like personal lending a bit of a cannery in the coal mine. So you -- one needs to be very careful and prudent on the overall size, which segments we participate, which segments to choose to pass. And it is the size that we believe it will be like for the foreseeable future, we have made a few credit changes as well, reacting to the economic outlook. So we feel pretty good about where this business is. It has incidentally served as a source of innovation for us. Like one of the -- we noticed a demand in society for short-term lending that we don't believe it was being met by large banks. So we launched the product last year called Flex Loan. There's not a whole lot of mystery. It is short-term lending, so you can borrow $250, $500 like just relatively small amounts, and you pay in four installments. And we put a credit box around it to prevent any type of credit mishap, and frankly, to prevent customers getting [ harms ] way, but repeatedly taking a product like that. So we don't -- we want to make sure that we are helping our customers. And so far, it has -- not only has performed quite well. It has been really well received by our customers and by society at large like the ability to provide an alternative to overdraft and alternative to payday lending has been -- reputationally has been a positive for us.

Okay. Yes, I think I'll maybe see if there's audience questions before I get into some more questions on credit, so I start right here.

[indiscernible] You mentioned several times more cautious on underwriting. Can you just kind of broadly give us more color across your businesses that you supervise -- like what products, what customer segments are you relatively getting more cautious on. And then what's happening to spreads as well because that's more about like competition, it is just what you're doing?

If you think about -- so may I answer your first question again. In some ways if you are a consumer lender, you favor clarity in big way. So I would rather know that we are in a recession. Then eventually leaving this fog before, that some metrics point to a very robust economy, some metrics point to signs of stress, depending on which time of the day, you're watching CNBC or Blomberg, you're going to get somebody saying that is a soft landing, It's a hard landing, it's no landing, like who knows. So that's what informs our caution. Like until we understand what type of macroeconomic environment we are actually operating on there, we will be more conservative in credit, but we're still growing. Like even in that [indiscernible], we have so much room to grow, the businesses that we're going to grow in, that even in a more restrictive credit box, we're still growing like quite robustly, like in credit cards, for example. The -- As I mentioned before, if you think about a tale of two cities, if you think about spectrum of credit, ranging from very credit challenged segments of our society to high FICO scores like pristine credit. There's a tale of two cities here that you see more deterioration in the lower credit segments. We can hypothesize as to why that is. Our hypothesis as good as yours. We believe it has to do with -- they have spent most of the stimulus money. So we are out of that segment altogether as it relates to front book origination. So we are not originating subprime anywhere, any asset class, nothing. And I'm using subprime as a proxy like we obviously our credit risk underwriting take lots of variables into account, FICO is just one of them. But as a proxy, I think we are not originating any subprime, and we are a little bit more cautious on near-prime. Prime is super prime, like we are still very comfortable underwriting. Its spreads, I think spreads in auto are now about 480, like 478 basis points -- sorry, yield -- the yield, not the spread, the yield on auto is about 478 basis points, about 51 basis points higher than third quarter last year. which means that we have been able -- the industry has been able to pass on some of the interest, some of the higher cost of funds to the consumer and the consumer has been able to absorb that. And in Card, the yields are like they serve public information, you know what they are. They are quite high right now, which is the other reason that's why you want to be careful in the lower credit like segments because obviously higher cost of credit that consumer can exhibit stress if the job market changes. So far, so good. Job market is very robust. But we'll see how that plays out over the next 12 months.

It's no secret that Wells wants to make a push in card, which is an extraordinarily expensive business to build organically. At the same time, the company is known to its investors as perhaps an expense management or expense cutting or keeping expense flat company. How do you square your strategy in card, particularly given the spend that JPMorgan, Amex, Capital One is putting out there. How is that tension between wanting to be bigger in card versus what sort of the baseline is in terms of expectation for consolidated expenses.

Yes, you've asked a phenomenal question. I believe that management can do more than one thing like at a time. For example, we didn't talk much, but our #1 priority in the division isn't growing credit cards, it's investing in our control environment, meeting all of our regulatory obligations. And we are absolutely maniacally obsessively focused on that. And still, we are growing the card business, we are achieving a lot of savings in home lending, et cetera. So we can multitask if you are disciplined enough, and I'd like to believe that we have been on the [ Charlie ]. I think there is a nuance. You're absolutely right that the card business is an expensive business to grow, but there is a nuance in there, which is the power of a money Central Bank. And the -- it is not as expensive for us to grow as it is for a card monoline to do so. Why? We have a captive audience of 38 million customers that engage with us on a weekly, in some cases, on a daily basis, right? They have checking accounts with us, They have mortgages with us. They Have saving accounts with us, they go to our online properties, they go to our mobile app, and they engage with us. So the acquisition costs are not as high as otherwise would be. And also critically importantly, and I want to be careful here because I don't want to reveal trade secrets. Our underwriting has benefited tremendously from having access to the consumers' cash flow. And that is the power of a money center bank. That is the power of scale. And so therefore, I wouldn't necessarily equate our cost of growth with the industry's cost of growth. And then lastly, our penetration numbers, I assume -- and I won't get into the details, but our penetration numbers are still quite modest. There is a long runway to grow. It is a lot more expensive, as you can imagine, to grow that marginal penetration when you are fairly penetrated in the book, that marginal growth is a lot more expensive, lower response rates, you need to offer like higher bonuses and et cetera. When you are underpenetrated, that marginal growth isn't nearly as expensive. And I think that's why we believe we still can continue the expense management discipline and that expense story and make the investments and grow the card business. The last thing that I would say, some of the investments that I have described, both in auto and in card will make us more efficient. A lot of what I'm describing here is investing in fraud tools that can automate a lot of the fraud processes that becomes less labor-intensive and that also reduces operational costs like less fraud costs. So which is why -- that's why we are so excited about it because I think there is a lot that we can do to bring that business to the level of sophistication of some of our peers and our competitors, and you can achieve multiple benefits across the P&L, like revenue, cost, credit, et cetera.

Kleber, I have a question. Following up on your hypothesis about the lower FICO score, customers having higher delinquency rates now and greater credit costs. Do you think that, that lower FICO score customer, because of the increase in income they received during the pandemic started to live beyond their normal means from pre-pandemic income levels. And now that those stimulus payments have burned through and they're back down to maybe a lower income level. This is contributing to this higher credit costs at the lower for FICO score level?

You might. It's a phenomenal question. I don't think I'm qualified to answer. Like I have learned like the hard way that there are two things I'd like to comment on. One is an economic forecast. And the second one is the underlying reasons for consumer behavior because gosh, there's a graveyard of people that had brilliant explanations that turn out to be profoundly inaccurate. So I prefer to stay on my lane on looking at the performance of our portfolio. and then acting accordingly. One thing that I will tell you, the -- those of you that may have had exposure to consumer lending, if you are obsessed to consumer lender, you need to make some of the credit adjustments not when you see the crisis, right? You need to anticipate that. So we have made some reductions and become more conservative in credit beginning in the second half of last year. which is why we feel very comfortable with our growth prospects in places like credit cards because we have been preparing for a downturn for a while. Now if the downturn doesn't come, that no harm, no foul. But if one comes, we believe we'll be in decent shape. Because once the downturn is right in front of you, you become a bit of a passenger. The moment to drive the bus is before one comes.

John Pancari, Evercore ISI. We had a big monoline card player, flag recently some surprising stabilization and delinquency trends that they're seeing that over the past couple of months that look more seasonal versus deteriorating. I know it's early for you guys. I know you're still early in your life as a bigger card player. Have you seen anything anecdotally in your delinquency behavior, delinquency trends that lead you to believe that maybe we're seeing some stabilization on that front?

We have -- I think it's too early to tell like I don't want to draw a line with one data point. But one thing that has been actually positively surprising is that somewhat -- the stability in payment rates. I think I would have expected payment rates to be now at pre-pandemic levels, but there is still -- they are still a few percentage points higher. So that may point to a consumer that is still holding up. But again, I think we need more data points before we can draw a line.

Yes. I'm looking at your segment reporting in the third quarter. This Consumer Bank had revenues of $9.5 billion. In cards are $1.4 billion of that. My question is about the credit card late fees that the CFPB wants to cap and then the Fed's debit swipe fees that they want to lower. Can you grow that credit? First of all, are both those items in that 1 line item that $1.4 billion?

Sorry, I always say -- what was the second question? I'll answer all of them.

Okay. And can you grow credit card fees if these regulations are put in place next year.

Yes. So I won't -- as I mentioned in my opening remarks, so the externally reported segment has two CEOs running them. So I run the consumer lending. And then there is another person that runs the deposit business. So I don't have a whole lot of insights on the debit side of it, debit cards. So I'll answer your second question. The late fees would have an impact, but we believe is an impact that -- we're not going to get into numbers here, but we believe it's an impact that we could manage. We -- late fees one word of caution, like as you think about the impact of late fees because I have seen this in other contexts. I don't -- it is not as simple as a straight line if you take the current late fees revenue and you subtract by whatever amount the regulators may cap because there's a dynamic on incidents. So if the fees are lowered, you may end up having some offset on higher incidence. And I think sometimes like even our regulators may not fully like appreciate that aspect of it. So it's a bit too early to tell what the actual impact would be for the industry and for us because consumer behavior will need to be observed, and I wouldn't make any assumptions on consumer behavior right now until we know exactly what that new level will be and the implementation time line. But just remember, there is a consumer on the other side of those decisions, and they will behave in certain ways based on what they believe the fee levers should be. We would like to make most of our money from the garden-variety revenue sources, right? So it's NIM, it is annual fees where they make sense. So we believe -- we still like the risk-adjusted returns, regardless of the late fee ultimate like posture by our regulators. And whatever they decide we live by it.

Just to make sure in a $1.4 billion credit [indiscernible]?

I don't know.

Yes, they are in there. The answer is yes. So Kleber, just -- Wells Fargo a lot of the focus has been on expenses over the last few years and doing a really great job managing expenses, keeping them flattish. What are some of the opportunities that you think are available in the consumer banking and lending segment. What sort of efficiency improvements are there?

Yes. I mentioned a couple of those like in a previous question. As I said before, the servicing rightsizing of our mortgage business, that one is still playing out. And you should expect as we have fewer mortgages to serve into service that we don't need as many people and the technology [ apparatus ] and, et cetera. So I think there are opportunities there, again, to be captured over in a multi-year fashion. I believe there's still a lot of opportunity on automation. I think as we grow the card business, as we repositioning the auto business. I still believe there's a lot of room for us to automate processes and make investments in technology. So I think there is a still -- I think for -- in consumer lending, as you see, quite a few tangible places that we can still continue to push on expenses.

Okay, right here. Okay.

I just wanted to follow up on the expense side. So given the elevated level of investments you're making in certain businesses, is the goal eventually to bring down the dollar expense number as some of those investments normalize? Or is the goal to generate more positive operating leverage because your revenues will catch up and perhaps grow faster than the expense side?

Yes. So let me without getting to the specifics. So let me go through each one of the business because I don't believe we are making elevated levels of investments like in consumer lending, like for personal lending, we are not trying to grow that book. The investments that we are making are frankly mostly towards trying to get some expense -- like some expense saves invested in fraud tools, investing in better underwriting. Those things tend to have a pretty tangible like pay off in a relatively short payback. Auto finance business, the biggest investment we are making is in replacing a servicing platform. Most of you may know, if you have a node like technology platform, the maintenance cost of that platform is actually a lot higher than a modern one. So you ended up getting like a lot of multiple benefits, like not only you get fewer operational errors, better customer service, better net promoter scores, we ended up actually with lower annual maintenance costs. And so that's helpful. That's auto. Home lending, we are not making large scale, like investments, we are trying to like actively rightsize that business. And the investments we are making in card, it is the things that you would naturally think about like higher marketing levels and et cetera, those things are, in some ways, discretionary. Like if the economy turns, we would act accordingly. We are not trying to grow the fixed base, like the fixed cost base of the card business, like that is not something we're trying to do. Now we are trying to become better like in places that matters for the customer, credit underwriting, fraud prevention, et cetera. But again, those things do have a payback that is -- that you can touch, you can feel that is pretty tangible.

So the Fed's capital NPR is particularly awkward on sort of what it could do to the mortgage banking business. And I know Wells Fargo has already gone through just a very significant reduction. But just would be curious to hear your thoughts on how you might further react if that were to go through as planned and in any final rule sort of what you'd be hoping could be a water down in there.

Yes. I think that at this stage, our views of the mortgage business are pretty settled. They're pretty cemented. And so I don't think that particular that particular decision by our regulators, if and when it comes, will really change much on what we do in the home lending business. I can't comment like more broadly for the company, that's a question for someone else. But as I said before, we are not trying to be a stand-alone mortgage company chasing new customers and stand-alone returns. We are trying to focus primarily on our own customers and serving them extremely well, and that speaks for a much smaller mortgage business than we have had historically.

No more questions. So Kleber Santos. Thank you so much. We really enjoyed learning about what you're doing and things what's going on in Wells today.

Thanks folks. Thanks for inviting me.