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

I'm just going to read a Morgan Stanley disclosure. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. With that out of the way, we are so delighted to have with us today Mike Santomassimo, Chief Financial Officer of Wells Fargo. Mike, thank you so much for joining us today, and congratulations on exiting the asset cap.

Right. Thanks for having me. We're excited.

How did that feel?

Yes. It was -- it's great, right? And like, look, it's the culmination of just years and years' worth of work across thousands of people across the company. And so we're proud of all the work everyone did, and we're thankful for all the efforts that people put in over a long period of time. And so hopefully, now with all of the other consent orders that were terminated throughout the year and over the last number of years, it feels like a very different sort of place. And I think that -- we're a very different company than we were 5, 6 years ago, and so we're excited about what's next.

Okay. The asset cap was in place for 7 years, right? And this just came off last week.

Yes. Tuesday. Yes.

So can you talk a little bit about what opportunities it opens up for Wells in the near and medium term, call it over the next 2 and 5 years?

Yes. Look, I think while like 5 years-or-so, the risk and control work was, by far, the top priority that we all had. And there was a significant amount of time that we all had to spend on that and all of the broader regulatory work. We started the path, and we've been talking to them about a lot of the priorities and where the growth come from, but we started this journey 5 years ago. And if you look across each of the businesses, the same priorities that we've been talking about are the places that we're going to see growth on from not just in the next year or 2, but in the next 5 or 10 years as you sort of look at each of them. And when you start -- just start on the consumer side, in the branch banking business, we've been investing in the branches now for the last number of years. We're refurbishing -- we're through 1,500 or close to 2,000 of them. I think we've refurbished something like -- or will refurbish something like 750 of them this year alone, and we're going to work our way through that, just to change the look, change the feel. We're investing in the people in those branches. We're adding wealth advisers to service the affluent opportunity, which we can come back to in terms of the opportunity that's there. And so the growth that we should see coming out of the branches should be significant over a long, long period of time. That was somewhat impacted by not only the asset cap, but also sort of the sales practices consent order that went away a year-or-so ago. And after that consent order was terminated, we've reintroduced the incentive plans. We introduced a lot of the priorities that -- growth priorities that come through that channel. And so over a very long period of time, we should continue to see good growth over that -- from that business, not only sort of in growing the core checking accounts and banking business, but also cards, wealth and the other things that we can do with clients coming out of that channel. When you start looking at consumer lending, our card business is another great example. That started back in the end of 2019. New leadership team. We've replatformed every single product we have. We've launched 11 new products since then. We've seen good growth in new accounts. And it starts with just like really good products, simple proposition, simple value propositions for clients, good service. And we continue to kind of refine the business as we go. There'll likely be a few more card offerings over time as we continue to complete the product set. But we should see, again, good sustainable growth coming through there as well. The auto business is something we've been investing as well to become a bit more of a full spectrum lender across the platform there. We also signed up an agreement with Volkswagen and Audi that went operational just in the last 30, 45 days, and we should start to see that portfolio trough and grow a little bit over time. The one place that we don't really think of as a growth business is the mortgage business. It's still a very important business to clients and for us, but it's not something that we want to be really big in. It's something we want to be really good at for our clients, and we're still in the process of rightsizing the servicing component of that business, and that will take a little bit more time to do. But that's probably the one exception on the consumer side. You then go to wealth. If you go back 5, 6, 7 years ago, we had lots of attrition in that business as a result of some of the sales practices and other issues. That's really started -- that's really stemmed. We're starting to see growth in advisers. We feel like we're seeing every big team that moves across the industry now, where that wasn't the case years ago. We also have a couple of kind of unique characteristics of that business as well. We've got the bank channel, which I talked about, which we call Wells Fargo Premier. It's the offering we've been building out for the last couple of years. We've got a couple of thousand advisers that sit in the branches today already that are going after that opportunity. And if we can do a good job in going after the wealth management business there, it also brings more banking and lending from those clients as well. And so that's -- and we're just in the early days to really see that start to build. We also service registered investment independent advisers in that business that's unique to us in terms of the top number of wealth management franchises, fastest-growing piece of the market in terms of advisers. And so that should give us an ability to grow with those -- that piece as well. And then you go to the commercial side, we've been adding hundreds of bankers in the commercial bank over the last couple of years. While we've got good national share in the commercial bank, I think many markets across the country, we just don't have the share that we think we should have. And I think we've been just methodically going market by market, segment by segment within -- in those markets and adding people there. And so that should -- that momentum should continue to build over a long period of time. And then in the Corporate Investment Bank, there's 3 businesses within there. In the investment banking side, we've talked a lot about that. We've added dozens of investment banks, senior investment bankers over the last few years, and we're continually just executing the plan we've got there to fill in coverage gaps, to fill in gaps across segments within whether it's equity or debt capital markets or the M&A teams. We're starting to see a little bit of share growth there. We're certainly seeing lots of green shoots in terms of deals that we just wouldn't have been part of if we didn't have those folks come into the firm. Our markets business has been the most constrained of the businesses, given the asset cap. We just haven't been able to allocate the balance sheet we would like to that business. And so that business will have more flexibility now that the asset cap is gone. And again, there, just systematically investing in technology and people to sort of build out the right capabilities there. And we believe there's a lot of demand there for what we can offer. And then commercial real estate, again, big business for us, important business for us and will be as we look forward. And so when you look across the businesses, there should be really good growth opportunities in really all of them, mortgage aside. And this will play out over a long, long period of time. We always are a little bit cautious here to say, look, it's not a light switch moment, like it doesn't happen Tuesday, the asset cap is on; Wednesday, the growth just accelerates, right? These are plans that we've been executing now methodically for a number of years and growth should happen over a period of time.

One question is when the asset cap has been in place, capital is an even more scarce resource, right, than it is the day after the asset cap comes off. So is there any change to how you consider or think about allocating capital in a post asset cap world?

Yes, sure. But initially, where you have most -- more flexibility that you didn't have a week ago is in the markets business and that's where you can do more financing-type activity with clients that then will ultimately drive other business you can do with them. So there's certainly more flexibility there that starts right away. And then you could be a little bit more front-footed on going after different types of deposits across the commercial side of the business. But again, I just caution, it does take some time to grow. It doesn't happen in a week. And -- but we're pretty excited about what the opportunity looks like across each of those businesses. And I think clients want alternatives, and I think we've got a full set of capabilities. And there really are just a few of us across this banking space where that have this full set of capabilities that we can bring to bear -- we're largely U.S.-focused, but that can bring to bear with clients, and we think there's a lot of opportunity to do that.

And one of the questions that I've gotten is, well, how will you be funding this incremental growth, given the fact that you did have to pull back on deposits? So could you tell us a little bit about how you're thinking about the deposit side of the equation?

Yes. Look, I think in the market side of things, we'll get back to a place where a lot of that growth is funded through like all other markets businesses across the street funded through the -- through wholesale markets. Some of that was funded through our deposit franchise in the past. It doesn't -- that was a little bit different and a little bit because of the asset cap. On the deposit side, it comes back to just basic blocking and tackling. On the consumer side, it's about growing core checking accounts across the consumer business. In wealth management, same thing. We're underpenetrated in the banking side of the wallet for our wealth management clients, and that's been a focus for us. And on the commercial side, again, we can be just a little bit more front-footed, a little bit more competitive as we go out there to compete for different types of deposits there or different clients.

Okay, great. What about on the expense side? And the reason I'm asking is, does the asset cap removal spur any incremental expense saves?

Yes. We still -- outside of the risk and control work and the expenses associated with that, there's still a lot of opportunity to drive efficiency across everything else. And our mentality as we go into, whether it's budgeting or just normal business reviews as we go through each of the parts of the firm, is that there needs to be more efficiency driven across each area. And there really is opportunity just about everywhere still. It just takes some time as you sort of go through on peeling the onion to really find those opportunities, doing it in a methodical way, doing it in a sustainable way and really across the whole company, I think there's more. On the risk and control work, for sure, there'll be opportunities to streamline to make it more efficient. It hasn't been anything we focused on in any significant way at this point. That will happen over a longer period of time. But as you go through the last 5 years of building all of this -- all these capabilities and you look back and you sort of -- and you start to operate it with -- operate every day with it, there's tons of opportunities to do that as well, but that will take a little bit longer to get at.

Okay. And one somewhat technical question about the asset cap removal. The regulators removed the asset cap, but they left in place a consent order that requires you to maintain and improve your risk management program.

Well, the asset cap was always Phase 1 of the consent order. So that was just -- that was the way the order was constructed. And as part of Phase 1, you adopt and implement all the things you need to do. And as Phase II, you see it sustain itself over a slightly longer period of time. And so that was always the plan, and we'll continue to see that one through as well.

So this doesn't change the expense profile at all?

No.

And I don't know, maintaining and improving our risk management program, to me, sounds like business as usual.

Yes. I mean it really is, right? It's something that you should be doing all the time anyway, right? And I think all -- a lot of other -- all the other firm, big firms across the industry have done this over time. And I think over a period of time, you look back -- and we started this journey 5 years ago, and so technology is different today than you can deploy. You find lots of different interconnections, way to simplify things, and so it's just natural course of the way we approach not only the risk and control work, but really just about everything else you do, too, right? You should be constantly sort of reevaluating how you go about executing what you do every day for clients or internally and looking for ways to bring technology to bear in different ways or just look for ways to simplify things. And in a lot of -- and in most cases, that will save you money, but most importantly, it will actually make the client experience better, too. You can be faster, you can be nimbler, you can sort of deal with client inquiries in a different way as well. And so I think it all comes together to hopefully be a win-win for us and clients as we go through them.

Okay. One of the other questions we've been getting from investors is, what about that ROTCE goal of 15% post asset cap environment? In '24, you generated 14% and you've got a 64% expense ratio, that's a subset of that result. Can you talk us through what you're thinking about with regard to the expense ratio, the ROTCE in a post asset cap environment.

Yes. I mean we started this journey back, I guess, at the end of 2020-2021, where our ROTCE was 8%. And so we've made a lot of progress to get to kind of where -- to where we are. We set out the goal first the 10%, now 15%. And what we wanted to make sure those goals were, were something that we could achieve in a reasonable period of time. And -- but were also kind of respectable targets, I think, overall, but we've never thought of it as like the end goal. And I think when you look at each of the underlying business segments we have, there's really no reason why they shouldn't have returns and efficiency ratios that are comparable to the best-in-class peers over some period of time by segment, right? And so I think reasonable people can do different math. But I think that would lead you to an end goal that would be potentially higher than 15%. And once we get to the 15% goal, and we feel like it's sustainable then we'll kind of reset expectations from there. But I think it was never meant to be sort of the end goal of where we'd sustain for a long period of time, and so I think there's more to do. And again, everybody can have maybe a slightly different view on what that should be, but we'll talk about it when we get to the -- when we feel like we're there.

Okay. So let's wait a few more quarters for that, that's what I'm hearing, given that you're already at 14% for 2024. Just turning a little bit to some of the nuts and bolts here on loan growth. You did have positive loan growth in momentum in loan growth, I should say, in 1Q ahead of the asset cap removal. And part of this is coming from nondepository financial institution lending. Maybe you could give us a sense of how we should be thinking about your loan growth over the course of the rest of this year and how important NBFI lending is to that?

Sure. Look, through the first quarter, we saw a little bit of loan growth, not a lot, very little.

Positive.

It was positive for the first time in a while, but it still wasn't a lot. And so -- and then what's changed since the end of the first quarter is all the uncertainty that was sort of injected into the environment. And so when you look across the different portfolios, you really shouldn't expect much, right, for the rest of the year. And when you go through each; on the consumer side, with rates where they are, mortgages likely continues to decline just a little bit. Credit card growth, we'll see where it ultimately sort of ends up each quarter, but that will move around a little bit. And auto is pretty small in the scheme of things. And so I wouldn't expect large growth on the consumer side in any way and likely potentially a net decline as you sort of look across the quarters. The -- and then when you look at the commercial side, what's hard to predict is just what's going to happen for the rest of the year. And I think the uncertainty that's been there has caused people to pause a little bit on investments, on inventory builds. They've been really thoughtful about sort of borrowing, particularly given how expensive it can be and that's just hard to predict exactly what's going to happen. We haven't seen in commercial industrial book. We haven't really seen a big change. You can see that through the Fed data that comes out. There really hasn't been much. People haven't been drawing to build liquidity. They're not making those investments. And I think they need to see more of what's going to play out for the rest of the year before they get that confidence to kind of make those investments. And so it's a little hard to predict, but I wouldn't expect too much as you sort of go into the rest of the year. There's certainly some opportunities in some of the other portfolios like the NBFI book, as you mentioned, which I can dig into. And then you look at what's happening in commercial real estate, you'll continue to see office decline a bit, but there's opportunities in other parts of that in that book, and so we'll see how it plays out. But as you look at the -- if you look at the rest of the year, it's hard to get too excited about seeing big changes in loans as you look forward. On the nonbank financial book, it is an important portfolio for us. It's been that way for a long time. The largest piece of that portfolio are lines that are capital call facilities that we provide to largely bigger private equity, private credit funds. And the risk-return there is quite good. We focus those -- that exposure on the more established bigger firms. I think when you look across that portfolio over a very long period of time, the risk is quite -- the risk-return is quite good. And so we feel really good about that part of the portfolio. As you look at the rest of it, we lend against a bunch of different kinds of assets. We lend against corporate and kind of middle market corporate debt to corporate loans. And in those portfolios, we approach it, we think, in a little bit of a different way, maybe, than some others at least. And where we're underwriting every single loan. So we underwrite -- close to 2,500 to 3,000 loans underneath that portfolio. We're not lending to a portfolio, we're lending loan by loan. We evaluate them each quarter. We look at -- we mark them. We've got attachment points that are quite good relative to lending directly to those underlying borrowers. And again, we've got a very experienced team and feel good about kind of the risk that's underneath that. And then there's a whole bunch of other different asset classes, whether it's mortgages of residential or commercial mortgages or other types of assets we have underneath that. And so all that come with attachment points and risk that we feel is quite good relative to the return we're getting.

So one question I've got from folks is when we think about NDFI loss content, is that similar to C&I? Is it higher? Is it lower?

Well, I mean, look, I think the loss content in there has been quite low, actually, over a long period of time in our portfolio. And so it's hard to make a general statement like that. But I think as you look across the different portfolios, it's actually been very, very low. And so we feel good about the risk that's there. And again, you get different attachment points than you would if you're lending directly to a lot of these borrowers.

Which reduces the risk.

Reduces the risk. Yes.

So it seems to me, based on everything you said, that NDFI loan losses are at or lower than P&L.

Yes. I mean you can -- I don't think we disclose that in that level of detail, but we feel really good about and there's been very low losses in that portfolio.

Yes. I'm interpreting really good. Okay. Excellent. And maybe you could give us a sense since we're on the topic of credit, how is credit just generally trending in the quarter?

Yes, look, the shorter answer is pretty good, right? I mean, it's like trends are consistent than what we've seen over the last quarters -- last number of quarters. When you look in the consumer side, we're not seeing deterioration of any note come across the portfolios there. If anything, payment rates in the credit card business are a little bit higher maybe than -- marginally than we sort of would have modeled, which is good from a credit perspective, obviously. And then when you look across the different portfolios, it's been pretty -- trends have been pretty consistent. On the commercial side, really not seeing systematic themes emerge that are causing near-term credit issues really at all across any of the underlying portfolios, which is quite good. And even with all of the volatility that's been there now the last, I guess, it's 2 months, we're not seeing that really change the trends in any significant way at this point.

And how do you think about reserving for these tariff risk, which seems to be on again, off again or high, low, medium? How do you deal with that in the reserving?

Yes. Look, I mean, I think with any -- with the whole process around the allowance and CECL requires a lot of judgment in any quarter, certainly in a quarter where there's lots of headlines that you sort of need to digest, that is certainly the case. And -- but underpinning it is that there's multiple scenarios that you look at all the time, right? And so as you look at our process, we have 3, 4, 5 scenarios, but really all of our weighting is either on a base case scenario or downside scenarios at this point. We've had significant weighting on those downside scenarios for a while. That's not changing. So that, in essence, incorporates potential volatility or like negative impacts from lots of different potential reasons. And so a lot of that is sitting in sort of the reserving process already. And so -- and then as you look forward today, is there more uncertainty? Yes. But as we come back to what we were just talking about, what we're actually seeing in performance is still quite good. And so -- and if there's some guardrails in terms of where the public policy ends up or trade policy and other things, then it feels like you get to a place where the base case scenario is pretty manageable and not -- maybe not as bad as people feared 2 months ago. So we'll see how it plays out. But a lot of that uncertainty was largely baked into sort of the way we were thinking about the allowance, and it's been that way for a while. You always get the reason why it could be negative, wrong. That's just like the reality. But nonetheless, you sort of -- you need to sort of think about like a lot of different scenarios each quarter, and that's the way we've been thinking about it for a while.

And the loss content that's being generated this quarter is more similar to last quarter, no real big change...

Yes, we're not -- I mean, there's always some seasonality in some of the portfolios like card and stuff, but we're not seeing trends change in any significant way across really any of the portfolios at this point.

Well, we're on the quarter, can we talk a little bit about NII? And just generally speaking, your overall guide for NII plus 1% to plus 3% year-on-year for the full year, right? Maybe you could talk about how that's holding up this quarter? And if there's no rate cuts, does that matter? And you've got a steeper curve, does that matter?

Yes. Well, when you look at like rates, if you go back to the expectations from the beginning of the year, long -- the 10-year or longer-term rates are still lower than what we anticipated in the beginning of the year. Although they're up maybe from the prior quarter, they're actually lower than where we started the year. And then short-term rates, they're close, right? But it's really a second half story in terms of what's going to happen ultimately with the Fed. But the later you get in the year, the less impactful it is for the calendar year. And we'll see. Obviously, rate expectations in terms of what's going to happen is -- have been I guess maybe the understatement is probably volatile, right, over the last -- but it's been that way now for a couple of years, right, 2 or 3 years where I feel like every time we get into a conference like this like 3 days ago, something happened or 3 days from now, something is going to happen. And so the expectations just keep evolving quite a bit. But as you get later in the year, obviously, they're going to be less impactful for this year. And then the things we continue to focus on for the rest of the year and watch are obviously, deposit levels, deposit mix. We're not seeing, again, big changes in trend there at all. Pricing, there's not -- we're not seeing pressure on pricing on the consumer side. The commercial side is always more competitive, but that's just the reality of that market. We're not seeing, again, any real pressure there. And so we'll see how it goes. We'll provide more fulsome update as we sort of get to earnings. And then we talked about loan growth, right, which is -- we didn't expect a lot as we go through the year. But I think as the year progresses, we'll see what that brings. And then obviously, trading NII is becoming a little bit of a bigger driver. We'll probably talk more about that in the future. And so that can be -- that can move things around a little bit in different periods as we go, and so we'll see how it goes. But I'd say there's no big changes in trend than what we talked about in July.

Can I just ask you to explain a little bit the trading NII has been a bigger driver, could you just unpack that a bit?

As our trading business just gets bigger, it will be a bigger driver of NII. And so we'll talk more about that as we go in the coming quarters.

Which benefits if rates come down?

Certainly. Certainly NII benefits. And then in different environments, you have more fees than you have NII or vice versa. And so it's just -- in a lot of cases, just geography that moves around a little bit. So...

And then just on trading and investment banking, the whole capital markets business that Wells Fargo has. Can you speak a little bit about how the year has been progressing? I mean, I think we started off a little lighter. And is there any inflection?

Well, inflections are hard to predict and like you only know them after the fact. And sometimes they don't last very long, so we'll see. But certainly, as you look at different parts of the investment banking side, the M&A fee pool is up a little bit in the U.S., but like announced volume is down, right? You look at some of the equity capital markets year-to-date, down, right? And so I think you've seen somewhat muted in terms of what maybe people hoped they'd see as it came into the year, but those things can change pretty quickly. The debt capital markets are wide open for issuers, and I think that's really good. And I think you can get lots done there. Hopefully, the equity side has started -- for IPOs and other things that's starting to open up there more. I think we saw obviously a pretty successful IPO or a couple of them over the last couple of weeks-or-so. So hopefully, that continues. And then I think you're starting to see more deal activity, but again, I think that maybe got put -- got a little bit muted in the quarter given what happened earlier in the quarter, but I think hopefully that will start to pick back up. And I think, as you know, the investment banking game, it's a long game, right? And so a lot of the investments we're making are really intended to drive growth in market share over a long period of time. And what happens sometimes quarter-to-quarter can be a little out of your control. But I think the opportunity there is going to be huge. And I think the activity level with clients is pretty high. So now we need to see that translate into more activity and then we'll see where it goes.

Okay. And then on expenses, any key drivers for getting that expense ratio down? Does AI factor at all? What's really behind expectation that you can get expenses, the expense ratio improved?

Yes. Well, I think, again, I come back to what we were talking about earlier on the efficiency side. We really feel like just about every part of the company still has more to do on efficiency. And sometimes that's technology-driven, sometimes not. And I think as you look at AI, I think certainly, AI is going to help drive some of that efficiency in a different way and maybe faster pace than you could have done 3, 4, 5 years ago, for sure. And we've got a whole set of use cases that are focused on driving the efficiency side of it, everything from call center agents and making that experience better for customers to -- and that's live piloting for internal call centers already. It's using AI, either agentic AI or sort of regular AI to sort of automate, sort of a lot of processes across different parts of the company. It makes digesting the -- like numerous research analyst reports we get like much more efficient, like [indiscernible].

Well, you only have to pay attention to one.

Only one, yes. And so we can compare and contrast your tone versus somebody -- and so you can do lots of different things now that -- in a much, much more efficient way. And so I do think AI is going to help drive efficiency for really everybody, not just our industry, but certainly across banks maybe in a different -- at a different pace than you saw historically. But it's -- but a lot of the efficiency agenda really is hundreds and hundreds of different projects at any given time across the whole company that drive it. There really are no like 1 or 2 that I would sort of highlight that are the ones that are going to be the thing. And that's what we've seen now for the last 3, 4 years, right? We've seen headcount come down significantly from the peaks, we've seen us generate $12 billion of gross saves across the company, reinvest those back -- much of that back into the businesses. And that's still the same mindset we bring each time we go through it.

So as you go through the process of thinking about what the ROTCE target could be as you hit 15 over the coming quarters, years. It would be really helpful to understand what you think you can get that expense ratio to?

Yes. Yes, I mean, they're like part and parcel, right? They come together -- like they sort of move -- in some ways, move together, right? So I think that's certainly important.

Absolutely. Super. Last topic I wanted to touch on here is capital. And clearly, you have significant excess capital with a CET1 of 11.1%, which is well above year minimum of 9.8% and we've got a regulatory environment that looks like it's going to be reassessing and we have the CCAR soon, so this will all be exciting. The question I have for you is how do you think about what the right capital level is for Wells because I'm sure the regulators will be asking you that at their [indiscernible] in July, right, Michelle Bowman is putting together industry [indiscernible] on this. So how are you thinking about what the right level of capital is? And how are you thinking about capital deployment in this new world?

Yes. I mean, look, I think there's a lot to that and I know we're running out of time. But I think the thing I'd say is like the rules hopefully will become a little clearer over time in terms of where like the Basel III ends up. So that's positive. Hopefully, the stress test reform gets us to a more reasonable place in terms of where that ends up for us and the broader industry. And as we look forward from a capital perspective, it's great that we have a lot of excess capital. We have more flexibility to deploy it now, now that we have an asset cap, which is great. And so that will help drive the growth. And then I think we'll -- we've been pretty active in sort of giving some back to shareholders as well, and so we'll look at that. And then we'll assess sort of where our buffer needs to be over the regulatory minimums and buffers over a period of time, and that potentially can get a little bit smaller. But I think the good news is we come into an environment where we've got a lot more balance sheet and growth flexibility with a lot of capital, and we can deploy that to help clients and grow over a long period of time. So I think we feel really good about where we are.

Super, Mike, thanks very much for joining us this morning.

Yes, thank you.