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

Okay. So good morning, everybody. Welcome to the 36th Goldman Sachs Annual Financial Services Conference. Delighted that you can all be with us here this morning. There's about 1,000 clients that are attending this event. That's up 10% compared to last year. And there's 125 companies participating. We just added up the market cap. It's almost close to $6 trillion of market cap, which is obviously ahead of where we were last year. I am delighted to welcome Charles Scharf to kick off the conference. Charlie needs no introduction. He is Chairman and CEO of Wells Fargo. He has presented at this conference every year since you have been CEO. And actually, you've kicked off this conference pretty much every year. So I guess this is a tradition, and we really, really appreciate you being with us this morning.

So maybe we can just start off with a discussion about the macro backdrop. You've been very consistent in saying that the consumer remains resilient, that spend trends have been steady. What have you seen in the fourth quarter? And at a high level, what are you expecting in terms of corporate and consumer behavior next year? And any thoughts on the path for the trajectory of the economy as we head into '26?

Sure. Well, thanks for having me. It's great to be here. Listen, it's just a lot more of the same. And there's not any real new news here. Other than what I always continue to say is kind of what you see on TV in terms of what the concerns are and what we see in terms of the data are 2 very different things. The consumer continues to spend delinquencies are probably marginally better than they were last time we spoke or last time we talked publicly about it. Deposit balances are strong. Investment balances are strong. Now consumers are making very active decisions on what they want to spend money on. So you do see material swings period-over-period in terms of whether they're spending in retail stores, where they're spending on travel. So it's very, very hard to predict from our standpoint what different categories are going to do well. But when you look at it, the overall spend levels continue to be extremely strong, probably a touch higher in the first couple of weeks since the holidays, just barely touch on a year-over-year basis. So that bodes really well for the holiday season and again, very consistent with what we've seen. There's still this divergence between the more affluent, the less affluent. Nothing is new there. Nothing has changed. It certainly isn't spreading to any real extent. And spend patterns seem very, very consistent across age groups, across geographies and things like that. When we look at -- on the commercial side, our middle market customers also continue to do quite well. They are seeing the impact of tariffs. I've said this in the past, they're encouraged long-term by what tariffs will mean for them to be able to be competitive, but it has created pressure for them in the shorter-term. Certainly looks like it's held back hiring on their part and some level of investment in things like inventories and whatnot and very much focused on their own costs. So as opposed to really investing for growth at this point, while they have to readjust for what the tariffs mean for their cost base, they've been preserving margin by focusing on cost. But relative to what we see in terms of just overall credit, very, very strong losses that we see are very idiosyncratic to an individual company or something like that. And then the same thing in the large corporate segment. So overall, when you look at it and then you all know what market levels are, things are pretty good for us.

Got it. And just a quick follow-up. This bifurcation between higher-end spending versus lower end. How is that progressing? Is that stable? Or is that gap getting wider in any way?

As best we -- remember, we don't have a lot of credit extended at that level. So as best we can tell, it's still relatively stable. Okay. So just one thing, you asked about like how we're thinking about the future. When we think about where the future -- how this is all going to play out, just kind of state the obvious, which is for the consumer, it's going to come down to employment and level of wages. And so even though you do see some pressure on employment, the majority of what you see are new jobs not being created. And so folks who are our clients continue to have employment, wages continue to look like they're outpacing inflation for our customer base. And so that's going to be the thing that we're always going to be looking at to determine whether we feel good or bad about the future. And so as best we can tell, there looks like there's a degree of stability at this point, although we can talk about what that means for the longer-term with things like AI. And then on the commercial side, if there are lower rates as we look out over next year, that should bode well for people's willingness to borrow and invest.

Okay. We'll come back and talk about some of that in a few minutes. But let's talk about your strategic priorities. Obviously, a very important year for Wells Fargo with the asset cap now being lifted. So maybe you can talk about your strategic priorities, how have those evolved since the asset cap is being lifted? And what are the milestones and metrics you think investors should be most focused on from here when it comes to Wells Fargo?

Sure. So it's one of these things where we look back over these last 6 years. And just to remind everyone, when we look at the performance improvement that we've had in the company, right? We've gone from something like an 8% ROTCE to 14% or 15%. We come to forums like this, people never sit there and say, well, we know that you can't really compete on a level playing field with everyone else because of the asset cap. That has been the reality, right? And when you look at what we do as a company, the majority of what we do is traditional bank activities, where we take deposits, we lend, we have inventories for clients, and we've not been able to grow that the way other people have been able to grow. So when we think about what we've been able to accomplish over these last 6 years, we've had a lot of focus on growing our nonbalance sheet businesses. So whether it's in the corporate investment bank, whether it's in the credit card business, which has used some balance sheet, but it also drives spending and things like that. And in our wealth business, we're now able to compete on a much more level playing field with everyone else. So we've been unable to take large corporate and middle market deposits the way we otherwise would have. In fact, we pushed a lot of that outside of Wells Fargo over the past bunch of years. We've not proactively gone out and tried to build the deposit base in the consumer businesses because of the caps that we've had to operate. And so with those things gone, we can now compete on a much more level playing field. So as we look forward to the future, it's an incredibly exciting time for us, right? We did update our these -- our ROTCE targets to 17% -- between 17% and 18%, which is the next logical progression not the end state, but another stopping point along the way. And in the environment that we're in where we can actually invest and grow all of our businesses, which we're incredibly happy with the franchises that we have, we think when we look at every one of our businesses with the exception of, I would say, with the exception of our home lending business, we have opportunities to grow profitability based on both returns and higher growth and just competing.

So you mentioned the ROTCE target, the 17% to 18%. I think when we do a benchmarking, it looks like returns lagged the most in the consumer bank. So can you spend a couple of minutes talking a bit about why that's the case, what you're doing to attract new customers in the consumer bank maybe some of the work you're doing to improve the profitability of the branch network. But ultimately, is there any reason to believe that you shouldn't be able to get to best-in-breed returns in the consumer business over the next 3 to 5 years?

The answer to that question is no, there's no reason at all. In fact, I would expand it even further, which is when we look at every one of our business segments, all 4 segments that we report publicly, there's nothing that we think stands in the way of having returns and growth equal to the best-in-class, whether they're the large banks or other people we compete with. And that's because we feel so comfortable with the scale we have, the quality of the franchise and our ability to invest. So -- and it's absolutely true in the consumer business. The one thing I just -- I'll mention is when you look at the returns of our consumer business, it's really not being dragged down by the consumer banking business. We're not growing in the consumer bank as quickly as we want because of what I said before, but the returns are strong. Where the returns are subpar, is in the home lending business, where we're still transitioning to a much more -- much smaller business with higher profitability and our credit card business, where we've been investing significantly over the past 4 or 5 years. And we're just starting to get to the point where the early vintages of the new products are starting to contribute towards profitability. In the credit card business, because of the upfront cost that you have, you don't -- you lose money for the first 2 or 3 years. And so that's actually been a drag on the returns of that segment. But as long as your balance levels, your spend levels, your credit quality is playing out the way you assumed it would be in your models, you know you've got the profitability that's going to start showing up.

So let's talk about some of those growth initiatives on the consumer side. And there's 2, I think, that are really impressive. The first is the card business and then second, auto. So within card, maybe you can talk a little bit about how profitability is tracking relative to expectations as that book seasons. And I think that the second linked question is it does feel as if a lot of your peers are really leaning into growing the card business? It does feel like the competitive environment is definitely stepping up. What are the initiatives that you're pursuing to remain competitive from a growth perspective in cards?

Sure .We've been focused on identifying this as a strategic priority when I got to the company, and we've retooled almost everything in the card business, starting with the management team, but all the way down through when we first got to the company, our lead products were American Express products. Now they're Visa and Mastercard. We renegotiated the network agreements, which allowed us to invest more into the products. We've rolled out, I want to say, 11 new products since we've been there, which when you look at the product proposition we have, they're as good as everything in the marketplace and leveraging the brand that we have with the great product, what you find is you get positive credit selection, not negative credit selection. We haven't compromised credit quality at all. And so everything that I've said continues to play out exactly the way we would expect. And to answer the question, the performance is right on top of the way we model things. So we feel really great about what we have been able to build. There is a lot of competition in the marketplace. And the reality is we do think that scale really matters, right? There are those that have scale. We think we have enough scale both in terms of what we get because of the knowledge and the view of the Wells Fargo brand across the country as well as what we can drive in terms of efficiency and delivering the products that we can compete with everyone out there. We do believe that the branch channel that we have is a real competitive advantage. If you asked us how we're doing at delivering cards through branches, we'd say not even close to as good as we can be. So significant opportunity. We had a significant increase in new cards in the third quarter that you saw above the second quarter. And that was from direct channels. So not going through third-party providers. It was either through our own marketing, our branch channel. So we have these competitive advantages and again, there's no -- this is a -- it's a business where if you've got the brand, you've got the product, you've got customer service, you price things properly, you'll win. And so we feel really good about the ability to continue to compete and grow the business.

And then the auto side is the other area that we've seen a pickup. And I think you've had a couple of really important partnerships come on stream and that's increased originations. How are you thinking about the trajectory of growth in the auto business heading into next year?

Yes. The auto business, we've always said we're going to be very careful to focus on returns over growth, right? That's a business that does go in cycles, competition goes in cycles. You need to figure out when the right time to really compete is and to do more business and when to do less. So there have been times in the past where we've scaled back originations because of pricing in the marketplace. And where we sit today, we've been able to believe we take some share but again, focused on making sure that we've got the right overall level of returns. We've -- we're now the primary provider, the preferred provider for Volkswagen and Audi in the United States, which is a great win. They used to do it themselves, and we now do that for them. That is a totally different proposition than just going out and having relationships and competing loan by loan against everyone out there who's providing things. These are where you usually have subvention from the manufacturer. So you have a real relationship with the manufacturer, creates a different kind of relationship with the dealer, and you're generally first in line to actually win. And so things like that are very interesting for us. If we could do more of those, we would look at things like that. And again, I think we feel good about what we've done, and we're going to continue to make sure that it's got the right level of profitability, not just growth.

Okay. So let's talk about the other growth initiative, which has been the corporate and investment bank. I think on our numbers, you've added at least 120 basis points of investment banking fee share over the last 5 years. More recently, you've been involved in a number of very high-profile financing. I think the recent one is the largest investment-grade bridge financing. I think that's been done by a bank. So congratulations on that. Can you talk a little bit about the outlook for the capital markets business? But then also talk a little bit about your ambitions from a longer-term perspective in terms of market share in that business?

Sure. Yes. Listen, I think -- I feel great about the progress we've made in the Corporate Investment Bank. It has been a very, very focused effort to look at what strengths Wells Fargo has and what we could build around it. The world is -- history is littered with companies that have tried to build investment banks and have failed because they've done it without a real competitive advantage. They've done it by hiring the wrong people at the wrong pace and focused on doing the wrong business. And there have been a select few that have gotten it really right. And when we look at the reasons why we think we can compete in the marketplace, it's because we understand those things. And first and foremost, we have great competitive strength, which is we've got this broad set of corporate relationships that we built over a long period of time where we lend to them, we do their cash management business. We've got relationships with sponsors because of our real estate business. And when you look at what we do, we lend in the U.S. as much as anyone else out there, and we just haven't built all of the other businesses around it. So we've had a very, very focused effort where we've looked at what industries we're strong in, who are the big fee payers. We've looked at our customer base, both in terms of large corporate and middle market and said, where are they paying fees to the Street and where can we build around that. What we found is that -- we're a very attractive place for bankers to want to come work because of everything that we have to offer. This is -- we have a $2 trillion -- there are only a select few of us that have a $2 trillion balance sheet that can do the Netflixes or we did the largest at the time, it was the largest noninvestment-grade bridge to a company called Quikrete. It's an amazing platform to have. And when you have the commitment to invest in a methodical way, industry by industry, product group by product group, what you find is that you get, again, just like in the credit card business, positively selected, you do the right kind of business not the business that the other people don't want to do, but the business that you can actually compete with. And what we found is that people want providers like Wells Fargo. They want other choices out there. They like doing business with us. They value the relationships that we have. And if we can show up with credible people with credible capabilities, we can compete with anyone out there. And so our aspirations are to continue to grow that way very methodically. I mean we've been able to create this kind of growth without standing up and saying, we're going to be losing money for the next bunch of years while we -- it hasn't been the case. We've been doing it piece by piece, watching the people that we've been hiring, the people we promoted internally create that share. It's profitable share. When you look at the fees of the company and you look at what we've been able to generate. And so our goal is to be top 5 and then continue to go from there. I'm not as concerned about the timeframe. It's going to be very methodical. And it's both in the investment bank and it's in the trading businesses, again, where we have relationships with investors and corporates, and it's building around a client-centric flow-based business.

Okay. So let's talk about the loan growth picture kind of in aggregate for the firm. You've seen this improvement on the consumer side in card and auto. I think on the commercial side, it's lagged a little bit. So maybe you can talk a little bit about how demand is tracking in the quarter? And do you see room for an acceleration in commercial loan growth heading into next year?

Yes. Listen, I think commercial loan growth has picked up a little bit. Not significantly, but you do see -- we saw some more loan growth in the third quarter that we saw in the first half of the year, which is what we had hoped for. We see that continuing into the fourth quarter. But as I said before, commercial customers are still being careful about their overall inventory levels and their willingness to invest. You do see a lot more strategic activity as people think about in this kind of environment how they can accelerate growth through things other than organic growth, some of which we participated in the financing of others that have happened through the private credit space. And so we would expect that level of cautiousness to continue. And then you get to the point where they have more certainty on tariffs, they have figured out how to build their models, their profitability models with this higher level of cost of goods sold. And at that point, we'd expect to see some more level of investment. So as we look forward between that and lower rates, we would expect to see some level of increased lending as we go into next year, but it has been picking up, albeit slowly.

I mean just as a quick follow-up, the OCC just lifted their restrictions on some of the levered lending within the banking system. Does that have much of an impact in terms of how you think about loan growth heading into next year or your appetite to originate and hold those types of loans?

Yes. Listen, we think it's extremely helpful and extremely prudent. I mean when you look at the guidance that's been out there, they've -- when they put out guidance, First of all, I think when you look at the way different firms follow guidance, it's not always consistent. And I think given what we have been through over the past bunch of time, we've probably been on the more conservative end of how to follow guidance. So to some extent, we were a little competitively disadvantaged because of that. But it also -- what they basically said is that we want you to determine what your acceptable risk levels are. As you know, they've got a lot of requirements on us to make sure we're thinking about risk the right way. And to the extent that things fit into our risk appetite and it's well controlled, then we should be able to lend. And so there have been -- there's a lot of lending that has happened, which is now outside of the banking system that as we've talked about. This is the fact that we can now compete for loans that we weren't able to offer before is an opportunity for us. It's not -- doesn't mean that the private lending market is going to change dramatically because those products are different. They're structured differently. They're priced differently. The speed is very, very different. But certainly, some of that can be done inside the banking sector because the guidance has been taken back.

So let's talk about the other side of the balance sheet in terms of funding the growth. I think you've seen growth in deposits year-on-year now for the last 3 quarters, which is very encouraging to see. So 2 questions. The first is, how are you thinking about deposit growth heading into next year. But secondly, and I think far more importantly, how should we think about your ability to get back to your deposit market share levels kind of pre asset cap, which were obviously considerably higher?

Sure. Listen, as I said before, I think we've been operating in an environment where you can't grow deposits. I mean that is -- that's the reality of where we've been operating. And so as I said, we actually proactively went to corporate customers and said, please take your deposits elsewhere because of other things that we've had to actually manage the balance sheet. And we've not been proactive in terms of looking for consumer deposits. And so that is different today. And so when you look at what we're doing in the consumer bank, we have -- we're far more active in terms of our marketing. When you look at what we're doing inside of our branches, we're creating the atmosphere of wanting to grow in ways that we hadn't historically. When we look at what we're doing in terms of our products, the way we're pricing things -- we are kind of regenerating the engine that our competitors have had of looking at the competitive advantages that we have to attract more customers in bringing in active checking, savings alongside of it, investments alongside of it, lending products alongside of that, but to create a much more material growth engine than we've been able to operate within in the past 6 or 7 years. So how that plays out, that plays out over a period of time. But we do think when you look at the competitive advantages that the large banks have, we're able to provide better products priced differently if we choose to do so than other folks because of the efficiencies we have. The level of investments that we can make, they're all very real. So when you see other people come up here, there are a couple of us that have the scale that are perfectly happy with the franchises that we have. And most of the others would love and need to be bigger to be able to compete with a bunch of us. And so the fact that we compete on a level playing field with the other large banks out there makes us feel really good about what that future is but it's not going to be something which is going to be -- we're not going to go from here to here overnight. It allows us to grow, hopefully faster than the industry and continue to take share back.

I mean, is there a target deposit share number that you're thinking about or you think that we as analysts and investors should think?

No, we're not thinking about it that way. I think what -- it's a little bit like we've talked about ROTCE, where you want to just -- first, you've got to -- I think it's -- I think we want to be able to show you all that we can deliver and that we can start taking share back. And then once we get there and we start showing we can take share back, we can talk more about where we ultimately want to get to. But it's a little bit like the world is our oyster now. There's no -- our ability to take share at this point is dependent on our ability to execute with the competitive advantages that we have. Where that stops? That's not today's issue.

Okay. So let's talk about efficiency. You've taken out $15 billion of gross saves over the last 5 years. And I think what that has translated to is this really impressive ability to really fund some of these growth initiatives without really seeing much growth in the expense base. So a couple of things. The first is, can you talk a little bit about the efficiency agenda from here. Talk a bit about the ability to continue to self-fund investment, but also talk a little bit about AI use cases. And frankly, just how big a deal it is as you think about your ability to improve the efficiency?

There's a lot in there. So first of all, I think we feel -- and our expense base is down since we've gotten into the company. While we've had to spend -- we've said this in the past $2 billion to $2.5 billion more annually because of the regulatory work. And so that means that we've been able to -- we've increased the level of investment significantly because we've reduced $15 billion gross. And so as we think about what the future holds, let's put AI to the side for a second. Our mindset is very similar to what it's been, which is -- we've gone from 275,000 people to 210,000 people or so. And we're not as efficient as we should be without the benefits of AI. And a lot of it is just the continued examinations that we do as you peel the onion back of looking at where those opportunities are to actually do things more efficiently. So we continue to believe that we can fund increased level of investments in the company, whether it's technology investments, whether it's marketing, whether it's increased bankers in the corporate bank, which we've talked about in the commercial bank, which we haven't talked about, which we've also been increasing the level of investment in without significantly impacting the overall expense base of the company. People always ask us now, does that mean like for next year how to think about the overall expense levels. And we'll talk about that when we get to the end of the year because we're going through our budgeting process, but we've got a lot of degrees of freedom to make decisions on the direction of travel. And so we understand that investors want to see continued progress in the financial performance of the company. We do believe that our returns should be higher. But I think we feel good about the fact that we continue to have opportunities to drive efficiency, which will allow us to increase the level of investment. And if we can prove that those investments will generate higher returns and faster growth, then we'll make those. And if not, well, we can slow them down and prove them over a period of time. So we've been very, very conscious of what we got the ability to do, but we've got to show people that, that's the case. The AI conversation is an interesting one. And I've said this, I do find it very -- when people say that whether AI is an opportunity to drive significant increases in efficiency and what it's going to do potentially to headcount. It is extremely significant. And anyone who doesn't say that is just either doesn't know what they're talking about, most people do, but they're afraid to say it. because no one wants to stand up and say that we should have -- we're going to have lower headcount in the future. It's a difficult thing to say. Now it doesn't mean that it's going to happen next year, and it doesn't mean that it's going to happen in every area of the company, right? When you look at what we've been doing inside of Wells Fargo, we've rolled out these tools, Gen AI tools within our engineering workforce. We're 30% to 35% more efficient in terms of writing code today. We've not reduced the number of people we have coding today, but we're getting a lot more done. That's real efficiency. That's really significant. There are other places out there where we're going to be able to look and figure out how we're going to be able to do with less people. And then we're going to make the decision on does that mean we can invest more in certain areas or not. But anything that we do, you've got to look at and say, you've got the capability to do something because of large language models Agentic AI in ways that are very, very different today. And it doesn't matter whether it's compliance, whether it's legal, whether it's call centers, whether it's pitch books in investment banking, credit memos in the commercial bank. These are all opportunities to do things much, much more efficiently with AI that humans have been doing. Now it's not going to totally replace humans, but it does create an opportunity to do things significantly different. Again, I don't think this is going to -- it's not next year in terms of what it's going to mean, but these are things that we're all building capabilities for that are going to start to roll out over a period of time. We're going to be very careful about doing things in a way that are very responsible. We're trying to be very thoughtful about what it means for retraining workforces, use attrition as our friend. But it's a reality. And I think it's a positive reality, but we've all got to be focused on what it means for the future. When we think about just overall levels of efficiency, I just want to remind people just to follow us on a quarter-to-quarter basis. As we've gone through the budgeting process and even pre-AI, we do expect to have less people as we go into next year. And so we'll likely have more severance in the fourth quarter than we've had in the first part of the year as we just planned for a lower cost base.

Okay. So let's talk a little bit about capital. You've obviously got a lot of excess capital. Obviously, regulatory reform is yet to come, I guess, to a degree. So maybe you can talk a little bit about the path to the 10% to 10.5% CET1 target that you set out from an organic growth versus capital return perspective. And I think it would also be very useful just to get your updated thoughts on the dividend and the dividend payout ratio and the trajectory for that, just given the significant improvement in the profitability of the firm?

Yes. I mean we do have a significant amount of excess capital. We've reduced the target level from 10% to 10.5%. Our first choice would be to be able to invest in growing the customer-related business that will happen over a period of time. And so the fact that we live an administration which is more friendly and we think more analytically based in terms of determining what the right levels of capital are for banks that will have the ability to deploy more capital than we would have otherwise been able to employ in the past. But we also believe there's only so much excess capital we should keep. And so we want to have a conservative balance sheet. 10% to 10.5% is still, we think, very, very conservative. And so we are going to buy stock back as we've been doing. We bought back about $5 billion of stock back so far this quarter. We're not indifferent to the stock price. So we're going to be thoughtful about in the shorter-term, what that looks like, and that will help determine on a quarter-by-quarter basis what those trends will look like. And we want to consistently grow the dividend as we grow the earnings capacity of the company. So we haven't changed our view of what the dividend payout ratio should look like, but we would expect the dividend to continue to grow on a consistent basis. But we'll prioritize it that way, which in terms of opportunities to grow organically at first, consistent dividend increases and use buybacks to return excess capital.

And then in terms of inorganic growth and acquisitions, how are you thinking about that? You obviously are out of the asset cap. Obviously, it's a favorable regulatory regime, it seems from an M&A perspective. How should we think about your appetite to engage in M&A as a way of accelerating what I think is already a very good organic growth story?

Yes. I think you should -- I mean, listen, the way we think about it is, I think, first and foremost, what we don't -- we come in every day with a big smile on our face because we don't feel the need to do anything. We think we've got so many opportunities to grow the franchise as I've talked about, and the fact that we have complete franchises in all of our businesses today, we feel no pressure to do anything. And that's a great place to be between that and the constraints that we've had in the past, first and foremost, that is where we're spending the majority of our time. It's about creating the organic growth engine inside the company, which is justified by the quality of the franchises that we have. Now that doesn't mean that we're not thinking about M&A. I think when you have an environment like this where this administration is open to it. We -- they haven't been open to it in the past. We've had our hands tied. You don't -- we're not going to ignore it. But it means your hurdle rates should be very, very high. So the only reasons why we would do things would be a combination of very strong financial impact of doing something, but it also has to be strategic. Like we have no interest in doing something which could just add a little bit of earnings to the company, could be a little bit of a distraction, could be a bigger distraction than a little bit of distraction, create risk and take our mind off the great opportunities that we have. So we would think about it but would have to have very strong financial returns, make us strategically more interesting for investors and not get in the way of the organic opportunities that we have. And so those are very, very high hurdles that we take very seriously. And again, you've got to think about them because you've got the opportunity. But the driver of our conversations internally are predominantly the organic opportunities that we have.

Okay. With that, sadly we're out of time, but Charlie, fantastic having you here this year and look forward to doing it again next year. Thanks a lot.

Thanks, everyone.