Wells Fargo & Company ($WFC)

All right. Up next, we have Wells Fargo. I'm delighted to have with us today Mike Santomassimo, Wells Fargo's Chief Financial Officer. Mike, thanks so much for joining us.

Yes. Thanks for having me.

All right. Mike, let's get right into it. Wells is a broad view into the economy across consumers and corporates. As you look across the businesses today, what are you seeing in the environment? And where have the biggest changes in client behavior been over the past few months?

Yes. Thanks. And my guess is you're going to hear a lot of the same from a lot of people today. But when you look at it, you're not seeing a lot of change in behavior over the last few quarters. And people probably are maybe over using this word resilient, but it's been very stable, very resilient, very good activity levels across really all of the businesses, which is really good to see. On the consumer side, people continue to spend in May across our debit and credit card spend, it was up 9% year-on-year. That includes the impact of gas being higher across that portfolio. That's a little under $1 billion of incremental spend sitting in there. So consumers are spending probably 45%, 50% more on gas than they were more than a couple of months ago, but that's all sort of within there. But we're not seeing any real changes in the other aggregate categories of any substance. The employment picture across the country is still quite good. We're certainly seeing a little bit of strength now in the last couple of readings maybe start to reemerge there. And that's translating into really good credit performance across all the portfolios. So it's a little bit better than we model each month, not a little bit worse. And so that -- and that's been a continuing trend now for a while. On the commercial side, there's been lots of caution still there, I think, across the commercial banking client base. People are still a little hesitant to make a big investment or overextend themselves too much on building inventory. I think they want to see sort of what happens with the overall environment. So that -- again, that may -- that translates into good credit performance across the board. And so I think overall, like the picture is still quite good. And I think even as you look at rising debt levels, income is keeping up. And so the ability to pay and kind of the debt-to-income ratio is actually in quite good shape when you look across most clients and then obviously, you have a little bit of dispersion between lower income, higher income folks. I think lower income, definitely struggling a bit more, living a little more paycheck-to-paycheck. But if you've got any investments or other liquidity, I think you're doing quite well relative to the history.

So let's dig into the business and let's stop there with the consumer and consumer banking and lending. You've talked about rebuilding the growth engine in the consumer bank after several years of being under the asset cap. As you look across the franchise today, where do you think the biggest opportunity still exists and what actions do you think you need to take to get there?

Yes. Look, I think there's opportunity really across all of the core things we do through the branch system or through the consumer bank. And you look at our checking account growth, which is something that's lagged in the past. And so we reintroduced all of our incentives plans over the last couple of years. We're starting to see that take effect across the branches, but we still have a ways to go to get to kind of full productivity there. So I think that's going to be a big opportunity as that continues to ramp. I think if you look at net checking account growth now, we're up almost every quarter year-on-year for the last 11 or 12 quarters. And so I think that is continuing to sort of get the pace and start to become much more meaningful, I think, than it was. I think you're seeing good growth in our credit card sales through the branches as well. We saw an uptick in the middle of last year through the branch system that has kind of sustained itself. We have a little bit of variability quarter-to-quarter, but that productivity out of the branch system is quite good and great to see come through. And then we have the opportunity to provide wealth management services to the affluent client base and that gets serviced out of the branches as well. We call that Wells Fargo Premier. So it's combining banking and wealth management together. We combine that into the consumer segment in the beginning of this year or in the first quarter. And so I think you're going to see really good growth from those investment assets coming on to the platform as well. And if we can do a good job on the wealth side, that usually brings more deposits and lending business into the picture for those clients as well. And so we're really excited about really across the board that opportunity. And we're seeing that pick up as we go over the last few quarters or a year. But we have a long way to go, I think, to get to kind of full productivity across the branches. And so that should provide some good growth for a long period of time.

Great. So hope I thought on wealth because I do want to dig in there, but maybe to round out the conversation on the lending side. On credit card, you've noted that earlier vintages from the new products launched in 2021 are beginning to mature and contribute more to the profitability of the business. Can you talk about how the earnings profile of the card business evolves over the next few years as these vintages season?

Yes, sure. We're really happy with the progress that business is making. So just as some of you may remember, it was almost a complete rebuild in terms of the product set. So we've launched 13 products over the last number of years, every go-to-market card is a new card that we launched in the last 5 years. And so we've seen really good progress now as I go, we probably have a couple more to come over the next year or so, and so we'll see how those get rolled out. But if you look at the earliest vintages, you're really starting in 2022. We had a little bit of the first active cash card got rolled out in the latter part of '21. So 2022 is sort of like your first real vintage. So the '22, '23, '24 vintages are all profitable this year and '24 has got a little more maturing to do over the next year or 2, but we're seeing really good profitability. It's right on top of the business case and the modeling that we've done. And then the credit performance there, as I mentioned earlier, is actually better than what we would model not worse. And it's still -- those vintages are like 60% new clients -- 60% existing clients, 40% new clients to the bank and so really good progression. And then you've got the '25 and '26 vintages, which are a little bit bigger. As I mentioned, we've seen really good uptake in sort of originations. I think originations were up 20-plus percent last year. We expect more growth this year. So those will mature over the next couple of years. And so we're transitioning from the acquisition of these new vintages being a drag on profitability to contributing positively to profitability this year, and that will start to build as we go over the next couple of years. And so progressing exactly as we would have thought and generating good returns.

On average, how long does it take these vintages to fully mature?

Two to 3 years and some of the earlier vintages maybe a little bit faster, but 2 to 3 years is sort of what the average is.

Got it. All right. And let's talk about auto lending. You're becoming somewhat a full-spectrum lender again on the auto lending side. What does that mean in practice? How far down the credit spectrum are you comfortable going at this stage?

Yes. Yes. Look, it's full in quote, right? So it's -- we're not trying to be a lender to every part of the credit spectrum within the auto business. We spent a couple of years kind of reworking some of the servicing, the credit underwriting and the modeling that we do in that business. And so you've sort of -- you saw us reenter that sort of earlier last year, and we've seen some really good growth now over the last year plus. Part of it is also the partnership that we signed up with VW and Audi in the U.S., and that's contributing quite nicely to it as well. But when you look at the portfolio, the primary focus is still on prime customers. 70% of the book is 700-plus FICO. 80% is 660-plus FICO. And so in terms of the new originations. And so I think you're still -- still the primary focus is there. And we're seeing that marginal return -- the return of that marginal new customer be exactly kind of where we thought it would be as we look forward. And at the same time, we're investing in all of the dealer services that we provide to sort of the big dealer networks to make sure that we're getting the right mix of businesses. And so -- so I'd say it's -- we're expanding a little bit in that business, but certainly not trying to go too deep down into the credit spectrum.

Got it. All right. Let's talk about wealth. Wealth Management has quietly become one of the stronger momentum stories within the company. You just spoke about initiatives like Wells Premier. What do you think has changed most meaningfully inside that franchise over the last 18 months or so?

Yes, it's really been a progression now for a number of years as we've been investing in the people, the technology, the products across that business. And if you think about, we've got really 3 primary channels that we go to market. One is what I referred to earlier, which is that Wells Fargo Premier, which is going after the opportunity that's for the client service out of the branch system. We've got roughly 2,500 advisers in the branches already across the network and you're starting to see those flows really start to ramp. And as I mentioned, that will bring much more deposits and lending business with it as we do a better and better job there. We've got the kind of core adviser, financial adviser channel that others have as well. And I think there, the focus has been on really 3 or 4 things. One is if you go back 6, 7 years ago, we had a lot of attrition there. That's all stemmed. We've got really low attrition there. And we've really been able to recruit some very significant teams and a whole bunch of great advisers into that channel over the last few years. And when you recruit the right advisers, you're not only bringing like the investment assets, you're bringing lending, you're bringing banking, you're bringing alternative. And so you're bringing a whole bunch of the things that drive profitability in that channel. And I think that's what we're really excited about as you see those teams come on and sort of ramp up. We've also been investing in technology there. We just finished the rollout of a completely modern sort of adviser workstation across all the whole footprint that we've got. And we've been investing in sort of the banking lending products. We still have a lot of opportunity to get better penetration in the lending side of that business, no matter how you want to measure that. There's a lot of opportunity to do more there across the client base. And then really the last channel there is the independent advisers. As many as you know, but that's the fastest-growing channel in the wealth management business here in the U.S. We're the only of our normal peer -- general peer set that big bank peer set that can service those independent advisers. And we're really starting to see the recruiting from not only the traditional wire houses, but also some of the independent providers come onto that platform this year. And so we're excited about the growth there. So hopefully, you'll see more growth come through this year.

All right. Perfect. Maybe on the business side, let's round out the discussion with -- on the corporate and commercial side. You've described a dynamic where your financing balances and you expect some of the broader wallet share to follow over time. Can you talk about where you're starting to see that broader wallet share capture come through?

Yes. And if you look at like the markets business, trading business, if you look at it relative to where we ended 2024, which is really after that point is we're really, really started to see some of the growth in the balance sheet come through. The balance sheet is up roughly $180 billion since then. -- call it, 60% of it is in financing balances, roughly. Roughly 20% of it is in kind of the trading side and another 20% in sort of the lending that we do out of that business. And so you're seeing sort of really good progression. And on the financing side, the biggest piece of that are things like treasury repo and other repo that we do to provide the financing that many of these clients need and as you can imagine, there's -- the bigger clients drive, call it, the top 25 or 50 clients sort of drive a big portion of sort of those financing balances. And what we're seeing there is financing revenues up, returns are good in that business. But we're also seeing the trading side of it also increased quite a bit, right? So if you look at the first quarter as an example, versus a year ago, so first quarter '26 versus first quarter '25. Equity and fixed income revenues are up 15% or 20%, respectively. Total Markets revenue is up 21% and you're seeing sort of that business come through as we sort of grew the overall balance sheet. And as our CEO said a couple of weeks ago, we expect to have a good quarter this quarter with kind of mid-teens growth in the markets business year-over-year as well. And so we're seeing sort of that benefit. And if you go client by client and you look at the top 10 clients, 9 out of the top 10 are doing a lot more with us, one isn't. And so we'll have a -- we'll figure out if we're going to keep providing those balances to that client or not, right? And so that's part of the natural progression that you'll have with these businesses. Most of it will play out the way you thought, and you'll make decisions to sort of reallocate balance sheet as you go. But the financing business we're doing is very high quality, low risk, high return driving that other behavior that we want to see across that -- those client bases across all the other businesses that we have in market. So we feel really good about the progression. And we're still in the early phases of seeing some of the business come on as you have to ramp up with those clients over time.

So low risk, high return, clear momentum and lots more to come.

Right.

All right. Perfect. Okay. So then on the investment banking side, you've hired roughly, I think, 100 senior investment bankers over the last several years. You're seeing those market share gains come through as well. Where are the biggest opportunities across the franchise today think about advisory, ECM, leverage finance, sponsor coverage, I guess, where should investors most focus?

Yes. Look, we're really pleased with the quality of people we're getting. We're really pleased that we're getting them from really everywhere across the street, boutiques, big investment banks, and so people are attracted to the platform. I think when you look at it, not just only by product, you also look at it by sort of the client base as we cover, we have a big opportunity to continue to do better in our -- covering our commercial banking clients. They generate somewhere between $2 billion and $4 billion a year, and we're continuing to see that in investment banking fees. And we're continuing to see that market share increase each year, but still more to do there. When you look at it by product, certainly the equity capital markets and advisory side are places that we know we can do better. We have a strong debt capital markets business, but still across both investment-grade and leveraged finance as we do better on the advisory side, we'll also do better on the acquisition finance side. So there should be opportunity really across the product set. But we're really excited about what we can do in the commercial banking client base. You'll definitely see some more activity across large corporates and some sponsor activity, but it should be spread across the products. But I think you'll as I said, I think the advisory and the equity capital markets side should be those places that you see more opportunity over time.

And anything else on the commercial banking side and where you're seeing strong traction there? Anything else you need to do there?

Yes. I mean, look, I think we've got great national share in the commercial bank, but there are a lot of markets across the U.S. where we don't have that same share. And so we prioritized about 20 markets right now. Some of them are big markets like New York and Chicago and other places. Some of them are smaller across the country, but all places that have significant wealth and significant business creation. We've added a couple of hundred bankers across the last couple of years to go after that opportunity. If you look at the new client acquisition results that we've seen now for a number of quarters, they're up 20%, 30%, 40% over year-on-year in terms -- depending on when you look at it. And so we're seeing some of that activity really come through. It's across the board in terms of lending, deposits, treasury management business. And so -- and then in some investment banking business as well, not only sort of advisory and sort of the debt side, but also rates, effects and other sort of activity that we can sort of help them with across the board. And so we're pretty excited about the opportunity there. And we're seeing some of the results come through and the new clients that are getting added to the platform.

Right. Perfect. On the lending side, one of the other, I guess, debated areas has been the growth in the NBFI exposures you spent a lot of time and give us a lot of detail at earnings around the exposures there. Where do you continue to see some of the best risk-adjusted opportunities in that business today? And what's the outlook for that business?

Yes. Look, I think as we talked about at earnings in April, we feel really good about the exposure that we have there. It's a very granular book, right? It's not one thing. There's many things that sort of underpin that. I think the protection you get the way the structures work and the way we go about underwriting them, I think, is -- gives us the confidence that the risk-adjusted returns are there. And I think you'll go through like waves in terms of where the opportunity is. But the biggest parts of the portfolio are still going to be the capital call and subscription finance facilities that we provide to the biggest private equity funds and the like. And then we've got a big business that supports the private credit space, what we call corporate debt finance. And again, I think you'll see at different points in time, you'll see sort of the growth rates move around there a little bit, but we think there's still a lot of opportunity to serve the best clients there.

So let's pivot over to deposits and NII. Since the asset cap was lifted, you've gone from being one of the most consumer funded large banks to now seeing much faster growth in the commercial interest-bearing deposit side. And I guess that is weighing on NIM a little bit. So how should investors think about the longer-term returns and the longer-term implications of this transition?

Yes. Look, I think the short answer is this business is a really good business. These are commercial customers across the commercial bank and the corporate investment bank, primarily. You also see some interest-bearing in the consumer side. But really, you're talking about the commercial businesses that drive most of the growth there. And the marginal profitability of this business is very high. It generally brings with it a whole bunch of other stuff that we do with customers, whether it's lending, treasury management, FX, rates and other things that we can do with these customers. And it should drive really strong profitability over a really long period of time in that business. And if you now take a step back and say, okay, well, why is it growing so much faster now? It's because we had to stop growing it while we had the asset cap. And if you go back into 2021, 2022, we actually had to push a lot of it off. So -- and during that time, we pushed probably $0.5 trillion of balances off and didn't participate in some of the growth that the rest of the industry saw there. And so some of the -- the bulk of this is coming from existing clients that have other relationships that are bringing more to us, which is really good to see. And some of it is coming from new relationships as we get the traction I talked about earlier in the commercial bank or even in the corporate investment bank. And it all comes with other fee-based businesses around the treasury management, as I mentioned, or other markets activity. And so it actually should be a really good thing and drive really good profitability over a long period of time. And you'll see the mix change a little bit in terms of the deposit base, but that's okay, right? Because it will really drive some really good growth in those commercial businesses.

As we think about those broader relationships coming in with the deposits I guess how long does it take? Does it happen concurrently to take a few quarters or years to deepen the relationship?

Some of it happens right away, and some of it grows over time as they transition other -- some of those fee-based businesses away from others. And some of it's episodic, depending on how -- what they need in terms of the FX and rates and other things. And as you -- and as some of the lending facilities or the revolving credit facilities they have, those obviously have some timetables to them as they sort of look at moving those things around.

Got it. Okay. And then let's talk about NII. You maintained your NII outlook even as the market has repriced to fewer Fed rate cuts. The belly and the long end of the curve are also higher now. I guess walk us through what has changed both positively and negatively underneath the hood on NII since January. And if there's any update you'd like to share there, would love to hear them.

Yes, sure. So first, we're very confident in our $50 billion target that we have for this year or guidance that we gave for this year. And I think, obviously, you'll see that, you'll see the quarterly growth in NII that sort of underpins that as we go. I think when you look at some of what's happened -- you've certainly seen a different expectation for rate cuts. We had 2 or 3 and sort of in the guidance, but they were really back-end loaded. And so that's a positive, a modest positive for the banking book, now that like rates are effectively flat for the year. It's a modest negative on the market's NII as that's a liability-sensitive business. And so you have some offset there. So the net-net of it is actually a relatively small impact for us relative to the guidance we have off of the base of a $50 billion number. So it's relatively small. And then when you look at what's happening across the rest, you have loan growth performing well. That grew 4% quarter-on-quarter in the first quarter. And so that is looking like it's going to be potentially a little bit better than what we had modeled as we go through the year, but we'll see. Obviously, there's things like tariff refunds, there's some seasonality there. And so there's a lot of things that we got to sort of watch and sort of see how that progresses, but that could be a positive relative and be a modestly -- modest positive to net interest income as we sort of look in the year. And then you have the deposit side. And as we talked about, we're having a lot of success growing interest-bearing deposits. That's actually running a little bit better than what we would have thought. So that obviously has a little bit of a compresses NIM there a little bit. And on the noninterest-bearing side, we're seeing very stable balances there. We had -- we assumed they would grow a little bit. That still may be the case. But at this point, we're assuming they're going to be more stable, particularly given sort of the higher for longer rates. But overall, it's actually performing quite well in terms of what we're seeing across the deposit side. We're not seeing like pricing -- like more pricing pressure really across the board. We're just having a lot more success on the interest-bearing side and noninterest-bearing are stable. And so net-net of it ends up being -- we still feel very confident in sort of the $50 billion number that we put out there. And then when you look at the quarter for this quarter, you're obviously going to see a step up in NII. We expect that, that underpins sort of what I talked about in terms of the overall forecast. And as I mentioned in the first quarter, you'll see a modest impact on NIM as we go into the quarter, likely 3 or 4 basis points in terms of compression there as you sort of see the mix there change a little bit. But again, that's kind of what we expected to see. And so we feel overall really good about like the trajectory we're on across the NII space.

Okay. So I guess rates slight positive earning asset balances, clear positive on both the loan side and the deposit side. And then we have some pressure on NIM as we get into the second quarter? And then how should we think about it from there?

We'll see. Like we'll give more guidance as we go in -- at earnings. But I think we -- as we said in the first quarter, that compression moderates.

All right. Perfect. Great. And then you brought up deposit pricing, and there's been this growing discussion out there on AI-driven cash optimization and what that might do to cause the pricing over time. How are you thinking about that impact right now?

Look, I mean, look, there's a lot going on in the space. You've got stable coin. You've got tokenized deposits, you have like legislation happening, a whole bunch of things that are out there. And there's certainly going to be a role for some of these things, like stable coins when you think about cross-border activity or even tokenized deposits and cross-border activity, there'll certainly be a role there. I think when you think -- start thinking about like AI more broadly, I think when you look at the core piece of our deposit base, which is that consumer deposit account, the vast majority of those are first under $250,000, average balance is a lot smaller. There's a whole bunch of operating cash that sort of you get to some like stable balance there pretty quickly. And so it's not clear that like you're going to see a lot of impact from that anytime soon. Some of these genic sort of ideas, at least anytime soon. And so we're not seeing any kind of behavior shifts as we speak. And I think you'll -- clients have a lot of opportunity if they wanted to optimize cash more, but I think you're going to find very quickly that you get to some pretty stable balances there.

Got it. All right. Maybe we should move to expenses. The -- you've reduced head count for more than 20 consecutive quarters now. You're simultaneously investing in a number of growth initiatives. How should investors think about the balance between the efficiency gains that you're seeing and the reinvestment that you need to make on the next few years.

Yes. Well, I mean, look, we've done a lot on the efficiency side already. But the good news is we still have a lot to do. And it just takes time to sort of get at it. And I think newer technology like AI sort of helps you maybe get things deeper, faster than maybe possible a couple of years ago. So we still have a lot of opportunity to drive efficiency over the next number of years. And that's where we start the conversation with everybody across the businesses every time we talk about it, right? There's a huge amount to do across every area of the company still we'll make decisions on sort of where we want to invest. But as you've seen over the last number of years, we've been able to sort of find a pretty good balance between driving efficiency and the investment side. And that's certainly the mindset that we bring as we sort of look over the next year or two.

So maybe bringing it to this year, you've spoken about, I think, your expense guidance is about $55.7 billion for the year. Are there any updates to that?

No change. I feel really good about it.

All right. Perfect. So I'm going to come to the room and just to [indiscernible] to see if there's a quick question. But let's talk a little bit about reserves. We spoke about the seasoning card book, momentum on both the card and auto side. Some of these loan balances do come with higher reserves, I guess, how should people think about reserves going forward?

Well, look, as I said, like the good news is the credit performance is quite good, right? So I don't anticipate like shifts in any major shifts in overall coverage -- but as loans grow, you're going to have -- they bring allowance, right? And so -- and obviously, depending on which category grows more like they bring some allowance with it. And so that's not always -- it seems like a lot of financial modelers seem to forget that fact that as loans grow, you have to add allowance, but the way the accounting works. But I think we don't expect any change -- any significant changes in coverage ratio because credit has been quite good.

Got it. All right. Are there any questions here in the room? All right. Maybe let's talk about capital here with CET1 ending the quarter at about 10.3%, it's already within your target range. Obviously, there's capital accretion coming from the earnings side as well. And there's the Basel endgame proposals. So I guess when you're thinking about capital deployment here, how are you thinking about balancing capital return versus growth in investments from here?

Yes. Look, I mean, the first priority is always going to be supporting clients and growing organically with clients. And I think the good news is we've got plenty of capital to do that, right? And and we're generating a lot more as we sort of look forward. And so we have the opportunity not only to support clients and participating growth, but also give more back to shareholders. And so we'll find that balance as we go. And then obviously, we go through the same process each quarter in terms of thinking about the growth opportunities, think about any of the risks that are there including the volatility in rates and then sort of we buy back. We haven't been shy in terms of buying back stock over the last number of years. And so the same process as we sort of thought about it going forward. And we'll see where the rules shake out, ultimately, I think comments are due on the 18th, if I recall properly. And so we should hopefully, the regulators will be able to work through that pretty quickly and get those rules finalized. Like we're not thinking they're going to be in place until 2028, but let's see, hopefully, they're going finalized quickly.

Anything specific you're focused on as we approach the end of the common period?

There's a whole bunch of like small things that are part of proposal. We're going to comment through the trades with a lot of the other banks. But I don't think there'll be anything super surprising that comes out of that.

Got it. All right. Perfect. So Mike, maybe to wrap up, you're already on the path to the 17% to 18% royalty target, which you've laid out. A lot of it is executing on the opportunities that you've already invested in. So as you look at the businesses, which of the drivers do you think is most underappreciated and I guess, in terms of the contribution of getting wells to that next level of returns, where should investors be focused?

Yes. I mean, look, we're -- we feel great about the ability to get there in a reasonable time period. And I think the good news is there's like a lot of different paths to get there. We're not over reliant on any one thing and I think when you look across a lot of the returns we're starting to see on the investments, and you saw this in the first quarter results with originations in card and auto up a lot. You've seen the card -- we talked about the card business -- we've seen the improvement in the investment banking side, which is obviously fee -- high-margin fee-based revenue. And we talked about wealth. We talked about all the growth we're starting to see sort of in the consumer base more broadly. Those are the things that will drive us to the return. And then you complement that with like really good, strong expense discipline. And I think we feel like we've got a lot of different ways to sort of get there, and like I said, in a pretty reasonable time period. And so we feel very confident about that. And as we've said over and over, we don't think that's the end. We think there'll be opportunity to continue to improve overall returns from there once we get there.

All right. With that, we're out of time. Mike, thanks so much for joining us.

Thank you.