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

Right along. Very pleased to have Wells Fargo once again at this conference. Representing the company, Mike Santomassimo, Chief Financial Officer. Mike, thanks for joining us this morning.

Thanks for having me.

Maybe the best place to start, just big picture, U.S. economy has been resilient, obviously, uncertainties. Fed I'm told it's going to hike tomorrow, geopolitical backdrop, who knows. AI, build out, packing things. Just maybe just talk to how your customer base, consumer commercial is holding up in this environment? What are you watching most closely on a macro perspective as we look to the remainder of the year.

Yes. No, despite all the noise that's out there, it's been quite good in short. And I think -- when you look at the consumer side, I've stopped beating this word resilient because it's just strong. The activity levels have just been strong now consistently for a while. We see spend up across the debit and credit card products every week year-on-year. categories move around. Sometimes it's oil or gas prices go up, it shifts a little bit in terms of the spending. But that's still sort of like a 3% to 5% of spend depending on who who you are. And so there's still quite strong spending across the board, and it's just not been changing really, really at all. you couple that with like really good credit performance. So debt-to-income levels are quite good overall across the client base. We're not seeing changes in delinquency trends that would sort of lead you to believe there's like more credit issues coming. Payment levels across the card space are quite high. historically and not really changing. And I think as long as you've got the economy continuing to grow, call it, 2%, 2.5% this year depending on who who you sort of look at. You've got a really strong sort of employment picture with unemployment still quite low. You've got wages keeping up with inflation for the most part, across most customer bases. And so it's hard to see sort of what's going to be the catalyst for that to change at this point. And I'm not sure a small increase in rates is the catalyst at this point. We're just not -- we're not expecting that to be the case. When you look at the commercial side, again, still good performance. I'd say that commercial banking, middle-market type customers still being pretty cautious and prudent. We're not seeing big increases in utilization across revolvers at this point. I know we'll talk about loan growth later, but that's not what's driving sort of the loan growth we're seeing. So you look at the commercial customer base still quite healthy, good liquidity. We're not seeing any systemic credit issues going to pop through and so it leads you to believe the rest of the year should be quite constructive, I think, still. And I think you got to look at the obvious markers, whether you start to see changes in unemployment sort of tick up on the consumer side, and you sort of start to see stresses across the commercial side, but it's just not what we're seeing at this point. And I think that leads you to believe that the second half and into early next year should be still quite healthy.

Sounds good. I guess, middle of last year, the asset cap finally came off. Final Caseta removed in March. So positive milestones there. Just how has removal of those constraints change the way you think about growth, investment opportunities, capital deployment?

Well, first, it's a different place. There's no way -- you can't say it any other way, right? And I think as a lot of the work that went to it over many years to solve all the issues across the many consent orders we had. So it does feel like a very different place. And I think in a lot of respects, there's a lot of excitement around the growth opportunity that we have there. And I think the way we've been thinking about it is the same thing we've been working on now for the last number of years. We started the investment agenda 4, 5, 6 years ago, depending on sort of the area of the product. And a lot of the growth that we're going to see across the investment bank, the wealth management business, the card business, the broader consumer franchise across the bank branches and wealth management that we do within those in those branches is what's going to drive growth. And I think you're starting to see some of that come through. The balance sheet has grown a bunch since last year. we saw really good growth across all of the businesses last quarter, bar none really in terms of what we're seeing in terms of some of the improvement. We saw a good uptick in core checking count growth. We saw good flows into the wealth management business. We saw good eBanking activity levels, good market revenues and activity across the client base. And so we still have a ton more to do and a ton more opportunity to go after, but we're starting to see some of that come through. And it's exciting to see sort of how the team is executing every quarter and going after it.

Got it. And I guess against this backdrop, I guess we've seen pretty good growth in trading assets and loans. I think every manager category outside of mortgages are up in the first half. Just as you start to think about the second half, maybe talk to the loan environment. I know you kind of guided to mid-single-digit year-over-year growth by the fourth quarter, but I think we're up like 12% in the first half. So just how do you think about the trajectories from here? And just maybe talk about the competitive landscape?

Yes. Look, we're -- I mean we're super happy that we had such good growth in half and whether it's card, auto, the commercial portfolios really all saw some good growth. And we did see a very consistent home lending sort of portfolio as well in the first half after a number of years of that sort of getting rightsized. So overall, the activity was quite good. But as we sort of said in July, we expect -- we didn't expect the 12% to continue for the whole year. And so while we'll likely be better than where we guided in the first part of the year, it will be a little bit lower than what that 12% number certainly for the full year. But -- and I think that will set us up well as we go into next year. Activity levels are still pretty good. We're seeing good new client acquisition in the commercial bank as we've added a couple of hundred commercial bankers over the last couple of years. We're seeing growth across the corporate investment bank and then just continue the growth across the card and the auto portfolios. But I think the growth rate will get a little bit lower than what we saw in the first half.

Got it. And then maybe on just deposits. There are 2, you've kind of been running ahead of the mid-single-digit target. You talked about although mix is maybe more secured to interest-bearing perhaps than originally anticipated. If I look at deposit cost, though, you've definitely seen, I guess, underperformance versus peers on that one metric. Maybe just talk to what's driving mix, what's driving price and just how we think about growth mix, pricing move forward from here?

Yes. Look, while we are under the asset cap, we just couldn't grow the commercial deposit base the way that others could over the last number of years. And so it's actually quite good to see sort of the traction that we've got with clients since the asset cap has gone away, where we've been able to grow a lot of that operating business both across the commercial bank, corporate investment bank, year-on-year, the wealth management deposits are up. And so we're seeing really good activity levels across the whole franchise, which is great to see. As we sort of talked about a number of quarters, the first place you're going to see that growth is in the interest-bearing deposits, primarily because it's where we saw the biggest dollar growth is the commercial side that's just where you're going to see some of that growth come through first. And these are really good relationships, really good return over a very long period of time. They bring operating business. They bring the opportunity to get fees. They bring the opportunity to get more noninterest-bearing over time as you sort of grow the payments business and other things you do with these customers. And that just has a mathematical like impact on deposit cost, right? So if you're growing interest-bearing faster and noninterest-bearing are sort of pretty stable, then you're going to see an increase in in the deposit cost, but that's actually a good thing, I think, over a long period of time as we start to see a really good traction across the deposit acquisition across each of these businesses, which is great to see. And so -- and I think we still have a lot of opportunity to grow on the interest-bearing side. And then over a longer period of time, you'll see new checking account growth and growth in the consumer business grow the noninterest-bearing or the low sort of basis point sort of savings products as well on the consumer side. And then as we grow our operating business in the payments business, you'll see more of those noninterest bearings grow across the commercial side as well. Those just take a little bit longer to sort of come through. But we're seeing really good uptick in activity across those parts of the business as well.

Got it. I guess maybe sticking with deposits for a second. I know you recently launched a tokenized deposit product. Maybe just talk about that product. Is that something that there's customer demand for -- just how do you see that opportunity evolving over time? And just maybe more broadly, what's your view of tokenized deposits alongside stable coins and just how you see this playing out just of questions out there.

Yes, there's a lot going on in that space. The conversation internally started with how do we do a better job helping our primarily U.S.-based customers how do we serve their cross-border needs and much, much better, whether it's increasing operating hours or providing more transparency in terms of the uncertainty around when the payment is going to get there, and the blockchain technology in the tokenized deposit was the best technology to sort of help us solve some of those problems and some of the client needs there. And that's where we're really focused. It's not about optimizing our internal network. It's not about optimizing sort of like our own treasury needs. -- it really is just going straight to how do you do a better job helping clients meet the needs they have across their cross-border payments. And so I think that's what we're really focused on. And we're excited. It's going to launch in production next week, and so we'll start doing like payments and it will scale and sort of get much broader over the coming quarters. And I think there's a real need there to provide sort of better, more transparent sort of cross-border payments. And it allows us to tackle an addressable market that is probably much bigger than we could have using traditional rails. Given our lack of sort of a global sort of branch network that others might have. And so it should increase our addressable market quite substantially. Help us do a better job with customers, cross-border needs. And so it's kind of a win-win, I think, overall. I think the focus there, if you then contrast that to stable points, is there a role for stable coins in the payment ecosystem Maybe. It's likely going to be in places like cross-border remittance where you're sending U.S. dollars to a country that's got high inflation or other issues within their underlying economy. And the recipient wants to hold a dollar-denominated sort of asset. And so there could be some limited use cases there. But I think these things will likely complement each other, complement each other over time.

Got it. Maybe kind of shifting back to the income statement. We touched on this, we're in talking about deposits, but NIM was down 13 bps in the first quarter, 4 bps in the second quarter. You talked about 3Q having a similar decline to 2Q and then stabilizing in the fourth quarter. Is that still the right way to think about it? And just kind of looking out beyond that, ultimately, what do you think drives stabilization expansion, kind of puts and takes and where should we focus?

Yes. Look, I think as we sit here today with a couple of months of the quarter through and we think about NIM, it will be a little better than we thought. So I think we came into the quarter thinking to be down 3 or 4 basis points. It's likely to be maybe down 1%, maybe flat, like it will be pretty close to sort of that as we look. And so we'll see how have the last few weeks shape up in terms of the end of the quarter, but it will be better. And I think when you start looking at sort of what some of the things that are happening, we continue to get a grind up of yields across the asset side of the balance sheet. So higher rates have certainly been a little bit helpful as you sort of look at some of that. And when you got growth across the card book or the auto book or a lot of the lending portfolios are continuing to see a little bit of a grind up in yields and then as we reinvest the securities portfolio, we're picking up some yield there as well. And then on the market side of the balance sheet, we've talked about this a lot, but we continue to get more efficient on the balance sheet. As we've gotten -- as we continue to grow in the equity finance side, you get better netting and you get more efficient there on the fixed income side, we can do more efficient ways to sort of implement repo, like sponsored repo and other products where you get a lot of netting benefit. And we're a little bit ahead of maybe where we thought we would be in terms of getting some of those benefits come through across the markets business. And so so it's actually quite constructive, I think, given sort of what we're seeing. We're still growing at a good pace, but it's just more efficient use of the overall balance sheet across those businesses. And as you sort of look forward, our view is the same. We expect it to be pretty stable as we sort of go into the fourth quarter. The banking -- if you separate markets from kind of the banking book in the third quarter, the banking book is going to be pretty stable to the second quarter. And I think that stability sort of continues as you go into the fourth quarter. And then over a longer period of time, you should see some expansion, but it's all the things that we've talked about in terms of loan growth, you get the benefit of asset repricing as you continue to have higher rates for longer. And as we grow the underlying businesses across the consumer and the commercial side, you'll start to see some of that come through not only in NII, but NIM as well.

And I guess with the Fed potentially hiking tomorrow and maybe more so into next year or later this year, just how does that -- is that good for oils [indiscernible]. I know the tenure broke 5% yesterday. Can you maybe talk about what's fast-iterate environment, just how it impacts you.

Look, I think obviously, some steepness to the yield curve would be helpful, right? And so that been a little volatile. But as you sort of look at -- if the Fed increases 25 basis points, we're still modestly asset sensitive on the banking book. You still have some noise in the markets business, right? Higher rates mean lower NII, higher fees. And so you sort of have like some differences here in terms of where we could be. And so I think -- actually, I got the backwards, right? So it's lower NII, higher fees, right, in terms of as rates go up on the market side. So you're going to have a little bit of noise there on the market side. But I think on the banking book, we're still modestly asset sensitive. So we'll have a little benefit from higher rates. And I think overall, like if it's 25 basis points, I don't think that's going to be a big driver of activity one way or the other as we look at the rest of the year.

Got it. And then since January, talking about $50 billion for the full year NII in $2 billion of markets. Is that still the way to think about it?

Still the same. That's the update is the same. And so I think it's no change. And I think -- as we sort of talked about, loans might -- I talked about the last couple of quarters, loans are a little bit better than we thought. Noninterest-bearing deposits are pretty stable. We expect a little bit of growth, but with rates a little higher, stable is, I think, a good outcome. And so I think overall, it still shakes out to be about that $50 billion and about $2 billion of that is in the markets business.

I guess when you talk about loans and deposits running higher than maybe you initially expected. How much of that do you think is like asset cap catch up versus just kind of good core growth? And maybe what inning are we in of this if it is [indiscernible] catch up.

Yes. I mean, look, the short answer is it's like early innings of growth, right? I mean that -- like that -- like the opportunity we have is much bigger over and should play out over the coming years. certainly, you'll have a little bit of catch up when you look at the markets business in terms of the pace of growth that we saw over the last 4, 6 quarters. And you won't see that same pace of growth that we've seen, but the opportunity is still quite big across each of the businesses. And so early innings across each of the businesses in terms of really having this organic growth opportunity that we can go after.

One thing I'm just curious on in NII is just credit card, I know it's a business that you've completely revamped you've had good growth. I know some of that growth is maybe not earning initially. How do we think about that kind of layering in over time?

Yes. No, it's the right question. And you look at the -- what we've done, every product is brand new to the platform. And as it takes 2 to 3 years for these like vintages to mature, -- and we're still sort of in that ramp phase of seeing the profitability come through. So I think over the next couple of years, you'll start to see a more meaningful profit contribution from the growth that we've seen because of all the upfront costs will start to burn burn off from some of that growth we've seen. We still have another new product or 2 that will come as we go later in the year, mostly focused on sort of that mass market client, which has a little bit less of some of those upfront costs that they experienced and some of the products that we've launched so far. So I think coupled together, like we're seeing really good momentum in terms of the growth. And you'll see more of that profit contribution come through over the next year or 2, certainly, as the bigger vintages really start to mature more meaningfully.