Wells Fargo & Company Q1 2024 Earnings Call Transcript

Hey, John, it's Mike. Thanks, -- Thanks for the question. So look, I think not much has changed in our thinking on the topic. And so as you sort of think about it on a long-term basis, there's no reason. We still -- there's still no reason why our businesses shouldn't have returns like the best of our peers. And as we sort of go through that journey, obviously, we are where we are in terms of the returns today.

And as we get towards closer to 15%, it's going to be the same kinds of drivers that we've been talking about now for a while. We've got to continue to optimize sort of capital and balance sheet. You saw us return some via buybacks today. We're making investments on each of our businesses and so we'll need to start seeing some of the returns there. And this was a one-quarter of it, but a good quarter that shows some of the benefits of those investments we're making across a whole range of the businesses, which is good to see and Charlie highlighted a bunch of that in his commentary.

And then we've got to stay on the efficiency journey, which we continue to believe is not done, and we've got a lot of work to do to continue to drive efficiency across the company and we're going to stay at that as we look forward and so I think it's really those drivers that get-in and we still have confidence that we're going to get there.

Hey, John, it's Charlie. Let me just add a couple of things. Number one is, just as a reminder to everyone, we've tried to be clear, whereas NII was rising and we got to certainly either at the peak or near the peaks that we were out earning and that we didn't look at those ROEs at those points is sustainable, but that our clear journey was to continue to get there on a sustainable basis.

I think second of all, when we look at -- obviously, it's very hard to draw any conclusion from a specific quarter, right? You've got the FDIC, we've got operating losses, which we've talked about where our expectations are for the full year, which are different than the quarter. So it's very hard to draw a conclusion on a specific quarter.

But when we look at what is going to get us there, we are very consistent on what those things are. Number one is improved business performance. And we tried to highlight where we see that and those areas that we don't talk about are areas that we are still bullish on, but would like to see some more improvement in the ability to increase our returns in those parts of the company as well as continued capital return as well as the limitations we have because of the asset-gap. So again, our thesis hasn't changed, our views haven't changed and our confidence in getting there hasn't changed.

I would say it's something that we continue to think through -- you know our existing needs today with buffers are at 8.9%. At 8.9% everyone understands that Basel III endgame is coming, but likely with significant revisions. So, I don't -- and I think as the quarters continue, we'll learn more about where that will come out and we'll be able to be more informed about where we'll wind-up. We've always tried to be on the more conservative end, but there's a point at which too much is too much, which is why we bought the amount this quarter that we bought back.

Yeah. Thanks -- it's Mike. Thanks for the question. As you look at the pacing, we're really not going to provide specific guidance on like what we'll do quarter-to-quarter. I think obviously, as you pointed out, we've got significant excess capital to where we need to be. We'll be able to handle with whatever comes out of Basel III quite easily with where we are today, gives us the ability to be there and invest as we've got opportunities with clients.

And so we've got lots of flexibility. And each quarter, we'll go through the same process we go through every quarter, which is, you know, thinking about sort of where the capital requirements are going to go, looking at all the different risks that are out there across the spectrum, whether it's rates or other and then looking at what we're seeing from client activity and then we'll make a decision on the pacing of it. But as you say, we're still very confident we'll do more than we did last year, but pacing will kind of leave to -- we'll cover that each quarter after we -- after we report.

Yeah, let me start out. I think, first of all, when we talk about the level of investment that's necessary, we're making the investment and it's embedded in what we're spending. And so we are funding that through normal-course of business and some of the folks that we're hiring or replacing other people and others are additions, but that's part of what it is.

And so we don't anticipate any kind of step-up in the expense base to fund what we're doing, which we feel great about. We've got the ability to spend along the way and to actually see them paying-off for itself. Listen, I've said this very consistently, which is we are extremely underpenetrated across almost all segments of the investment banking space.

But we've been stronger on the debt side. We have not been as strong on the equity side. And by the way, all for reasons that relate to our own willingness to invest over the last decade and a half, not because of the opportunity or because of our business model, it's just the opposite.

It's just not something that the senior management team here was supportive of and we feel very differently than that. And so when we look across coverage in the equity space by industry on the strategic side and how that relates to our -- the existing high-quality debt platform that we have. Again, we're prioritizing industries based upon where we already have strength in relationship and where there are significant wallets. But we feel really great about our ability to serve a broad set of customers and their desire to do business with us because of both the platform and the talent that we have here.

And then when we look at our -- the trading side of our business, I would -- a big part of what we do there is to support our efforts within the investment bank, but it also is to leverage the broader institutional relationships that we have where we do a lot with those institutions, but we haven't necessarily leveraged trade and flow as part of that.

And so to do that, we're making investments not just in people, but in technology. We are -- as I alluded to, we're not doing any of this by rethinking the way we think of our risk tolerances. It really is about getting the right products, the right services, the right people and calling on our customer-base with a different degree of credibility and desire that we had in the past.

Sure. I'll take that, Ken. As you look at the commercial side, not much has changed. It's pretty competitive. We're not seeing it move one-way or the other in a significant way as you as you sort of look over the last quarter. Good news is we've been able to attract good operating deposits in Corporate Investment Bank. We've seen some growth in the commercial bank as well. And so all that's kind of performing as you'd expect. And you wouldn't really expect pricing to move there until the Fed starts to move and it will stay pretty competitive at that point.

And we still expect betas to be pretty high on the way down as you start to see that eventually happen. On the consumer side, standard pricing is not moving. And really what you're seeing is you're seeing -- people continue to spend some of the money that's in their checking accounts and/or move some of it into either CDs or higher yielding savings accounts.

And so you still see some of that activity happening across the consumer space and the wealth space where you still have some people moving into higher-yielding alternatives. The pace of that migration has slowed at least for now. And so we'll see how that progresses through the rest of the year, but it has slowed a bit over the last number of months.

Yeah. I think what we're seeing so-far is exactly what we expected to see at the beginning of the year. And I know people -- different people have different views back-in January. But this is exactly what we expected, which is pretty low demand. Now as I said in my commentary, it's a little bit lower than what we had modeled, but not substantially at this point. And it really is a demand function. When you look at what we're hearing from clients in the commercial bank or some of the clients in the corporate investment bank, they're looking -- they're being cautious still and saying, okay, I'm not going to build inventories as much as I might in a different environment.

They're being thoughtful about the cost of credit and how that impacts investments they're making or the timing and the pacing of that. And so on the commercial side, it really is a demand issue at this point. On the consumer side, you continue to see some growth in card balances.

Given the size of the balance sheet, that's not going to move the whole balance sheet very materially given where we start from. And then the mortgage side just continues to decline a little bit given the market that we've got there. And in auto, we're seeing a little bit more decline given some of the changes we made about a 1.5 year ago, -- a year, 1.5 year ago on some of the credit tightening and eventually that will start to turn. And so I think those are the dynamics that we're seeing right now.

Hey, Betsy.

Sure. Hey, it's Mike, Betsy. Welcome back.

Sure. When you look at the environment, we're not guessing at sort of what's going to happen, right? So, I think as you sort of look at the different variables there, you know, embedded in our baseline forecast is that we would expect somewhere around three rate cuts this year and that's what's underlying sort of our thinking at this point.

No, I mean, yeah. No, look, it's definitely less than what I think was being projected by the market and that's what we put out on our slide in January. And when you look at the impact of that in isolation, you certainly would see a benefit from less rate cuts. But I do think you have to put that in the context of, okay, now what's going to happen with client behavior and mix shifts as we look for the rest of the year. I mean, it's certainly clear we feel better today than we did in January about our guidance and our forecast there, but I do think we have to let some more time play-out to see how people react to what's happening and I think even you got to be really careful to take what happened over a day or two and extrapolate too far, right? We're seeing a bunch of that be given back today even. And what we've seen over the last couple of years is that every time you have this strong reaction, either up or down in expectation for rates that reaction tends to moderate a little bit over a pretty short period of time. And so let's -- we'll see how that plays out.

Yeah. And we've started to do that to some degree in the first-quarter where we have been starting to buy some securities, mainly mortgages given where rates and levels have been and that's been a good trade, I think for us so-far. And so I think you'll certainly see us continue to deploy more cash into securities, at least at some modest levels as we look-forward over the next quarter.

Yeah. No, I'll try to -- I'll take an attempt at that, Erika, and you can tell me if I covered it all. But the -- it's certainly -- we're at a point in time and I said this on a call with media earlier this morning. Like we're at a time where it's difficult to sort of model the different outcomes that you could expect to see with net interest income just given all the dynamics that are happening there.

And as you said, like I think -- the fact that rates might be higher than what people expected a week ago, that could change, first of all, but let's stipulate at this point, people are thinking it's going to be higher for a little bit longer. We do have to wait-and-see how clients are going to react. And I think we do our best to try to come up with a range of outcomes there and given that -- given what's happening in rates plus what's happening in quantitative tightening, what's happening in sort of the economy overall is going to all matter in terms of what happens with deposit levels.

And let's see how that plays out. But I think as I come back to what I said earlier, we feel we feel better than we did today than we did in January about where we are, but there's a lot to play-out for the rest of the year.

Okay, there's a lot in there. Let me start, Mike and then you chime in. So first of all, Mike, you can comment on like investment banking trading. But again, we're -- I mean, we're not going to answer the question on how you should think about what investment banking and trading will be in the future. What we're focused on are we building businesses? Are we taking share in a way which is profitable? And that's exactly what we're starting to do. And there is volatility to the business, but we're focused on building it over a period of time and that's what we're seeing. And so the way we would think about it when we look at our own forecasting is we would expect to see our market shares rise over a period of time and quarter-by-quarter know that will be subject to volatility that exists.

And when you think about the first-quarter in particular, usually, there's always going to be seasonality on the trading side that happens pretty much every year. So you can't just take that as a run-rate. And on the investment banking side, you've certainly seen some very-high issuance volumes on the investment-grade debt side. So that's likely maybe pulling some issuance forward later in the year, but we'll see. And then some of the M&A revenue that's embedded in there can be somewhat episodic and volatile just given the timing of deals and closings and stuff. And so you do have to look at those two lines over a longer period of time?

And then on your question on expenses, again, it is -- we're in the exact same place that we've been, which is we're not thinking about at all. We're not doing work, we're not thinking about whether there are efficiencies to be gotten out of all the risk and control work that we're doing. In fact, we're still on the other side of that, which is we still have more open consent orders and we're still committed to do whatever is necessary, including spending whatever is necessary to get that work done properly and build it into the infrastructure of the company. I've said there'll be a point at which when it's built into what we do and there's a high degree of confidence that is part of the culture and our processes that we will have an opportunity to figure out how to do some of those things more efficiently.

But that's not on our radar screen at all. What is on our radar screen is the fact that there's still a lot of inefficiency left within the company completely away from the money that we're spending on this. And that's where we're focused. And that's why we have the ability to invest in card and invest in investment banking and trading and accelerate the branch refurbishments and hire more bankers and commercial banking and things like that. So, I would just still continue to separate the fact that we're committed to get the work done. We're going to do whatever is necessary to spend there, and that's not the area of focus for us when it comes to efficiency.

Yeah. And when you look at all the different factors, Steve, there's some -- there's obviously nothing that's sort of unique to sort of our balance sheet. But when you look at both the asset repricing that's happening in securities, you look at what's happening and you sort of project forward on sort of the loans and the other parts of the balance sheet. That's obviously a key input as you sort of look-forward. And then -- and then at some point, you would expect that the migration and deposit mix starts to stabilize as you go forward.

And I'm a little intentional and -- I'm intentional in the words we use in terms of towards the end-of-the year. Is it right at this year, is it early next year like it's going to be -- we're getting closer to that point in terms of when it's going to trough. Calling the exact date with a high degree of certainty is difficult in this environment. But it's all the -- it's all the things that sort of we've talked about over the coming -- over the last few quarters are going to drive that. And then it starts with like deposits and deposit mix and deposit pricing and then goes through the rest of where we think the assets sort of net out?

Sure. And I'm not sure you shouldn't feel like afraid to ask the question you get or we should ask whatever you want. I just try to be as clear as I can on what I think we're in a -- we'll be in a position to answer and I don't want you guys to get frustrated by the level of consistency of the things that we want to be careful about.

But to your question, which is I think entirely reasonable, I've put into a couple of categories. I think first of all, probably the most important thing with the asset cap, quite frankly, it's not the pure economics at this point that will come from the lifting of the asset cap. It is still a reputational overhang for us.

And while the lifting of the sales practices consent order was extremely important for, you know, those that have just read the newspapers, certainly those that follow the stock care a lot about the asset cap and we understand that. And so that is just initially, -- I think an important factor-in terms of how we'll be viewed as opposed to what we'll actually do.

I think when we look at what we have done to proactively manage the company to keep ourselves below the asset cap, there too, you've got two categories. You've got places where we had gone and said, please make your business smaller because just because of normal deposit flows and consumer business and things like that, we'll have some asset pressure and we need to offset at someplace.

And then there is the opportunity cost of what we haven't been able to do because we've had the asset cap. And then what does that mean going-forward. On the first piece, we have limited our ability certainly within our trading businesses for some very low-risk things such as financing our customers and things like that.

So by not allowing them to provide a level of financing, which is very low-risk, we have not captured as much trading flow as we otherwise would have seen. In our corporate businesses, we've been very, very careful to encourage our bankers to bring in sizable corporate deposits that weren't clearly operational deposits.

And in some cases, been a little more aggressive about asking them actually not to have it here because we wanted to make room for other things that we thought were really important strategically, such as not being closed for business on the consumer side, which those folks would not understand is hopefully just something that's temporary.

So those are the places that in the short-term would benefit from the asset cap being lifted. I think when you get beyond that, you know, the reality is when you look at what we've been able to do and the amount of excess capital that we have, we're trying to deploy that by through the dividend and through our share buybacks because there's only so much that we should keep around and not return to shareholders.

But we still -- as I talked about, we think there are plenty of opportunities when you look around our different businesses to achieve higher returns by reinvesting it inside the business. It's not anything, which is -- I would describe it as dramatic. But in terms of the things that we can do when we don't have the constraints, take our -- whether it's our consumer business or our Wealth Business to build-out our banking product set, to be more aggressive about being full spectrum in terms of where we are on the lending side and the deposit side.

Across all of our businesses, we've been very, very conservative in what we have asked people to do because we don't want to have an asset cap issue. So again, I would describe it as it's the -- it would be the ability to grow in the things that we're confident at, that we do well that we have either in some ways consciously and in some ways unconsciously restrained the company from doing.

But all-in-all, -- certainly without an asset cap -- it's not a neutral, it's positive because of the things that we proactively stopped as well as we're just limited in our ability to take advantage of the franchise that we have. And you've seen others that don't have those that don't have those constraints, but have -- the quality franchise as well and you see how they benefited not just versus us, but versus the broader banking set.

Yeah, John, it's Mike. What we said in January is that we expected loans to decline in the first half. And so that is about what we're seeing, right? So again, it's slightly lower than what we modeled, but it's pretty close to sort of our expectation. And then we expected a little bit of growth in the second-half of the year and overall balances weren't going to do much over for the full year. And so at this point, could we be off on that a little bit maybe and could it be a little lower, maybe, could it be a little higher, yeah, for sure. And so -- but I think the more meaningful drivers this year of where NII ends up, it's going to come back to deposits, right? And what's the level, what's the mix, what's the pricing look like given where the environment is? And I think that'll be the more meaningful place to focus.

Yes. I mean I think again, it's -- our full year guidance that we gave you or assumptions we gave you in January, where we thought the commercial side would be pretty flat to where we are, to where we started the year, that's coming in slightly better than what we had modeled. In the consumer side, we would likely see a little bit of more decline as well as mix shift. And again, that's what you're seeing so far.

Listen, we just -- we want to be really careful in all this, right? We're not -- we're not -- we're trying to be as transparent as we can be about what we're seeing without getting over our skis and making predictions that none of us have the answers to. And so like when you boil it all down, in terms of the customer activity that we're seeing, you know, a touch less here, a touch more there -- there's not a big change from what we said three months ago in terms of flows on the deposit of the lending side. It really is relatively small relative to the big NII picture and what's going to drive NII at this point.

So, if we saw big changes there, we might say, let's change guidance. But it's tweaking along the way and we'll see how it continues to pan-out. And then what we said is relative to the rate environment, it's just again, it's -- this is a full-year number and we've had a couple of months go by, it's just too early to mark the whole thing to-market based upon that. But again, we also wanted to just provide the context, as Mike has said and I said in my remarks, certainly what we've seen is helpful relative to just the pure overall rate and curve piece of it.

Yeah. No, look, I think what you're seeing on the -- when you talk about commercial real-estate, you're really talking about office. And what you saw in the office space is actually it not moved at all and get worse or not get worse in the quarter. And so you actually saw non-performing assets not coming down a little bit in the CRE space as we've charged-off some loans and they weren't replaced by other items. And so that's a positive in the sense that it's not deteriorating at this point. And then everything else is sort of moving around like as you would expect, there's not substantial movements across the rest of the portfolio.

Yeah. And really what we were referring to when we mentioned that is primarily in the wealth management business is where we were focused given where market levels are. And that business is -- the cost-to-income ratio is pretty stable there in terms of the revenue-related comp. And so it's a little less than 50% in terms of the -- how to think about it. So the operating leverage is good.

Yeah. No, look, I think the cost to invest there, as Charlie noted, is in our numbers, right? So that's already there. So we're already anticipating that. And at this point, you know, we don't see that being a big pressure point one-way or the other. But obviously, as you know, if revenues like far-out -- far exceed our expectations in a positive way, that would come with a little bit of comp too. So that would be a good thing overall.

Yeah. Look, I mean, it's a hard thing to say with a whole lot of certainty Gerard in terms of exactly where it's going to stabilize. It will stabilize at some point, particularly as you look at the underlying mix of the consumer deposit base, right? A good chunk of our consumer deposits are in accounts less than 250. They're generally operating accounts for a lot of people. And so this thing will stabilize as we go. But as you've seen, we've had some pretty consistent plus or minus a little bit each quarter as we've gone through the last number of quarters. But at some point soon, that will start to -- we would expect that to stabilize, but we'll see exactly where it does.

Yeah. Once you start seeing more stabilization in the mix, that's when you'll see deposit cost on the consumer side stabilize, right? Because what you're seeing now is people, as I mentioned earlier, people are spending money in their checking account, low-interest cost for us and then you're seeing growth in CDs and some of the savings accounts, which are higher-cost. And that mix-shift will stabilize. It's very related to your first question around non-interest-bearing, right, once they were kind of related together, right? Once you get to sort of that core operating balance in people's accounts, that's when you'll see both of those stabilize.

Yeah. Look, I think you got to really dig into the underlying dynamics of what's happening in the portfolio, right? We're in the middle of a refresh of our product set. We're seeing faster growth in new accounts and new balances coming on than maybe other players just given the investments we've been making now for the better part of three years. And so that -- with that comes some maturation of kind of the -- or the new vintages. At some point, that should -- that should peak and you'll start to see sort of the normal behavior. But I'd just come back to we spent a lot of time looking at each of the underlying vintages here. Everything is performing very much on-top of what we would have expected or in a couple of cases, maybe slightly better.

And the quality of the new accounts we're putting on are -- the credit quality of them looks very good and continues to be the case. So, I would just say that we're in that normal phase of maturation. And as it sort of -- as it sort of peaks, well sort of let you know when we sort of feel like we're there, but it's -- but it should be coming over the -- over the coming quarters.

Yeah. I mean that's hard. I think certainly, it will be a factor that people incorporate into their thinking of how aggressive or not they want to be at investments they're making. But at this point, that would be that would be really hard to kind of prove out with any sort of empirical data. I think at this point, what we're seeing most is related to the overall sort of macroeconomic environment we're in with such high rates and people having some uncertainty just generally around where things go from here. So -- but I'm sure that will factor in at least to a small degree at some point as we go through the year.

Well, the environment is going to matter a lot. And so we've certainly been helped by some of the volatility that we've seen over the last four quarters, five quarters. And so that could change the outcome quite materially for all of us in the industry and the trading line. So keep that in mind. But as you said, we're continuing to make systematically make some investments there and we feel good about and we feel good about that. And I think we continue to see some good performance from a market-share point-of-view across those places. We've been making the investments. And -- but as Charlie also noted, we're somewhat constrained in some of those -- in some of those businesses. But we feel good about the progress that the team has made over the last couple of years.

Yeah.

Yeah, sure. As you pointed out, over the last -- if you go back a couple of years ago and you definitely saw some declines that we were seeing in the advisor workforce. But Barry Sommers and team have been working really hard to sort of not only stem some of the attrition, but also begin to really ramp-up the recruiting again. And I think we're starting to see some of that come through. And so a lot of that we're back to like more normal, maybe slightly below normal attrition levels across the business, which is good. And we're feeling very good about our ability to recruit high-quality advisers and so I think that trend you saw a couple of years ago is definitely different. And we'll continue to stay at it. We're mostly focused on experienced advisors, a little less on, as you mentioned, college recruits and that type of thing.

The only thing listen, Vivek, this is -- I mean, we're recruiting -- it's across -- there's no one prototype here. We are -- we've recruited some of the biggest teams in the country that have traded over the last year and a half. And these are people that wouldn't have come to Wells Fargo before that, because of the issues and it was -- and it was competitive and they chose to come here because of our capabilities, not because of what we're willing to pay them. At the same side, we are staffing-up in our bank branches and those are more entry-level people come out-of-the banker workforce and it's going to be across-the-board. But there's no doubt that the trajectory we have with our FA population is very different today than several years ago.

Yeah. I mean, look, we'll see, Vivek, where it exactly troughs. Obviously, sort of the exact pace of rate cuts is part of the equation, but we also have to look at sort of the broader trends that we've talked about throughout the call, right, and how do depositors sort of react, where does the mix-shift stabilize and what do we see from a competitive environment. So all of that matters as you sort of look at where exactly it's going to trough.

All right. Thank you, everyone. Appreciate it. We'll talk to you next quarter.