Wells Fargo & Company Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 14, 2023

There are 14 speakers on the call.

Operator

Welcome and thank you for joining the Wells Fargo First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations.

Operator

Sir, you may begin the conference.

Speaker 1

Good morning. Thank you for joining our call today where our CEO, Charlie Sharp And our CFO, Mike Sanovitsimo will discuss 1st quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our Q1 earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties.

Speaker 1

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8 ks filed today containing our earnings materials. Information about any non GAAP financial measures referenced, Including a reconciliation of those measures to GAAP measures can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie. Thanks, John.

Speaker 2

I'll make some brief comments about our Q1 results and update you on our priorities. I'll then turn the call over to Mike to review Q1 results in more detail before we take your questions. Let me start with some Q1 highlights. Our results in the quarter were strong and reflected the continued progress we're making to improve returns. We grew revenue from both the Q4 and a year ago.

Speaker 2

We continue to make progress on our efficiency initiatives and expenses declined from both the Q4 and a year ago driven by lower operating losses, but we continue to be focused on controlling other expenses as well. The consumer and majority of our businesses remain strong. Delinquencies and net charge offs have continued to slowly increase as expected. We're looking for signs of accelerated deterioration in asset classes or segments of our customers. And broadly speaking, We saw little change in the trends from the prior quarter.

Speaker 2

However, weakness continues to develop in commercial real estate office and Mike will discuss this in more detail. Given what we're seeing, we're taking incremental actions to tighten credit on higher risk segments, but continue to lend broadly. We increased our allowance for credit losses for the 4th consecutive quarter. Our economic expectations used to support the allowance have not changed meaningfully, but we do continue to look at specific asset classes such as commercial real estate to appropriately assess the adequacy of the allowance. We will continue to monitor the trends in each of our loan portfolios Both commercial and consumer average loans were up from a year ago, but were relatively stable from the 4th quarter.

Speaker 2

Consumer spending remains strong with growth in both debit and credit card spend, but spending began to soften late in the quarter. The decline in average deposits that started a year ago continued in the Q1, primarily driven by customers seeking higher yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press, But those inflows have abated. Our CET1 ratio which was already strong increased to 10.8% Even as we resumed common stock repurchases in the Q1, buying back $4,000,000,000 in common stock. Let me share some thoughts on the recent market events impacting the banking industry.

Speaker 2

We're glad that the work we have completed over the last several years has put us in a position to help support the U. S. Financial system. Along with 10 other large banks, We utilized our strength and liquidity and we made a $5,000,000,000 uninsured deposit into First Republic Bank reflecting our confidence in the country's banking system and to help provide First Republic with liquidity to continue serving its customers. I'm proud of everything our employees have done during this historic period to be there for our customers.

Speaker 2

We believe banks Of all sizes are important part of our financial system as each is uniquely positioned to serve their customers and communities. It's important to recognize that banks have different operating models and that the banks that failed in the Q1 were quite different from what people think of when they think about the typical regional bank. These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with a broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear.

Speaker 2

Our diversified business model provides opportunities To serve our customers broadly, which reduces concentration risk across the different elements of risk. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies. We also have strong capital and liquidity positions which include a mix of deposits and access to multiple funding sources And our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles. Now let me update you on the progress we've made on our strategic priorities. Our top priority remains building out our risk And control framework appropriate for our company.

Speaker 2

I spent time in my recent annual letter highlighting why we remain confident in our ability To complete this work, including having much more effective reporting and processes in place to provide appropriate oversight, Adding close to 10,000 people across numerous risk and control related groups as part of our commitment to make the investments needed to complete the work And building the management disciplines and culture to govern and execute the work which includes the operating committee reviewing risk and regulatory progress and escalations on a weekly basis. I also summarize the actions we've taken to simplify the way we operate. This work continued in the Q1 as we largely completed the exit of the correspondent home lending business as part of our plans to simplify that business. We're also narrowing our retail mortgage business to focus on predominantly bank customers and underserved communities. Our strategy includes broadening our existing investment From the special purpose credit program to include purchase loans, investing an additional $100,000,000 To advance racial equity in homeownership and deploying additional home mortgage consultants in local minority communities.

Speaker 2

We continue to transform the way we serve our customers by offering innovative products and solutions. We announced a multiyear agreement with Choice Hotels to launch a new co branded credit card this month, creating a best in class credit card program designed to enhance our customers' experience and bring them more value. We rolled out early payday late last year, which makes eligible direct deposits available up to 2 days early. In the Q1 this enhancement provided customers early access To over $200,000,000,000 in direct deposits, we launched Flex Loan in the 4th quarter, a digital only small dollar loan that provides eligible customers convenient and affordable access to funds. Customer response continues to exceed our expectations.

Speaker 2

We've originated over 100,000 loans since November. Digital adoption and usage among our consumer customers continued to increase. We added over 500,000 mobile active customers in the Q1 and digital logins increased 6% from a year ago. Since rolling out Vantage, our new enhanced digital experience for our commercial and corporate clients Late last year, we received overwhelmingly positive feedback on the new user experience. Vantage uses AI and machine learning to provide Tailored and intuitive platform based on our clients' specific needs.

Speaker 2

We also continue to make progress on our environmental, Social and governance work. We announced a $50,000,000 grant to the NAACP to support efforts to advance racial equity in America. This is the single largest donation the NAACP has ever received from the corporation and builds on our long standing relationship With the NAACP that spans more than 20 years. The Wells Fargo Foundation expanded its commitment to housing affordability

Speaker 3

There was

Speaker 2

another $20,000,000 housing affordability breakthrough challenge to advance ideas to help meet the need for more affordable homes across the country. We also announced a $20,000,000 commitment to advance economic opportunities in Native American communities, including addressing housing, small business, Financial Health and Sustainability. Before concluding, I wanted to highlight the management changes we announced yesterday. Mary Mack, the CEO of Consumer and Small Business Banking is retiring this summer. She spent her entire career at Wells Fargo and has led consumer and small business banking for the past 7 years through a significant amount of change, including defining a new path forward in the business.

Speaker 2

I can think of few Wells Fargo colleagues who have done as much for our company and have been as visible in the communities that we serve over such a long period of time. We also announced that Saul Van Burton, Head of Technology at Wells Fargo will succeed Mary. Saul is a strong leader, A technologist and he knows how to run a business. This makes him the ideal person to lead consumer and small business banking into the future. Our branch network will continue to be the key to business to the business, but our customers expect us to provide them with increasingly digitized and seamless banking experiences across all channels.

Speaker 2

Saul understands this deeply and has consistently proven his ability to convert new products And services across Wells Fargo. Finally, Tracy Kerens, currently Head of Consumer Technology will become Head of Technology for the company reporting to me. Tracy has worked in the technology and finance industry for more than 20 years and has led a series of business critical initiatives to modernize our technology platforms across our consumer businesses. She's a strong results driven leader. It's always great when we can tap our own leaders for roles Within the company and I want to thank Mary for everything she's done during her tenure at Wells Fargo.

Speaker 2

It's truly been a pleasure working with her. As we look forward, we're carefully watching customer behavior for clues on how the economic environment is changing. Customer activity is still relatively strong and delinquencies remain low, though they are increasing. There are pockets of risks such as commercial office real estate, which will likely impact institutions differently and we're proactively managing our own exposures. We continue to expect economic growth Slow and we are prepared for a range of scenarios.

Speaker 2

We will continue to monitor both the markets and our customers and we'll react accordingly. Our diversified business model should enable us to support our customers throughout economic cycles. I will now turn the call over to Mike.

Speaker 4

Thank you, Charlie, and good morning, everyone. Net income for the Q1 was $5,000,000,000 or $1.23 per diluted common share. While there was a lot going on in the banking industry around us, we continue to focus on our priorities and our results reflected the progress we're making, which I'll highlight throughout the call. Starting with capital and liquidity on Slide 3. Our CET1 ratio was 10.8%, up approximately 20 basis For the prior three quarters, we repurchased $4,000,000,000 of common stock in the Q1.

Speaker 4

Our CET1 ratio remained well above our required regulatory minimum plus buffers And we expect to continue to prudently return excess capital to shareholders in the coming quarters. In the Q1, our liquidity coverage ratio was approximately 22 We continue to benefit from a diversified deposit base with over 60% of our deposits in our Turning to credit quality on Slide 5. Net loan charge offs continued to slowly increase to 26 basis points in the Q1, but were still below pre pandemic levels. Commercial net loan charge offs decreased $16,000,000 from the 4th quarter to 5 basis points. However, while losses improve, we continue to see some gradual weakening in underlying credit performance, including higher non performing assets.

Speaker 4

We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase. Total consumer net loan charge offs increased $60,000,000 from the 4th quarter to 56 basis points of average loans driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago and we've continued to take credit tightening actions Nonperforming assets increased 7% from the 4th quarter driven by higher commercial real estate non accrual loans Over down 12% from a year ago due to lower residential mortgage non accrual loans.

Speaker 4

Of note, 87% of the non accrual loans in our commercial real estate portfolio were current on interest 75% were current on both principal and interest as of the end of the Q1. Our allowance for credit losses increased $643,000,000 in Order reflecting an increase for commercial real estate loans, primarily office loans as well as an increase for credit card and auto loans. Given the increased focus in commercial real estate loans, especially office, we provided more details on our portfolio on Slide 6. We had $154,700,000,000 of commercial real estate loans outstanding at the end of the Q1 with $35,700,000 of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs Challenging capital market conditions.

Speaker 4

While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been de risking the office portfolio, which resulted in commitments declining 5% from a year ago and we continue to proactively work with borrowers to manage our including structural enhancements and pay downs is warranted. As you can see in the slide, we provide some additional data on the office portfolio including Approximately 12% is owner occupied. Therefore, the loan performance is mostly tied to the cash flow of the owner's operating business rather than rents paid by tenants. Nearly 1 third had recourse to a guarantor typically through a repayment guarantee.

Speaker 4

The portfolio is geographically diverse and as you'd expect the largest concentrations are in California and New York. Over Two thirds of our office loans are in the corporate investment banking business and the vast majority of this portfolio is institutional quality real estate with high caliber sponsors. While approximately 80% of its Class A, keep in mind that this is a single measure that is hard to evaluate in isolation. For example, newer or refurbished properties may perform better regardless of whether they are Class A or Class B. We are providing this data to give you more insight into the portfolio, But as is usually the case in commercial real estate, each property situation is different and a myriad of other variables such as leasing rates, Loan to value and debt yields can determine performance, which is why we regularly view the portfolio on a loan by loan basis.

Speaker 4

As a result of market conditions and recent increases in criticized assets and non accrual loans, we've increased our allowance for credit losses For office loans for the past four quarters, the allowance for credit losses coverage ratio at the end of the Q1 for the office portfolio In the Corporate Investment Bank, it was 5.7%. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, This will likely play out over an extended period of time as we actively work with borrowers to help resolve issues they may be facing. On Slide 7, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the 4th quarter, While period end loans declined 1% from the 4th quarter with lower balances across our consumer and commercial portfolios. I'll highlight specific drivers when discussing our operating segment results.

Speaker 4

Average loan yields increased 2 44 basis points from a year ago and 56 basis points from the 4th quarter reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% from the 4th quarter due to the consumer deposit outflows as customers continue to reallocate cash in higher yielding alternatives and continued spending. During the market stress last month, we experienced a brief increase in deposit inflows that has since abated and while our period end deposit balances were slightly higher than we expected at the beginning of the quarter, They're still down 2% from the 4th quarter. As expected, our average deposit cost increased 37 basis points from the 4th quarter to 83 basis points With higher deposit costs across all operating segments in response to rising interest rates, our mix of non interest bearing deposits from 35% in the 4th quarter to 32% in the 1st quarter, but remained above pre pandemic levels. Turning to net interest income on Slide 8.

Speaker 4

1st quarter net interest income was $13,300,000,000 which was 45 Higher than a year ago as we continue to benefit from the impact of higher rates. The $97,000,000 decline for the Q4 was due to 2 fewer business days. Our full year net interest income guidance has not changed from last quarter as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. Ultimately, the amount of net interest income we earn this year will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix and repricing and loan demand. Turning to expenses on Slide 9.

Speaker 4

Non interest expense declined 1% from a year ago, driven by lower operating losses and the impact of efficiency initiatives. The increase in personnel expense from the Q4 was driven by approximately $650,000,000 of seasonally higher expenses in the Q1, including payroll taxes, stock expense for retirement eligible employees and 401 matching contributions. Our full year 2023 non interest expense Excluding operating losses, it's still expected to be approximately $50,200,000,000 unchanged from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses. Turning to our operating segments starting with consumer banking and lending in Flight 10.

Speaker 4

Consumer and small business banking revenue increased 28% from a year ago As higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit related fees driven by the overdraft policy changes we rolled out last year. We are continuing to make investments in this business. We're beginning to increase marketing spend. We're accelerating the efforts to renovate and refurbish our branches. For our bankers, we're investing in new tools and capabilities to provide better and more personalized advice to customers.

Speaker 4

We're continuing to enhance our mobile app And mobile active users were up 4% year over year and we're also seeing increased activity and positive initial indicators after our rollout of Wells Fargo It's early on for all of these initiatives, but we are starting to see some green shoots. At the same time, we continue to on our efficiency initiatives. Teller transactions continued to decline with reduced headcount we reduced headcount by 9% and total branches were down 4% from a year ago. In home lending, mortgage rates remain elevated and the mortgage market continued to decline. Our home lending revenue declined 42% from a year ago driven by lower mortgage originations including a significant decline from the correspondent channel And lower revenue from the re securitization of loans purchased from securitization pools.

Speaker 4

We continue to reduce headcount in the Q1 We expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the correspondent channel as announced in January and began to reduce the complexity and the size of the servicing book. During the Q1, we successfully marketed mortgage servicing rights for approximately $50,000,000,000 of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances driven by higher point of sale volume.

Speaker 4

Auto revenue declined 12% from a year ago, which are my lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due To rising interest rates, personal lending revenue was up 9% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 83% from a year ago and 55% from the 4th quarter With declines in both correspondent and retail originations, as I mentioned, we stopped accepting correspondent applications in January. So going forward, our originations will be focused on serving Wells Fargo customers and underserved communities. The size of our auto portfolio has declined 4 consecutive quarters and the balances were down 8% at the end of the Q1 compared to a year ago.

Speaker 4

Origination volume declined 32% from a year ago reflecting 4th quarter. Discretionary spending drove the growth with non discretionary spending stable from the 4th quarter levels. Credit card spending increased 16% from a year ago In line with the year over year growth in the 4th quarter with sustained growth in both discretionary and non discretionary spending. Spending growth slowed throughout the quarter, but was still at double digit levels in March. We continue to see some slight moderation in payment rates in the Q1, but they were still well above Turning to commercial banking results on Slide 12.

Speaker 4

Middle market banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances, while deposit related fees were lower reflecting higher earnings credit rates On non interest bearing deposits, asset based lending and leasing revenue increased 7% year over year driven by loan growth, which was partially offset by lower net gains from equity securities. Average loan balances were up 15% in the Q1 compared to a year ago, driven by new customer growth and higher line utilization. After being stable in the second half of last year, line utilization increased slightly in the Q1. Average loan balances have grown for 7 consecutive quarters and were up 2% from the 4th quarter with the growth in asset based lending and Leasing driven by continued growth in client inventory. Growth in middle market banking was once again driven by larger clients including both new and existing relationships which more than offset declines from our smaller clients.

Speaker 4

Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 37% from a year ago, driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment Banking fees from a year ago reflecting lower market activity with clients across all major products in nearly all industries. While commercial real estate Market transactions are down across the industry. Our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates And higher loan balances.

Speaker 4

Markets revenue increased 53% from a year ago, driven by higher trading results across all asset classes. Average loans grew 4% from a year ago, but were down from the 4th quarter. Lower balances in banking reflected a combination of Slow demand, increased payoffs and relatively stable line utilization. Declining commercial real estate balances were driven by the higher rate environment and lower commercial real estate sales lines. On Slide 14, Wealth and Investment Management revenue was down 2% compared to a year ago, driven by lower asset based fees due to lower market valuations.

Speaker 4

Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher yielding alternatives. At the end of the Q1, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Expenses decreased 4% from a year ago driven by lower revenue related compensation and the impact of efficiency initiatives. Average loans were down 1% from a year ago, primarily due to a decline in securities based lending. Slide 15 highlights our corporate results.

Speaker 4

Revenue declined $103,000,000 or 83% from a year ago as higher net interest or $223,000,000 pretax and net of non controlling interests. In summary, our results in the first Reflecting an improvement in our earnings capacity, we grew revenue and reduced expenses and had strong growth in pre tax provision profit. As expected, our net charge offs have continued to slowly increase from historical lows and we are closely monitoring our portfolios and taking credit tightening actions where appropriate. Our capital levels grew even as we resumed stock common stock repurchases and we expect repurchases to continue. And the guidance we provided last quarter for full year 2023 net interest income and expenses excluding operating losses has not changed.

Speaker 4

We will now take your questions.

Operator

We will now begin the question and answer session. Our first question for today will come from Scott Siefers of Piper Sandler. Your line is open.

Speaker 5

Good morning, everyone. Thank you for taking the question. Mike, I was hoping to just start out on the deposit side. So when you talk about the influx of deposits from some of the Your sort of special situations having abated. Did that money actually leave the bank?

Speaker 5

Or is it just sort of the inflows that have stopped?

Speaker 4

Yes. Hey, Scott. Thanks for the question. Look, the inflows stopped, right? And they came in a pretty short period of time and those inflows stopped.

Speaker 4

And I think what you're seeing since then is just normal spending in the consumer side and normal activity across The across the other businesses.

Speaker 5

Okay, perfect. And then I guess maybe switch gears I think in your prepared remarks, you had discussed plans to sort of prudently return excess capital in coming quarters. It was very glad to see the Resumption in repurchase in the Q1, but just given all the kind of crosscurrents that we've got, whether it's uncertainty on the regulatory environment or uncertainty on the economy, kind of countered against your very strong capital levels. Just Curious for maybe a little more color on how you would be thinking about share repurchase in the through the remainder of the year?

Speaker 2

Yes, this is Charlie. Let me take a step. Listen, I think the way we feel about it is our capital levels grew quarter over quarter Even after we purchased the $4,000,000,000 of stock, so it just shows our ability to generate capital if because of the environment or regulatory changes or things like that. So because of that, we do feel like we have the ability to continue to Return capital to shareholders, while we still have plenty of flexibility to deal with anything which could come our way. And so our excess above the regulatory minimums plus buffers is Extremely high beyond what we feel that it needs to be.

Speaker 2

So we think we can continue to address that and still be very prudent with how we manage capital. Wonderful.

Speaker 5

Okay. I have a bunch more questions, but I have a feeling they'll be asked going forward as well. So Charlie and Mike, thank you guys very much. Really appreciate

Operator

The next question comes from Steven Chubak of Wolfe Research. Your line is open, sir.

Speaker 6

Hey, good morning. So

Speaker 2

wanted to get

Speaker 6

a little bit more granular on some of the expense trends that we're seeing. We've gone through the exercise of benchmarking your segment efficiency ratios versus peers. Clearly, you've made significant strides improving profitability Across virtually every segment, Commercial, CIB and Wealth, the PPNR margins are running really in line with Peer group, it's still the consumer efficiency ratio in the mid-60s, which is running well above peers. And I was hoping you could just speak to the opportunity On the expense side within Consumer, how much of a benefit should you see from the retrenchment in mortgage? And maybe what do you see as a normalized

Speaker 4

Steve, it's Mike. I'll start and Charlie can chime in if he wants. I think when you think about consumer, I think we still have a lot more work to do there. And it's both in the Consumer lending space or the mortgage space as we simplify the servicing side of that business and that just takes a little bit of time to Work its way through, needs to be thoughtful and in some cases requires a little bit of investment in technology and the like. And then on the consumer banking side, we've continued to rationalize the branch footprint and branch setup.

Speaker 4

We continue to see teller transactions and other things decline. And so I think you'll see us focus there. And hopefully what you've seen in that segment is Consistent quarter on quarter decline in headcount and other factors and that will sort of continue to hopefully be the case. And then when you think about just where the end state is, we shouldn't look any different than our peers, our best in class peers for each of our segments including that one. So over a period of time, that's the goal.

Speaker 2

And I would just add, when you look at

Speaker 7

our that

Speaker 2

segment, We obviously mix versus other people is an issue. Our home lending business is today extremely inefficient, which is part of the reason why we made the decisions that we made. So we've got a lot of wood to chop there, which will play out over a period of time to make that business more efficient. And as we've talked about on the consumer banking side, we've done I think for many, many years after Mary got Her job in the consumer banking operation, our focus was dealing with the cleanup which they've done an job in the Consumer and Small Business Bank about and then turned our attention to becoming more efficient, which she has worked really hard on. And that's a combination of looking at our branch footprint, staffing within the branches, Migrating people to digital and we're behind on that.

Speaker 2

But there has been a lot of progress made over the last 1.5 years to 2 years and so there's still tremendous amount of opportunity there, but it's in flight.

Speaker 6

Yes. Really helpful color. Just for my follow-up, wanted to unpack some of the NII trends that we're seeing Within the Wealth side specifically, and there's a big focus right now on yield seeking behavior if the higher for longer rate environment persists. You and your peers have seen contraction in NII sequentially and continued deposit outflows. I was hoping you could speak to Whether you're seeing any abatement in just the pace of cash sorting or yield seeking behavior as of yet or if it's continued at a pretty healthy clip?

Speaker 4

Yes, I'll take that. And when you look at the sequential change in NII, it's really the few fewer days in the quarter that drove it. Otherwise, it's pretty flat The Q4 as we thought it would be when we talked in January. When you think about wealth, it's been pretty stable, the trend. It's not accelerating.

Speaker 4

It's not Decelerating at any significant clip at this point. And what we see there is we're capturing that cash Those cash alternatives that people are buying in the wealth business. And so I think that trend will continue for a while and the good news is we're capturing that In other ways, but the trend has been pretty stable and that's probably going to be the case for a little longer.

Speaker 6

Helpful color. Thanks for taking my questions.

Operator

The next question will come from John McDonald of Autonomous Research. Your line is open.

Speaker 4

Hi, good morning. Mike, I was wondering what your outlook is for the Q2 NII and if you could talk a little bit about the puts and takes to that and What are you thinking for Q2? Thanks. Yes, John. As you look at as things are trending, you can see Where deposits are on a period end and an average basis, so that's probably input number 1.

Speaker 4

And then you can see that deposit yields have increased, right? So those two things are going to be the biggest driver. So you should expect a little bit of a step down from Q1 into Q2 And we'll see exactly sort of what that looks like as we get a little bit into the quarter. But I think the variables are there to kind of come up with a range of outcomes. Yes.

Speaker 4

Okay. And the outlook for the full year, obviously, embeds a pretty big step down from the Q1 starting point. Can you give us any more color about the types of assumptions you have embedded into the full year outlook on deposit flows, mix shift and reprice beta? Yes, sure. And as we've talked over the last few quarters, there's still a ton of uncertainty out there With regards to really all the inputs that go into that, right?

Speaker 4

And whether it's the mix of deposits, the absolute level or where pricing will be. And Our guide assumes that it's still going to be a pretty competitive space for deposits on the pricing side that We will still see some mix shift happening and that will see some moderate declines as people continue to spend and the trends happen. As we talked about even last quarter, I think we'll get as time goes by, we get more and more information. And so we're hopeful that there's Upside to the forecast, but we'll see that in the second half of the year and it will be a function of how all those factors play out. But We're hopeful that we'll see that and there'll be some upside there.

Speaker 4

Okay, thanks.

Operator

The next question comes from Ken Usdin of Jefferies. Your line is open.

Speaker 8

Hey, good morning. I just want to ask a follow-up on the cost side. I think we're all pretty clear on your view of continuing to hold the core flat from here. But I think an ongoing question is just As we look further out, and I know there's no crystal ball here, like at what would you get the line of sight when that next wave of gross saves related to all the Duplicative and extra buildup in the infrastructure related to risk compliance, etcetera. When you get the line of sight of when you can start to sunset that, because I know you talked about that as a big point of how you get the ROE up over the medium term.

Speaker 4

Yes. Ken, let me try to clarify a little bit of that. So I think when you look at what we've talked about last quarter in terms of getting to a 15% ROTCE in the medium term that didn't assume that we would Have to take out significant amount of the costs related to the risk and regulatory build outs that we're doing. And that efficiency on those expenses will be out a little while. It could be years in terms of Before we really get at some of that, so but I think our focus is to get the return to a sustainable 15% In the medium term, by not having to rely on that, it really goes back to what we talked about really making sure capital gets optimized not just in terms of shareholder return, but also across the balance sheet, requires us to continue to execute on the efficiency initiatives outside of the risk and regulatory work.

Speaker 4

And then we'll start to get the benefit of some of the investments that we've been making now for the last couple of years.

Speaker 2

And I'll just add to that, just to be clear, When we think about the opportunities to continue to drive efficiencies

Operator

in the

Speaker 2

company, we don't even think about All the expenses related to the risk and regulatory framework work that we're doing. That work is and those They're necessary and those are not an excuse for us not to be efficient in everything else that we do. And so as we talked about In the consumer business just a second ago, we look across all the things that we do and there's still significant opportunity To just become more efficient and either reduce the expense base or provide more capacity to invest going forward. And at some point can we become more efficient in how we run the risk infrastructure of the company? Probably, but That's not on the radar screen and not necessary for us to achieve our efficiency goals.

Speaker 8

Yes. And thanks for those clarifications. One just a question on the fee side. I know watching your trading results are a lot different than watching some of the bigger peers, but just looking at that $1,300,000,000 on the face of the income statement this quarter in the context of the environment. Can you help us put that into context?

Speaker 8

Was that just Exceptional result this quarter. Did it have anything we should be mindful of as we think forward, and just your general outlook there? Thank you.

Speaker 4

Yes, sure. We certainly benefited from the volatility that we saw particularly in the rate market and other some of the other asset classes in the quarter And you can see that in the results. But when you look at some of the core platforms in FX and other areas, we've been just Consistently investing in some of those platforms, so hopefully over time you'll see good results there. But the quarter definitely was influenced By the volatility that we saw across the market.

Speaker 8

Okay. Thanks very much.

Operator

The next question will come from Ebrahim Poonawala of Bank of America. Your line is open.

Speaker 7

Hey, good morning. I just wanted to follow-up on the capital comments. I guess, Charlie, you talked about this. Is it fair for us to assume clearly we have the SCB coming out of the stress test that will be one data point And then the Basel reforms, should we assume that the Cap CET1 likely drift higher maybe 11%, maybe higher in the near term While you still buy back stock, is that a right assumption? And secondly, I think Mike you mentioned about optimizing for capital in RWA.

Speaker 7

Just maybe if you can call out a few things that you can do to optimize RWA relative to where the balance sheet is today?

Speaker 4

Yes, sure. Thanks. I think The simple answer to your first question is no. We don't expect that it to continue to keep drifting up. Certainly, we'll find out the results of CCAR with everybody else in June.

Speaker 4

And then we've got VALBA-four which is a little bit longer Time lines in that and but we're 160 basis points above the regulatory minimum buffers. We've got plenty of capital to deal with whatever Comes out of that. And as we said, over time, we'll get closer to 100 basis points or so above those above the 9.2%. And so I think there's Plenty of capacity to deal with whatever comes and continue to return money back to shareholders as Charlie said.

Speaker 2

And so I think the second part just to begin. Again, all I was trying to say is we have a lot of flexibility to deal with things that come our way. And so we're not anticipating significant additional capital needs. We're not anticipating That any potential downturn could create additional capital needs inside of the business. All we're saying is that if Anything of those things were to happen, we have the flexibility to deal with that both because of the amount of earnings that we have As well as the existing excess capital that we have.

Speaker 2

So you'll add those you take that and you say, we bought all those things happened While we bought $4,000,000,000 stock back this quarter, so we feel we'll be able to continue to return capital and still maintain a very conservative position.

Speaker 4

Yes. And then just to give you a couple like examples to help illustrate the capital optimization. The mortgage business is one of them. If we want mortgage exposure, we can buy securities. You don't have to always hold the mortgage.

Speaker 4

If you're buying securities, you don't have to buy UMBS, you By Ginnie's and so there's plenty and then you can look at each of the underlying portfolios and make sure we're getting the return from a relationship point of view that we think Whether that's in the commercial bank or the corporate investment bank. And so I think there's a plenty of areas that we can either reallocate Capital to clients that we think will get better returns for or optimize some of the underlying portfolios.

Speaker 7

Got it. And just one separate question. You made tremendous progress, Charlie, since taking over on the compliance risk management front. There was a news article last night talking about some OCC MRAs. I don't expect you to comment on that, but just give us a sense from a shareholder perspective, Your level of confidence around the risk of another shoe dropping and major setback to all the efforts and actions that you've taken To adjust the regulatory orders to the extent you can, just to give comfort that you know what the progress that we made is getting us closer to the finish line as opposed to Another big setback that could push us back again.

Speaker 2

Yes. Listen, I would refer you back to my shareholder letter Where I wrote about it extensively and I think we still continue to feel exactly the way we felt when we wrote that letter. It wasn't that long ago, which is We have continued work to do, feel very confident in our ability to get the work done and that we're making progress. And We live in an environment where things can come up, that's always the case. So we don't want to Pretend like there are no risks of other things out there, but if there was anything specific, we would do our best to let you know and We feel good about the progress that we're making and are extremely focused on making sure that we've got all the attention decked against it, But we're confident that the things that we're doing will close the gaps that existed at the company when we got here.

Speaker 7

Got it. Thank you very much.

Operator

The next question comes from John Pancari of Evercore ISI. Your line is open.

Speaker 3

Good morning. On the back to the NII drivers, can you maybe give us an updated expectation on how you're thinking about loan growth here As you look through 2023, I know you cited some of the pressures on the consumer side, but some of the favorable trends still in commercial. And then separately on the deposit side, you have an updated expectation regarding your total deposit beta As you see pricing pressure continue?

Speaker 4

Yes, thanks. So on the loan side, I think we're definitely seeing pockets of growth in places like the commercial bank and that's been pretty consistent now for a couple of quarters. It's not But the overall growth rate across total loans has moderated for the last three quarters and which is exactly what we thought might happen when we Talking last summer. And so I think it will still be pretty moderate. I wouldn't expect huge growth in loans over the rest of the year and embedded in our guidance is some low single digit growth rate in terms of loans for the year.

Speaker 4

And so I think that's what we're assuming there. The what was the second part again, John, sorry?

Speaker 3

Yes, it was around your

Speaker 4

updated deposit. Deposit beta, sorry. Yes. No, look on the deposit side, To date betas have played out almost exactly what we thought how we thought they would. And I think from here The path of rates will matter, competition will matter.

Speaker 4

And so as I mentioned earlier in the call. We're still assuming it's going to be pretty competitive when we give you the guidance that we gave you. And I think we may find that hopefully that it gets Maybe we're being a little conservative there, but we do think at this point it will still be competitive. And I think the betas We'll be pretty reasonable though on the consumer side when you look back after the rates rise, they stop.

Speaker 3

Got it. Okay. Thanks, Mike. And then separately on the commercial real estate front, maybe if you could just elaborate a little bit on the stress That you're seeing, I know you discussed office, maybe can you talk about your LTVs in office maybe On a refresh basis, if you happen to have that and maybe in other portfolios as well because clearly the change Between origination LTVs versus where we're seeing refreshed levels come in are clearly what is motivating some of the impact around reserve behavior. So if you could give us

Speaker 9

a little color there that would be helpful.

Speaker 4

Yes, sure. Look in the office space right now as many others have said 2, like this is going to play out over an extended period of time. We're not seeing a lot of near term In terms of what whether clients are current or seeing very big issues on a property by property basis at this point, but we do expect some of that to come. And I think it will be for all of the reasons that everyone's reporting on, right? And in particular, it will be in cities that You see weakness in places like San Francisco and LA, a little bit in Seattle.

Speaker 4

And so it's all the places where Either lease rates are already lower than the national average or the secular changes around back to office are changing in a little bit more of a bigger way. And but it's going to take time and we just haven't seen it translate into lost content yet. And we're going very granular property by property. And so giving you LTV numbers from a portfolio at a portfolio basis really isn't that helpful at And we haven't seen a lot of trades happening either recently. And so that also will impact how you think about The valuations and what we're doing is really just making sure we stress it in a whole bunch of different ways on a property level basis

Operator

The next question comes from Betsy Graseck of Morgan Stanley. Your line is open.

Speaker 10

Hi, good morning. Good morning. Hi. How are you doing? Couple of questions,

Speaker 7

a

Speaker 10

little bit of follow-up, but one on the credit side. Wanted to just understand a little bit about the recoveries in commercial. I know in the deck you mentioned that commercial NCOs were down in part due to higher recoveries. And just wanted to understand how long you see those recoveries persisting? And Is there any driver for them actually increasing from here?

Speaker 10

Thanks.

Speaker 4

Yes. There really isn't any story there, Betsy, I mean, we get recoveries every quarter and there really isn't a significant trend change one way or the other. And again, it's going to come back down to individual underlying issues or Situations that drive it quarter to quarter, but I wouldn't read too much into the trend.

Speaker 10

Okay. And then separately on the wealth deposits, I know earlier in the call you addressed this that you would expect to see the wealth outflows Continue at current pace or so for at least a little bit of time. I'm wondering, is there any anchor that you can give us with regard to Wealth deposits as a percentage of client assets that existed pre COVID that maybe we should anchor back on in modeling that line item?

Speaker 4

Yes. I mean, what we gave you in my commentary was just cash as a percentage of assets and it's quite a bit higher than it was Before about 12% now versus 4% and obviously deposits is going to be a subcomponent of that. And there are other drivers, right, of how much cash people are going to hold as a percentage of assets. And right now, you're seeing a lot of what It's going into cash alts, it's coming out of other asset classes. So it's not so it's a little harder to give View a specific number of like deposits as a percentage of assets because you're seeing people sell equities and Other asset classes and drive up those cash balances.

Speaker 10

And cash for you is it's including things like MMF and treasury bills, things like that?

Speaker 4

Absolutely, yes.

Speaker 11

Right. Yes, okay.

Speaker 4

And so I would just take the current balance that you see in the wealth space and deposit side and assume it Continues to come down at a pretty stable pace for a little bit.

Speaker 10

And then just last question here, on deposit betas, I know you indicated that It should be okay. I guess I'm wondering how you think about deposit betas this cycle versus last cycle, similar, higher, lower? Any Senses to versus prior cycle in magnitude would be great. Thanks.

Speaker 4

Yes. Look, I mean, it will be different obviously and part of what's going to drive that is how Long rates stay higher. And I think that will that's we'll find that out over a period of time. But As you can tell, where betas have performed so far, they've performed pretty well when you look at it relative to the last cycle, particularly given how Far rates have moved up in excess of what happened last time. And so and they're behaving exactly as you might think, right?

Speaker 4

And if you go portfolio portfolio, the betas are pretty high on the large corporate side. That's been the case now for a couple of quarters. They're a little bit lower in the commercial Given the nature of that client base and in the consumer side, they're relatively low given The amount of rate rises that we've seen so far. And so I think on the large corporate side, you'll see those be pretty consistent from here And the consumer side will be a function of all the things we talked about earlier.

Speaker 10

All right. Thanks so much.

Operator

The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.

Speaker 9

Good morning. I was hoping you guys could elaborate on the Swelling consumer spending towards the end of the month, any more color there and any thoughts on what's driving that?

Speaker 4

Yes, it was pretty small when you look at that change. So I wouldn't read too much into it. I think people are still there's still a lot of activity out there And consumers are still out spending both in the debit side and the credit side. So, wouldn't read into a couple of weeks.

Speaker 9

Okay. And then separately, I know I always kind of harp on some of these reg issues and I appreciate the New York Post article yesterday you I can't comment specifically on, but it did allude to some concerns in your trading business. And obviously, it Performed extremely well. You've been growing it, although I don't think you're growing it super aggressively. But there's been some political comments, maybe it was 6 months ago or so that you shouldn't be growing your Capital Markets business while you're investing in these other areas.

Speaker 9

So I guess maybe you could just address the trading businesses overall in terms of How you're growing them in a responsible way and how you're making sure that the oversight and risk management is fine. I mean, because again, externally, it seems like Everything is going really well, but there's it's hard to tell. Thank you. We

Speaker 2

have no concerns over what we're doing in the business. We're not increasing risk in any meaningful way. We've had strong oversight in that business and we think it continues. And we benefited from business activity, which is focused on customer flow. We have strong financial risk management in the company and have had that For a long period of time, we have strong risk management over our trading businesses and controls And I would just be really careful to take the source that you're taking and using that to expand into anything beyond from whence it came.

Speaker 2

Was anything meaningful to report, we report it. And as I said, we feel really good about the progress that we're making And we feel good about the performance of the company. And I think it's that that stands on its own.

Speaker 9

Okay. That's very clear and very helpful. Thank you.

Operator

The next question comes from Gerard Cassidy of RBC Capital Markets. Your line is open.

Speaker 11

Thank you. Hi, Mike. Mike, you talked about some of the reasons why your Commercial loan growth was quite strong on a year over year basis. Can you share with us are you guys Seeing any re intermediation where the DCM market was very weak in the quarter for the industry, it was weak last year. Are you guys seeing benefits from that where people are corporate and commercial customers are coming to you using your balance sheet more so than possibly a year and a half ago?

Speaker 4

Not in any meaningful way. There's always an anecdotal story I'm sure out there, but I wouldn't say it's meaningful.

Speaker 11

Very good. And then as a follow-up, I know you gave us some details about the net interest income growth this year. There's still We annualize the Q1 results. We

Speaker 4

lost you there for a second. Can you just repeat

Speaker 1

the whole second part?

Speaker 11

Sure. You gave us some details on the outlook for net interest income growth, up 10%. And if you annualize your Q1 number, of course, That would be greater than the 10% growth for the full year. And you gave us the reasons why there's a lot of uncertainty. The one specific question though is, As you're thinking on the yield curve and I know this is very hard, nobody can predict where it's going to be, but have you are you thinking that the yield curve And maybe a rate cut could be coming sooner and yield curve comes down when you look at your outlook or has your outlook for the interest rates changed, I guess, is the question.

Speaker 4

Well, I think certainly the market expectations are implying that there'll be a decrease In the late part of the year, and so I think that's certainly being priced in at the moment. But I do think that you need to be prepared that that's not going to happen. And I think it's possible it doesn't. So I think as we get a little closer, you'll we'll all know. But and what we try to do In our guidance is used what the market is telling us, right?

Speaker 4

So if that doesn't happen, there's and rates are higher than what the market is implying, then there could be There'll be a little upside there. Yes.

Speaker 2

And the only thing I'd add is listen, in all of this, there's a I tried to say this in our remarks, which is, We've said constantly we don't know what the future holds. We see what the market is saying. Who knows where the market is right or wrong. You have The Fed Chair who's talking about expect rates higher for longer and so we're prepared for a range of scenarios. When we think about giving guidance, we just try and choose a benchmark, which is the market, which is it's a scenario And pick your own scenario based upon what you all think and you can make your own determination what it will be, but we're just trying to give you both like a benchmark and what supports that benchmark, but also be clear that there are a range of alternatives out there which could make the result differ.

Speaker 2

Just trying to be as transparent as

Speaker 4

you can.

Speaker 11

No, I appreciate the further insights. That's very helpful. Thank you.

Speaker 2

Sure.

Operator

The next question comes from David Long of Raymond James. Your line is open.

Speaker 12

Good morning, everyone. I appreciate all the color on some of the deposit flows. But let me just ask it in a little different way. From a non interest bearing deposits Figure the number, the percentage has come down. How do you expect that concentration to change over the course of the next several quarters?

Speaker 4

Well, I wouldn't try to predict it exactly over the next couple of quarters. But I think if you look at we're about 32% in the quarter. And if you go back a number of years pre pandemic that was in the mid-20s. And so it could We've said this in other forums that you could see it start to trend towards there. Will it get down there?

Speaker 4

Unknown, But I think you'll see it trend down a little bit more.

Speaker 12

Sure. If you look back over, call it, the last 15 years since the great financial crisis, Rates have been pretty close to 0 outside of a brief period just before the pandemic. Do you see noninterest Is bearing deposits going back to pre great financial crisis levels for Wells Fargo or the industry where we had numbers there in the mid to high teens?

Speaker 4

I think that's almost impossible to predict.

Speaker 12

Got it. Okay. Thank you. Appreciate it.

Operator

The last question for today will come from Chris Kotowski of Oppenheimer. Your line is open.

Speaker 13

Yes, good morning and thanks for taking the question. I guess, I wonder how do you anticipate managing the duration of your investment securities portfolio from here? I mean, obviously, it must have extended out quite a bit last year. And we saw the mark to marks on it increase across the industry. But I noted kind of the HTM portfolio was down about 7% during the quarter.

Speaker 13

And I mean, do you anticipate running that down or and if so, how quickly does it run down if you do nothing?

Speaker 4

Well, I think obviously that's going to be a little bit dependent on rates and where rates go, given there's Some mortgages and mortgage securities in the portfolio in terms of the burn down. And I think we're going to continue to Be thoughtful as we have in the past around thinking about the size of the portfolio in total including the AFS and That's really a function of a bunch of things including how much loan growth we expect to see over a period of time. And then we look at all of the other constraints that we've got to worry about around liquidity and everything else and we decide on how much goes in And what the makeup of it is. But at this point, we feel comfortable with the Quantum and both in terms of the Size of the portfolio and the duration of the portfolio.

Speaker 13

Okay. So you anticipate keeping it roughly the size all things being equal or does it run down?

Speaker 4

I think we'll make that decision over time. I don't anticipate the portfolio getting much bigger from here over the next Few quarters, but I think we'll make that decision over time and then the burn down will be what it is based on where rates and natural maturities of the portfolio go.

Speaker 13

Okay. Thank you. That's it for me.

Speaker 2

All righty, everyone. Thanks so much. Appreciate it and we'll talk to you soon. Take care.

Operator

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.

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Key Takeaways

  • Wells Fargo delivered strong Q1 results with revenue up versus both Q4 and a year ago, expenses down, a CET1 ratio of 10.8%, and $4 billion in resumed share repurchases.
  • Credit quality trends remained stable but weakening, with delinquencies and net charge-offs slowly rising and the allowance for credit losses increased for a fourth consecutive quarter, particularly for office commercial real estate.
  • Consumer engagement stayed robust—card spending grew and digital adoption rose (500 K new mobile users, 6% more logins)—and the bank rolled out products like early payday access, Flex Loan small-dollar lending, and a Choice Hotels co-branded card.
  • Strategic priorities advanced, including bolstering the risk and control framework with ~10 000 new hires, simplifying home lending by exiting correspondent channels, and expanding ESG efforts with a $50 million NAACP grant and other housing and community investments.
  • Wells Fargo contributed $5 billion in uninsured liquidity to First Republic Bank to support the U.S. banking system, underscoring its diversified funding model and strong capital and liquidity positions.
AI Generated. May Contain Errors.
Earnings Conference Call
Wells Fargo & Company Q1 2023
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