Wells Fargo’s (WFC) 3Q17

Tim Sloan – President and Chief Executive Officer

The scandal continues to have an impact

“There is a little bit of impact on some municipalities they have put us on probation or just said they are not going to use as much for a period of time. Though we had some municipalities that have taken us off that because we’ve executed on everything we said we are going to execute over the last year….I can’t commit to you Matt that we’ve finished everything because things are still in progress but we are very far along but I think it’s also important to reinforce — our review of all of our policies, procedures, practices is going to continue for a long time meaning that we got to continue to ask more of ourselves everyday”

John Shrewsberry – Chief Financial Officer

On rates

“…the benefit from higher rates increased average loan yields 5 basis points in the quarter, the seventh consecutive quarter of increasing loan yields…We’ve not made material changes in rates paid on consumer and small business banking deposits within our retail bank with the majority of our peers also holding these rates steady. We have implemented some incremental deposits repricing for commercial and wealth and investment management customers as market rates have increased.”

Wells Fargo at Barclays Conference Notes

Tim Sloan – Chief Executive Officer

Loan losses are the lowest I’ve seen in my career

“As I mentioned, our loan losses in the second quarter were 27 basis points, it is the lowest that I have seen in my 30-year career in the company. If you take apart the various parts of our portfolio, the residential first mortgage portfolio is continuously performing incredibly well. As I mentioned, we had net recoveries in the second quarter, similarly the home equity portfolio, the second portfolio, I think the losses in the second quarter are 21 basis points, so it is again the lowest that we have seen that I can remember.

On the auto side because of the changes that we made in our auto business, we experience a slight decline in auto losses. I would caveat the expectations for the third and the fourth quarter in that, there are a lot of cars right now that are underwater in Texas and in Florida, and so there may be some issues there. We do not have a sizing of that right now, I don’t think anybody does. The credit card business continues, the losses have ticked up across the industry and up slightly for us, but it’s not something that we’re overly concerned about.

On the commercial and C&I and CRE side of the house again, some of the lowest in history and we really don’t see anything on the horizon that’s going to drive higher losses in that portfolio. There will be some impact I’m sure from the hurricanes, but we don’t believe at this point that it’s going to be significant. So overall, we’re in a very benign credit environment, I think you got to be careful when you are in a benign credit environment like this that you believe because you do want to believe that it’s going to continue forever, but geez while it lasts, it’s absolutely terrific. And I think it reflects not only a slow but steady growth in the economy, but also some good credit decisions that have been made by my colleagues over the last few years.”

Wells Fargo 2Q17 Earnings Call Notes

Timothy Sloan – President and Chief Executive Officer

Don’t really know what’s going to happen

“I mean the Fed has never had a balance sheet of this size. We’ve never been through a situation where they’re talking about reducing a balance sheet. We can talk about history all day long, but since we’ve never been through that, nobody knows exactly what’s going to happen. ”

A lot more transactions in CRE where we think the risk return isn’t there

“Having said that from time-to-time and again, this can be quarter-to-quarter or year-to-year there’s a fair amount of competition in stabilized commercial real estate projects, I mean there’s lots of liquidity out there. And so this quarter there just happen to be more transactions that we’ve looked at where we said, gosh, another risk return it just isn’t there, but I wouldn’t describe it, and that’s more based on underlying risk return in an individual transaction as opposed to stepping away from any region or any product type within CRE.”

John Shrewsberry

We became concerned about the underlying values of auto loan collateral

“I think a year-ago, we look at the market and what we saw in the market was the following. And that was that – remember that majority of our originations are for our used car loans. And so we saw – we would became concerned about underlying values of the collateral because of production levels by the industry. The number of cars that were coming off leases, we got concerned by the risk return in terms of pricing as well as term and we took that all into consideration in terms of ramping down our originations in improving the underlying quality. And on the short-term we gave up loan growth and so the metrics are not as good. We gave maybe some short-term revenue. But over the long-term, this is how we think about credit.”

Wells Fargo’s (WFC) at Deutsche Bank Conference Notes

John Shrewsberry – Chief Financial Officer

Optimism has faded a bit and confidence is lower

“we saw in the wake of the election and going through the fourth quarter a lot of optimism. It felt like it was going to produce real results as a result of the policy initiatives that have been all the rage….as a result of no real forward momentum on any of those fronts and frankly a little bit more of a sense of paralysis in terms of getting that legislative agenda through, my sense is that people are waiting and seeing. There still is a lot of optimism, especially at the small business end of things, but I think confidence is lower that these signature policy initiatives are going to come through….I think we are in a holding pattern from an optimism and momentum point of view until something breaks policy or legislative wise.”

Wholesale commercial customers are on wait-and-see mode

“so I think the wholesale customer, on average, is going to wait and see to figure out what the tax consequences, the trade consequences, the regulatory consequences are of deal activity or expansion activity.”

Long rates could stay low despite a hike in the summer

“…each time we’ve had a move in the front end, the long end has reacted by going down, and here we are in the 220 context, at least at the end of the day yesterday. So even if we get a move in summertime and a move at the end of the year, unless something changes on the policy side, which it could something that’s stimulative, something that’s inflationary, something that’s growthy, it feels like long rates could stay, could stay low.”

Yield curve may flatten

“something is going to have to change to not flatten if short-term rates come up, because there hasn’t been any stimulus for long-term rates to move up and stay up since the fourth quarter.”

US consumer not overburdened with debt

“I don’t think that we believe that today that the U.S. consumer is overburdened with debt, either with respect to cash flow in terms of the ability to service it, or with respect to the value of their assets given what’s gone on in home price appreciation over the time frame that you described. And in part I would give credit to the way mortgage origination has changed post Dodd-Frank in the modern era.”

Wells Fargo at Deutsche Bank Conference Notes

John Shrewsberry – Chief Financial Officer

There was a lot of optimism but that has diminished as there’s been little progress on the policy front

“Well, we saw in the wake of the election and going through the fourth quarter a lot of optimism. It felt like it was going to produce real results as a result of the policy initiatives that have been all the rage. And customers from different segments would have reacted or prepared for that differently from taxes to trade to energy or other highly regulated industries, healthcare, obviously. And as a result of no real forward momentum on any of those fronts and frankly a little bit more of a sense of paralysis in terms of getting that legislative agenda through, my sense is that people are waiting and seeing. There still is a lot of optimism, especially at the small business end of things, but I think confidence is lower that these signature policy initiatives are going to come through.”

The stock market still reflects a lot of optimism but the bond market is not showing us that.
You can see it in loans

And the stock market still reflects a lot of optimism, but the bond market is not showing us that. And you can see it in loans, first quarter it was pretty soft in C&I, second quarter is about the same I think. We have had a big reduction in outstandings in energy-related loans over the last year. So C&I overall would reflect that as well, but it’s still pretty flattish. On the consumer side, mortgages coming into the season, where more mortgage activity, more home buying happens, so with jobs where they are and rates where they are for that matter, my expectation is that, that will look pretty good. But it might have looked even better had there been more forward momentum. Autos, there will be probably be 0.5 million fewer autos, new autos sold in the U.S. this year. We have backed away from the lower tiers of credit in auto a little bit, but that isn’t raging quite the way that it was, 16.5 million cars is still a lot of new cars, but it’s not what it was a year ago. Card, for us, is a smaller business, but the consumer payment patterns and card fee type activity still seems actually quite strong, kind of mid single-digit growth rates, but balances tick down in the first quarter after a higher fourth quarter and the second quarter reflects normal seasonal activity. Commercial real estate still feels pretty full and there isn’t a lot of growth opportunity there rather it’s making sure market-by-market and property type by property type that things are where they should be. So I think we are in a holding pattern from an optimism and momentum point of view until something breaks policy or legislative wise.”

I don’t think folks are getting ahead of themselves

“Well, so I think the wholesale customer, on average, is going to wait and see to figure out what the tax consequences, the trade consequences, the regulatory consequences are of deal activity or expansion activity. That’s, for the reasons I mentioned, I think that they are going to wait it out. And I think the consumer housing isn’t getting ahead of itself, right. People are, in terms of first-time home buying, we are getting back into a phase where it feels like more of that is going on. In spite of recent stories, we haven’t seen that much cash coming out of mortgage borrowing activity. So, I don’t think folks are getting ahead of themselves there.”

Something is going to have to change to not flatten if short term rates come up

” I think something is going to have to change to not flatten if short-term rates come up, because there hasn’t been any stimulus for long-term rates to move up and stay up since the fourth quarter. I mean, we had a big realized move after the election, because I think people thought that there was going to be a great big tax stimulus, a lot of growth oriented initiatives, more borrowing going on from greater deficits, more borrowing going on from infrastructure, things that were going to put big strains on markets and none of that has happened. The Fed balance sheet could be a catalyst for something to happen. There is multiple schools of thought about that whether it happens – whether it results in higher rates and how quickly it results in higher rates. But clearly, that’s one thing that could happen that could increase the opportunity for people looking to earn more in the 10-year area.”

I don’t think that the US consumer is overburdened with debt

“I don’t think that we believe that today that the U.S. consumer is overburdened with debt, either with respect to cash flow in terms of the ability to service it, or with respect to the value of their assets given what’s gone on in home price appreciation over the time frame that you described. And in part I would give credit to the way mortgage origination has changed post Dodd-Frank in the modern era. There is the real effort made to underwrite exactly what a borrower’s resources are and what they can afford. And there’s consequences for people who originate in a different way than that.”

Probably an opportunity for banks to be higher returners of capital

” I do think that, in general, that this is probably true, that there will be banks this year – banks who haven’t been big returners of capital over the last few years who have earned their way into – built their capital level to a full level, gotten to something like a stable run rate of profitability. There’s probably an opportunity for some of those banks to have gotten more aggressive in their ask for return of capital this year. “

Wells Fargo 1Q17 Earnings Call Notes

Tim Sloan

Became concerned about used car values starting last year

“We saw and became concerned about where used car values and where competitive pressures were going back to the middle of last year. We have been very transparent about that. And we think that we have gotten ahead of any significant issues. And that’s why you are seeing originations be down in the double-digits year-over-year. And that’s not just something that happened this quarter. It’s been the last few quarters. I don’t know exactly where auto losses are going to go. They certainly could go a bit higher. But I think that the changes and the decision that we made over last 6 months has reinforced kind of the long-term view of how we manage credit at this company.”

John Shrewsberry

Tax reform and stimulus are inflationary in an economy with full employment

“I think the market was discounting for a while what the possibility was of meaningful tax reform, some form of infrastructure stimulus. And if both of those things get dropped on an economy with relatively full employment, that’s inflationary. And if that happens, there is a very reasonably expectation of higher long-term rates. ”

Stimulus still hasn’t occured so long term rates have fallen

“So, because that stimulus hasn’t occurred, it still may, but certainly is lower probability today than it was in November and December. They were back down in lower 10-year rates, lower mortgage rates than we were there for a while. And now we have to ask ourselves again, are we going to be lower for a while, lower for longer or are we still awaiting for a shoe to drop in for there to be a big backup in rates? “

Wells Fargo 4Q16 Earnings Call Notes

Wells Fargo’s (WFC) CEO Tim Sloan on Q4 2016 Results

Results for 2016

“But first I want to summarize our financial performance for the past year. We generated earning of $21.9 billion and EPS of $3.99 a share. We grew revenue by 3% including 5% growth in net interest income. Average loans grew $64.5 billion, up 7% and average deposits increased $56.5 billion, up 5%.”

Things have changed on efficiency ratio

“So, John I’ll start and then you jump in. I think Ken the efficiency ratio metrics that we set out at our Investor Day last year are really guidelines for us to operate in in the environment that we expected to turn the clock back to last May. We think that 55% to 59% range is best-in-class in the industry and the range that we’re expecting to operate in for the next couple of years. Things have changed clearly, and expectations have changed, but the efficiency ratio is a function of not only your expense rate, but also revenue growth and we’re hopeful that we’ll continue to grow revenue overtime as we did over the last year in 2016.”

John Shrewsberry

Lower point in the refi cycle

“Sure. The big sources, setting mortgage aside because we talked about it a little bit in the prepared comments and I think you just nailed it, we’re in that lower point in the refi cycle. So it’s really about getting after the purchase needs of our customers and then those refi that do come up, but applications are down across the industry and I think people expect that in general. So what that yields will depend on the path of where rates go, how jobs are formed and what the demand is for home buying.”

Wells Fargo at Merrill Lynch Conference Notes

Neal Blinde – Treasurer

Benefit from rising interest rate environment

“the result that we just had in the US Election where we had some really significant short-term increases in the yield curve, which are a real positive and because we had also positioned the balance sheet to still be modestly asset-sensitive, that’s an environment that we can benefit in as well”

Banks who do best aren’t the ones who speculate on interest rates

“And when I think about it, the banks that are most successful in doing that are not the banks that do the best job of guessing what the future rate path is going to look like, because no one is going to get that right all of the time. The banks who do the best job of managing through the rate cycle are the ones that don’t speculate on interest rates, because the most important tools for managing through rate cycles are the diversity and core strengths in the business lines and the ability of active management to identify the opportunities in changing markets and to take advantage of those opportunities in the business, in the core elements of the business.”

The biggest impact to capital ratios is what is going on in the RWA side of the equation

“And to give you a little bit of context around that, it’s very easy in common for people who are analyzing the industry and for us within the industry to focus on the numerator and our capital calculations. But the reality is, the biggest impact on the amount of capital we need to hold is, the denominator, what’s happening in that RWA calculation. And there is a lot within that regime that is in flux right now.”

Wells Fargo 3Q16 Earnings Call Notes

Wells Fargo & Company’s (WFC) CEO Timothy Sloan on Q3 2016 Results

Stumpf “retiring”

“This week, John Stumpf announced that he was retiring from Wells Fargo and the Board. He made this decision because he believed his leadership had become a distraction and, therefore, the best thing for Wells Fargo was for him to retire. This action demonstrates the dedication John has had to Wells Fargo throughout his 34 years with the company, including successfully leading us through the financial crisis and the largest merger in banking history.”

Senior management could have and should have done more

“Our senior management could have and should have done more. I’m fully committed along with the entire leadership team to fixing these issues and taking the necessary actions to restore our customers’ trust.”

How thinking about new incentive sceme

“I’m thinking about what are the drivers of developing those lifelong relationships with our customers. It’s about service. It’s about convenience. So think about our bankers being incented to provide good service, and so we’ll be measuring that on an independent basis, to think about our bankers being focused on helping our customers do more business, but being measured on product usage and activity as opposed to individual product sales and also about an overall growth in assets and balances and also think about it being much more driven to a team approach as opposed to just on an individual basis.”

Explanation for why they didn’t go outside for new management

“It’s a fair question. It’s one we’ve been getting. I think the board, by the changes that we’ve made over the last week and a few weeks is comfortable with and very supportive of the management team. I think over the last few years, really since the financial crisis, we had a huge opportunity years ago to reset the entire team and we selected the best folks that were available for all the roles. Since then, one of the great things about the company has been how we’ve been able to attract many senior leaders from outside the company, not only in our business lines, but also in many of our support functions, including corporate risk. So that’s already really happened from my perspective.”

Sorry if this wasn’t enough for you, Mike Mayo

“Mike, listen, I appreciate your question. And as one of the many stakeholders at Wells Fargo, I’m sorry that we’ve disappointed you. But we just spent 30 minutes talking about what’s going on at the company and we provided a lot of information. We provided new slides that provide a tremendous amount of detail on some of the retail sales practices issue and we deliberately and diligently walked through the performance of all of our businesses. And you know what, if that doesn’t satisfy you, I am sorry.”

John Shrewsberry

Loans grew 6% from a year ago

“loans grew 6% from a year ago and were up $4.1 billion from the second quarter. Commercial loans grew $1.9 billion from the second quarter on higher commercial real estate and C&I loans. Consumers loans were up $2.2 billion with growth in first mortgage loans, auto, credit cards, student lending and securities based lending.”

Non-performing assets only 1.25% of total loans

“Non-performing assets decreased $1.1 billion from second quarter with improvement across our consumer and commercial portfolios and lower foreclosed assets. Non-performing assets were only 1.25% of total loans, the lowest level since the merger with Wachovia in 2008. And for the first time this year, we did not have a reserve build.”

Efficiency ratio going to be at the high end of the range

“ There’s a lot of puts and takes there, which is why we usually revert back to the efficiency ratio of target because while we’re definitely going to have elevated compliance related costs and operational loss related costs, we’ve got a lot of initiatives underway, some of which you alluded to. Some are immediate and some are over the forecast horizon of a couple of years. And it’s designed to keep us in or below the high-end of 55% to 59%. So my guidance at this point is that we’re going to be at the high end of that range accounting for all of those things that we’re showing as levers in order to offset the elevated expense.”

Still in the process of refining implementation approach to DOL rules

“We’re still in the process of refining the overall implementation approach to be compliant with the rules. I think we’re still going to approach every client relationship with an emphasis on every client having a customized plan that guides their investment activity. We’re going to emphasize advisory solutions and continue to offer traditional brokerage for certain clients that include self-directed options. And we’ll be sharing more details as we get closer to implementation. I think with each ensuing quarter between now and later in 17, you should expect to hear a little bit more about the specifics of the implementation. But we haven’t reached the same conclusion in the same timeframe as the comparator that I think you’re referring to.”

Wells Fargo at Barclays Conference Notes

John Shrewsberry – CFO

Context around account opening scandal

“We commissioned a third-party consulting firm to conduct a review of all of the deposit and credit card accounts open since 2011 which included 82 million deposit accounts, and nearly 11 credit card accounts. Of these 93 million accounts reviewed, approximately 2% were identified as accounts where we could not rule out the possibility that an account was unauthorized. We included these accounts in a further review to determine if NE will do a refund. Based on that review, we identified approximately 115,000 accounts or 0.12% of the 93 million accounts examined, that had incurred fees where we could not rule out the possibility that they may not have been warranted. We’ve refunded a total of $2.6 million to those customers, an average of $25 per account. We take this issue very seriously.”

Terminations have taken place over the last five years

“The Wells Fargo culture is committed to the best interest of our customers and providing them with only the products and services they want in value. We’ve made fundamental changes as the result of our findings, including taking disciplinary actions such as terminations of managers and team members who acted counter to our values. These terminations were results of our own internal investigations as part of our internal controls and did not happen all at once but took place over the last five years.”

LIBOR has moved up a bit which is beneficial

” Treasury rates have remained under pressure in the long under the yield curve as decline since Brexit at the end of the second quarter creating a repricing headwind, particularly in investment securities. At the same time, three month LIBOR has increased approximately 20 basis points this summer which provides a modest benefit for us since we have more assets that reprice off of LIBOR than liabilities. Most of our LIBOR sensitivity is in commercial loans and long-term debt.”

We’re trying to put the right incentives in place

” So we’re trying to evolve the compensation model in a way where we create all of the right incentives for people to behave in a manner that’s consistent with our principles but not give up on our approach to satisfying all of our customers financial needs, to being relationship oriented and frankly, to cross-selling to deepen those relationships. And the intention is to do that through service, through training, through trying to make a great customer experience. As you could see from the size of the remediation, these bad practices were not a revenue generating activity. It was really more at the lower end of the performance scale where people apparently were making bad choices to hang on in their job.”

Issue first became news in 2013

“Well, this — as you may recall, because it was in the news in 2013 when we had started to see this pop-up and we had made some team member actions and that became news worthy in Los Angeles. It’s been an iterative process since then, culminating in the last year with the hiring of a consulting firm to run up an analytics exercise on this big body of data to really help us find where this is happening.”