Wells Fargo 4Q15 Earnings Call Notes

John Stumpf

Domestic economic conditions remain generally favorable

“while parts of the global economy have continued to experience stress and the markets have reacted negatively in the early weeks of 2016, domestic economic conditions remain generally favorable.”

I’m not going to call the economy robust, but we’re happy with where we’re at

“So far, Joe, with respect to consumers, they have not spent a lot of their gas savings so far. I think you’ll start to spend some more — and the thing for Wells Fargo is 97% of what we do is in the U.S.. And virtually everything we do in the U.S. is involved in the real economy. And there are pockets of strengths. You think of autos, you think of commercial real estate, you think of residential real estate, parts of ag, some middle market. And I don’t — I’m not going to say it’s robust, but we’re really happy we’re all-in in the U.S.. Let’s put it that way.”

Fastenal is a great company, but some companies are more impacted than others

“you’re going to have some companies because of what they are doing are going to be impacted more than others. And I can surely see where Fastenal, who — it’s a Midwestern company, I know that company, it’s a great company — will have some issues or would be saying the things they’re saying. That makes sense to me, given their product mix.”

Economy is more diversified than it’s been in past energy cycles and companies were more aggressive than in the past

“this one is different in a couple of respects. First of all, the economy in the U.S. is more diversified, so the communities in which energy plays a role is more diversified. Not true in every community but and we look at that. Secondly, companies this time around reacted much more quickly. I think in past recessions — in past corrections, there was more hope and prayer going on, for higher prices or a rebound. And so, they reacted quickly.”

John Shrewsberry

Credit quality remained strong

“Credit quality remained strong, with net charge-offs of 36 basis points of average loans and we continued to have strong liquidity and capital levels.”

$17B of exposure to energy lending

“Yes. I would — of the $17 billion — actually the first cut I would give you is upstream, midstream services, because I think that’s germane. And I’d tell you that’s about one-half upstream and one quarter services and one quarter midstream. And I think for that cut, we’ve separated out our investment grade component. So that what we’re focused on are really the — call it the BB and down, middle market, private clients.”

Outlook for housing is actually pretty strong

“our outlook for housing in 2016 is actually pretty strong. We’ve got a little bit more supply coming in. You’ve got more household formation. We’re going to have a four handle on unemployment before you know it and we’ve got low rates. So if that continues to be true, that’s probably a continued tailwind, in terms of some of the drivers of the estimation of embedded loss on the consumer real estate side of the loan portfolio.’

Criticized assets in the oil portfolio are 38% of outstandings. We’re stressing the portfolio for very low prices

“criticized assets today or at the end of the quarter in that portfolio are about 38% of outstandings. And there isn’t a simple way to dimension what the change would be in losses, based on some other future price income. As I mentioned to Betsy, we’re sensitizing our portfolio based on a continuation of very, very, very low oil prices, the context of where we’re today, rather than an upward sloping curve, in addition to scenarios that include an upward sloping curve and we’re comfortable with the amount of coverage that we have today. ”

We’re still in a time of elevated spend on several categories

“we’re still in an elevated time for what I would describe as compliance risk management, technology including cyber-related spend. We’re still in an elevated time of product development and sort of offensive related spend. And so, I think that that’s part of what guides us to this higher end for the time being.”

We spend a lot of time talking to regulators about what’s going on in the energy business

“it won’t surprise you that we’re very transparent, spend a lot of time talking with the regulatory community about what’s going on in energy. They are fully aware of how our portfolio works. But as you mentioned, at the beginning of that statement, it’s important to remember that we’re talking about 2% of a $920 billion loan portfolio. So they know that.”

MBA is calling for a decline in mortgage originations

“I think the MBA is calling for a $1.5 trillion or $1.6 trillion, down to $1.4 trillion mortgage market in 2016 versus 2015 and our folks seem to be in sync with that.”

Willingness to provide capital to energy companies has gone away

“Yes. So in terms of pullback and credit availability, I would expand the description to say, not just bank credit, but capital markets were actually, as you know, were quite open for energy companies very early in this. And that has gone away. My understanding is that smaller banks, regional banks, have only recently begun to really pull back from a willingness to provide credit. Maybe it’s this incremental leg down to where we’re on crude prices that has people generally believing that this could be where we’re for a longer time”

We’re being appropriately tough, but trying to help the customer work through this too

“I’d say, we’re all being as appropriately tough, to make sure that we protect the interests of the bank. We’re very — we’re working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue or two, to end up as the holder of a number of oil leases as a bank.”

Services companies are either in business or not in business

” Services companies I think are different than E&P companies, because for some of them it’s really not about a $5 band of oil prices or a $10 band of oil prices. They’re either in business or they’re not in business.”

It’s not robust, but it doesn’t feel like a manufacturing recession to me

“it’s as John described, right? It’s not robust. People aren’t super enthusiastic. But you’ve seen the growth in our commercial loan portfolios which reflects people doing business. And some — a lot of that is us taking business from other people, but in a significant portion of those cases, that’s folks borrowing money to do things, to buy things. And it doesn’t feel like a manufacturing recession to me.”

Lower oil prices are a net benefit to non energy companies

“certainly plenty of opportunity for a market-related contagion when one industry is suffering and other industries are starting — are trying to borrow. But in this instance, cheap oil is a net stimulative impact on U.S. growth. A WorldCom fraud was not beneficial for everybody else in the U.S. Telecom didn’t get cheaper. But fuel has gotten cheaper which is good for consumers”

Mike Mayo (Analyst)

~10% losses on energy portfolio if oil stays at $30 for the next year

“And just to clarify what you said before, if oil stays at $30 for the next year, you still feel that the $1.2 billion of reserves on the oil and gas portfolio is sufficient? Is that correct?”