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. “