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Wells Fargo (NYSE:WFC)

Wells Fargo at Sanford C Bernstein Strategic Decisions Conference

May 30, 2013 10:00 a.m. ET

Executives

John Stumpf – Chairman, President & CEO

Analysts

John McDonald – Sanford Bernstein

John McDonald

Good morning, everyone. Thanks for joining us today. My name is John McDonald; I am the large cap bank analyst here at Bernstein. We're very happy to have Wells Fargo joining us today. John Stumpf is Chairman and CEO and he has been a regular participant in this conference for the past several years. John, thanks again for joining us once again this year.

John Stumpf

It's a pleasure.

John McDonald

Perhaps we can start off maybe getting your brief take about the current operating environment, some of the pros and cons of what you are seeing out there right now.

John Stumpf

Actually, I see – I am more optimistic today than I have been in some time. We’ve been through – the country’s been through a lot the last five years. Everybody that owned a home five years ago, four years ago, three years ago, felt poor, feel a little better today. So I think housing is clearly on the upside of the curve. It’s not back to where it was, but – and housing plays a bigger role in the economy than just the economics around it. It has such a big influence on people's attitudes.

The stock market is up. There is an energy boom going on. You likely will become self-dependent or self-reliant on energy the next ten years, so lots of things, agriculture. On the other hand, jobs aren't where they should be and where they need to be.

But overall, people are more optimistic and that is good. When that happens, it’s a better environment for us. Even though rates are low, it makes it more difficult in our environment, especially on the margin side of the business, but all in all, I am more optimistic.

John McDonald

Speaking of the interest rate environment, as you said, it hasn't been a help to the revenue side, yet you and CFO, Tim Sloan, have said that you expect to be able to continue to grow net interest income. How do you do that in this kind of environment?

John Stumpf

Yes. So, for those who don't follow the margin every day, it's a difference between what we lend money at and what we take it in at, and a year ago, our margin was a 391. We ended – that was the first quarter of 2012, 2013 first quarter was 348, so we had quite a compression. But if you look at the net interest income represented by that margin, it wasn't that kind of a difference. It was flattish, kind of flattish, and we believe that we still can grow net interest income in this environment for a couple of reasons.

First of all, we have about – at the end of the first quarter, if you look at cash in due and Fed funds, about $160 billion, which is over 10% of our balance sheet, earning essentially nothing. And the reason it’s earning nothing is because we can't find the right risk rate ratio or combination to have us invest that at this time.

Secondly, even though the private sector is deleveraging, while the public sector is leveraging, we still think we can get more than our share of the loans. Last year, we grew loans by $50 billion. The net was $35 billion because we still have a liquidating portfolio that's exiting.

So, as we think about – if its low rates for longer, we still believe in that environment we can grow net interest income, but also recognize over half our revenues come from noninterest income, which is a huge advantage for us, fees for services.

John McDonald

But on the spread side, you're basically saying you have got some deposits coming in. That will drive some net interest income dollars even if it is dilutive to the spread?

John Stumpf

Correct. We don't manage the Company to the margin. We manage it around providing services and products that our customers need and help them succeed financially. But we believe in that environment, even with compression, we can grow the absolute dollars.

John McDonald

And then some of this $160 billion of cash, earning 25 basis points at the Fed, you’ll fade that into securities and loans over time as you see fit and I guess when you see…

John Stumpf

Correct, correct. And remember, we pay FDIC insurance on that, so it’s – I wish I was netting 25 basis points, John.

John McDonald

Yes, yes, and we have seen a backup in rates here. How opportunistic are you? Do you kind of dollar average into rate moves and things like that? How do you think about using that cash and deploying it?

John Stumpf

Well, I think one of the biggest risks today in our industry is not credit risk, it is interest rate risk, and how one does feather that in and how you make those choices is a big part of what I do every day and every week with our team, and a lot of us think long and hard about that; about what is the right thing, how far do you go out to the yield curve and how do you look at extension risk and all the other things, but we have a very active process within our Company to think about that as we have for years and years.

We have a bias towards being conservative and we’ve seen so many different rate cycles over the years that nothing surprises us anymore. And so, today, we could easily say – in fact, we’ve probably been wrong the last couple of years. We've had a lot of this stuff in the sidelines saying rates will turn around some time.

Well, sometime has not come yet, but my guess is – and I don't know what the Fed is going to do, but we have seen – yes, we’ve seen about a 50 basis point back, if you look at the 10 year. Just a few weeks ago, it was 170. Now, it’s 210 or 215 or something; I didn't look today.

John McDonald

So how do you see Wells Fargo performing relative to other banks when rates do rise? You have a big deposit base, you've got this cash, you've also got a good mortgage business. How do you see interest rate sensitivity?

John Stumpf

Yes, one of the things about Wells a lot of people don't either know or forget about is the fact that we have so many different businesses. First of all, 97% of our revenues are US based. We are the country's largest small-business lender, middle-market lender, commercial real estate, asset-based lending. We have, I think, the best consumer deposits, $1 trillion deposits, 15 basis points, more stores in the country than anybody else. We also are the leaders in ag lending and small – I guess I mentioned small business, but auto and mortgage.

So, we have a lot of different levers to pull and buttons to push and I think when rates – if rates do stay low, we’ve been in this environment now for five years. We have some structural things that will help us – improving credit, and I think that will continue. We still have a couple of categories that have above -the-cycle losses in them yet that will normalize.

Secondly, as we talked about, we have some expenses related to the downturn that we think will go away or become less, so that’s kind of a tailwind side. On the headwind side, low rates are not our friend. So…

John McDonald

But when rates do rise, do you expect your deposit base to be an advantage?

John Stumpf

Absolutely. In fact, I think one of the most undervalued parts of our franchise today is our deposit franchise. We put an enormous amount of effort into that and not only deposits, the kind of deposits you have. The fact that we have 15 basis points as cost is not – is less to do about our pricing in deposits and more about the mix. About half of our deposits are current accounts or checking accounts, either interest-based or noninterest-based checking accounts.

That’s a huge advantage. We have found that deposits that come with a primary checking account that relationship is 2.4 times more profitable than one that does not. CDs make up less than I think 4% of our deposits. So we are really in the primary transactional checking account deposit side, whether it be on the commercial side or retail side. When rates back up, I think you are going to see that part of our balance sheet and that part of our Company shine that you don't see today.

John McDonald

Proving stickier than some other…

John Stumpf

Absolutely. Thanks.

John McDonald

How about on the loan growth side? Feels like we are stuck a bit, still waiting for the loan demand, waiting for animal spirits to kick in. You've had some commercial loan growth, many banks have, but that line utilization doesn't seem to be there. What’s going to kick start this?

John Stumpf

Well, you're exactly right. I mean All things loans are top of mind for most in the financial services industry. Today, we’re sitting at $800 billion of loan and $1 trillion of deposits. So, it’s 80% loan to deposit, pretty high for some of our competitors. We have run this Company for decades at 100%, or 105% loan to deposit. That is the most efficient way for us to run our business, but we’re not going to make one loan if we don't think we can get repaid, so we’re going to make good loans. And I think what it’s going to take is for consumers to start to buy housing again. We’ve seen good activity on other consumer things like autos.

But on the commercial side, you're right; the utilization rates of our lines of credit that are outstanding are at 30-year lows. And what usually happens is when companies start to think about borrowing, they use their own money first, then they start to borrow against their lines. So, we first need to see them take down their deposit lines and start to shrink those and then they get into the borrowing. And we’re not seeing a lot of that yet.

John McDonald

Do you think that is just confidence about where the economy is going and what the Fed is going to do?

John Stumpf

Well, I think it is a number of things. First of all, companies have gotten a lot more efficient the last five years. There’s still capacity left in plant and equipment. I think technology has changed some of that. So, I think there’s a lot of things

But I do believe we will get back to those days some time. People will start to invest more. I think, as I mentioned earlier, this energy renaissance we have going on here could be part of the catalyst for that. So the economy is – it starts with attitude and confidence and then people start to invest and then they borrow and build things and we are the oil and the lubrication that makes all that happen.

John McDonald

And for Wells Fargo, you still have a sizable runoff portfolio? Is that…

John Stumpf

Right

John McDonald

You've got to work pretty hard just to run in place. You said maybe $5 billion, $6 billion a quarter that's kind of running? How long do you think that will be a drag?

John Stumpf

Well, every quarter, when I wake up, John, the first day of the quarter, I know we've got to do $4 billion plus in loans just to stay even. You are right. And that portfolio has worked down. And my guess is we have a couple more years left of that. The portfolio's in the $100 billion range, give or take, and it probably won't all run off.

Now, while we don't like the runoff. That’s either credit or businesses that we are no longer in, so it makes sense, even though it is part of the income statement. But that’s not an excuse. We still should be growing loans like we have in the last couple years.

John McDonald

Earlier in the cycle, you executed a few loan portfolio purchases. That seems to have dried up for you and for others. Just no one wants to part with their assets in this environment. Is that the problem?

John Stumpf

Well, I would encourage them to. We loved them. We did four deals last year. I think it was four for $20 billion or so. And, yes, the other sellers are either in stronger shape or have sold what they need to sell or – we’re still kicking a few tires, but our shoes are shinier than they have been in the past.

John McDonald

So, you mentioned credit continues to improve.

John Stumpf

Yes.

John McDonald

It feels like, in that environment, we could be in an environment, where the industry over earns a bit in terms of credit staying below normal for a while. Where are the areas of your credit – their charge offs are still elevated and have room to come down?

John Stumpf

Yes, if you look at our portfolio, about – these are round numbers – about $100 billion of our $800 billion loan portfolio is home equity. And home equity in the past year was about a third of our losses, so that’s still an opportunity there. Every time housing improves in value, the opportunity to charge off less there happens. In other words, that’s good news for that portfolio. And we also have some other first mortgage portfolios that are still elevated a bit. So, I think that is where we are going to see the improvements, but it would not surprise me if we would see credit improve from here and be under the – through the cycle loss rates for some time.

Just think about it, in the last five years, you make your best loans, after a bubble bursts, not going into one. So, if you behave yourself, when things get frothy, you have a huge opportunity to do really good credit after that, and you enjoy some of the credit benefits as you go through the cycle.

John McDonald

Yes. And right now, home equity loan is one-third of your losses.

John Stumpf

Yes.

John McDonald

And mortgage related is virtually half of your losses.

John Stumpf

Yes.

John McDonald

Room to run there. Correct.

John McDonald

Okay. How about on efficiency? You've always been a revenue-focused company. I've heard you make the joke revenue is king and queen. Yet, you and Tim Sloan talked a lot about efficiency productivity the last year or two. Where do you stand on this balance between revenue and expenses? How do they coexist at Wells?

John Stumpf

Sure. We have an efficiency ratio guardrail or goal of between $0.55 per dollar of revenue produced to $0.59 per dollar produced, which would put us at the top of the class for our size organization. We ended the first quarter at $0.585, give or take. And we have said publicly that we believe we can operate in this environment, even in a low rate environment because after all, that’s a ratio. Expenses divided by your – or your costs divided by your revenues, so both matter in that ratio.

Revenue still is king and queen. It is the whole royal court, but you can't produce those kinds of revenues, if your costs are outsized. And I actually think efficiencies within companies, if done right, actually help you accelerate your revenue growth, not inhibit revenue growth.

So, when we are out competing for revenue for business, if our cost structure is less than someone else's, we can help that customer and give them more the value than someone who doesn't have our same cost structure. And our costs tend to go up a little bit because of the quarter. The first quarter tends to be a little higher because we have some of the incentive comp and things that go through at that time, but we still believe the $0.55 to $0.59 is a comfortable place in which we can operate.

And we have taken costs out. The key is – the trick is how do you take costs out and not affect revenue? We don't think one of those ways of doing it is shutting down stores or branches as people would think of it because we still think – we still know 90% of new sales take place in the stores. Doesn't mean you can't have a different store format.

John McDonald

So, getting down to – from where you are today at the $0.58.

John Stumpf

Yes.

John McDonald

And getting down to the lower end of your range, $0.55, $0.56, will take some combination of the cyclically elevated costs running off, I assume.

John Stumpf

Perfect.

John McDonald

And then, perhaps a better revenue environment in terms of rates at some point?

John Stumpf

Both of those would be helpful, yes. And we still have about – last year, we had about, I think, $4 billion, $3.9 billion, of these environmental costs that are still embedded there; foreclosures, litigation, other things that won't go to zero, but they should come down.

On the other hand, four years ago, we had 116 million square feet that are 6,200 stores occupied plus our 3,000 other mortgage and other banking stores, our offices and facilities for our 275,000 team members. Today, that’s down by 16 million square feet, so we’re producing more revenue in less space. That’s a huge opportunity. There are still nickels and dimes and pennies in the corners like that. In addition to the environmental cost that will help change that – keep at that ratio, or move it one way or the other, but also the denominator matters. Revenue does matter in that.

John McDonald

You get a lot of questions about the mortgage business. It has been fantastic the last couple years. Obviously, the mortgage origination revenues have been very strong and you have said that you expect that to inflect a little bit the gain on sale margins, probably not sustainable at this level and the volumes you expect to come down. How do you see Wells managing through that process and handing off to either something else within the mortgage business or something else within the company?

John Stumpf

Yes, clearly, mortgage is an important business. We love the mortgage business. For two-thirds of Americans, it is still the biggest asset purchase they’ll ever do. It is part of how the way Americans save and it changes families.

So, to be in the consumer business, we think you have to be in the mortgage business. We like it that we love that business, but we also love the other 89 businesses we are in. And in the mortgage space in the last couple years, 75%, 80%, 67% of our business, depending on the quarter, was refinances.

The other part was purchased money. As we get to the closing innings or the later innings of the refinance business, the purchased money business will become a bigger part of the business. It might be overall less because refinancing was such a big part, but we kept our relationships with our builders, our realtors. We have 10,000 people who are Wells Fargo team members, who go out and do this. We also have 30,000 some personal bankers in our stores who refer business in.

So, the purchased money business is really in our wheelhouse, but if it is less overall, and it could be, than what we have with the refinance business. We also have figured out how to adjust our cost structure, such that we can quickly react to changes in the business.

But our culture of our Company and the way we do business, it's about serving customers. We work together. And if it’s not mortgage – its mortgage today, it might be credit card tomorrow. It might not be an even tradeoff and might not be a quarter-by-quarter tradeoff, but if we provide great services and products, the rest seems to take care of itself.

John McDonald

Even within your mortgage line, historically, you had pretty good balance between…

John Stumpf

We still do.

John McDonald

Origination and servicing. And that’s skewed a lot now towards origination fees, but I assume that that balance – you expect that to shift back to servicing as that becomes more of a…

(CROSSTALK)

John Stumpf

Absolutely, Absolutely. So again, for those of you who don't know us as well, we do about one in five mortgages in America, 20% or – it depends – I think it was 22% at the end of the first quarter. And we do about one in five or so on the servicing side. And as interest rates rise, we do fewer originations, but the servicing business becomes more valuable. And just the opposite happens when interest rates drop. The servicing business tends to refinance and you lose some of that, but you do more origination, so it’s a wonderfully balanced business within itself.

Another part of that business, we do a ton of business with customers who we service loans for other than the mortgage. It’s a great source of cross-sell and other products and services.

John McDonald

And some investors do worry about Basel III treatment of the mortgage servicing asset. It is valued at a low level today. But as rates rise, that probably will be more highly valued. That will help your income statement, but some worry about the treatment of that on your capital. How do you think about managing that asset in a capital-friendly way?

John Stumpf

Correct. So, we are given only so much room under the MSR as valuation as it counts towards capital. We’re well within that right now and we have some room within that because we put our DTAs against that. But we’re thinking about options on how to deal with that, a potential put for the asset to the economic interest in the asset or selling some of the financial interest in that. There are ways for us to think about that in a capital-efficient way. But whatever we do there, it won't affect our commitment to the mortgage business, either as an originator or as a servicer.

John McDonald

So last year, at your Investor Day, you gave some – expanded your return on asset kind of guidance for the range that you expect to shoot for, 130 to 160.

John Stumpf

Correct.

John McDonald

You are right about in the middle of that right now, 150. How do you feel about that target today as we sit here and look at the world?

John Stumpf

Yes, it still feels like the right guardrails on that. I mean could it go above that or below that? Sure, but we’ve been in this low rate environment now for some time. We’ve had elevated environmental costs and we’ve been through the largest merger in US bank history. We paid for all of that as we went along.

And to be able to do that and be sitting in the 149, 150 range – remember, from 2000 to 2007, probably the best days the old Wells Fargo had, we – our ROAs were not much; they were the 165s to 170s. So, we are closing in, even in this low rate environment, on – to the numbers that we had during our best times.

So in other words, I think the Company today is better positioned than any of the three Wells Fargos I worked for – a smaller regional bank, a larger bank when Wells and Norwest merged, and now this one is by far the best, has the best brand, the best customer base, the best diversity, the least risk across the board. And it's very much still like a regional bank in its culture, in its thinking. I still call on customers, John. When I am done here, I will be calling on a customer this afternoon. I will be at a customer event tonight in Charlotte. I still talk to a team member or two unannounced every day. That part has not changed.

John McDonald

How do you fit that in with what’s going on in terms of the too big to fail debate? Where do you stand on that? And how much do you worry about incremental capital?

John Stumpf

Yes.

John McDonald

Because how that ROA translates to your ROE…

John Stumpf

Sure.

John McDonald

Will depend where Wells gets put on the capital tax?

John Stumpf

Well, I've said publicly, I don't think any company in America or any bank surely should be too big to fail. Failure is as an important part of the free enterprise system as success is. And I don't think Wells is too big to fail. We went through the worst economic downturn in our generation and made an operating profit every quarter. In fact, we had a sizable profit the time, when 2008 when everything had hit.

That being said, I understand why policymakers and regulators and legislators don't want to be put in a situation they were put in in 2008. And they’ve dealt with that in large part. I mean Title I and Title II of Dodd-Frank deals with that. Capital levels are way up, even our capital levels – we held a lot of capital. We’re up 40% from when we were, a much higher level of capital. So, I think if we just give this stuff a chance to work and see where we all are. I hope we can come to that kind of resolution. We're all on the same page.

Now, with respect to capital, liquidity and leverage, I’m not against – first of all, I’m not against good, tough regulation, with regulators having real tools and teeth to take care of the wrongdoers. I get that. Strong capital and strong balance sheet is critically important. Liquidity – most of these companies failed because of liquidity, not because of capital.

But the other hand is, at some point, enough is enough. And if you go over, then it becomes a detriment to lending and to helping the economy and pricing and so forth. So, I want sufficient capital, but not – or even – I don't even care if it's 5% or 10%, whatever, I mean, we can argue about what the exact number ought to be, but I don't want to go over the top in this. There’s also a cost of having too much capital.

John McDonald

And there clearly are going to be some buckets. The biggest bucket is going to be for the big global universal banks that look like they’re going to have to be in the category of, at least for now, 10% on a Tier 1 common. Sometimes it is hard to know how to bucket Wells Fargo. On the one hand, you don't have the globality and complexity of a big universal bank, but you do have this $1 trillion handle on your asset size. How should investors and how do you kind of think about where to fit Wells in on this scheme?

John Stumpf

Well, that is an interesting question because we are – we’re almost in a category of one. I mean we happen to be large, but we are US-centric. Our DNA is much more of a regional bank. We think ourselves as a local bank. Even though we do sophisticated things for large corporations and we’re dominant in the middle market and we love that business, we tend not to be global. We tend not to be interconnected. We tend not to be – alter the things, where your complex and so forth, but we are sizable. So, we understand that part of it.

So, where all that comes out I can't tell you because we don't know the end yet, but I can tell you this. We do spend a lot of time with those who have influence – regulators and legislators – on this process. Actually, regulators, about making our points known and about the value that we add to the economy, like all banks add to the economy and why we don't want to go over the edge on any one ratio. I think of these ratios as a mosaic of regulatory influences that hopefully we find the right answer and not an answer that hurts the long-term growth of the country.

John McDonald

So, for now, it seems like you’re going to target at least on the Basel I – Basel III Tier 1 ratio 8% to 9% and you said maybe a capital payout ratio of 50% to 65%?

John Stumpf

Correct. So, in the US, we’re at 7%. Everybody's at 7% – 4.5% plus 2.5% gets you to 7%. We had a 1% SIFI buffer. And I actually think Basel got that pretty right, as opposed to wrong, where they were able to calibrate different risks, based on size and complexity and connectedness and so forth and we were at the low end, 1%. Some were at the high end, 2.5%. That took us from 7% to 8%. And then, we have a self-imposed buffer. At the end of the first quarter, we’re at 8.39% on that. So, we are building into our self-imposed buffer and that feels about right to us. Again, I can't – I don't know what’s going to happen on the liquidity side – .

John McDonald

On the US side of Basel?

John Stumpf

Exactly.

John McDonald

Hopefully, we’ll know by the end of this year.

John Stumpf

Hopefully, we'll know then.

John McDonald

Okay. And in terms of the dividend, seems like, over time, maybe 30% to 35%, you might be sneaking up a little bit on the 30%. Do you see the Fed 30%, kind of is that a soft cap, would you say, on what they’re looking for?

John Stumpf

You’ve mentioned just in your question before 55% – 50% to 65% payout ratio is what we are targeting now and we think that’s – what we're trying to do is a couple things at the same time – return capital to our shareholders who have been very patient and we appreciate each one of them.

And then, secondly, also anticipate and build our capital structure within the Company that will make sure that we meet all of our regulatory requirements. So, we were thrilled that we’re able to go from $0.22 a quarter last year to $0.25 the first quarter and then $0.30 this quarter. And I think dividends and buybacks both are important. I think they say something a little different and, yes, we are slightly above that 30%.

The Fed – we work very closely with them. We have a good relationship with them. We don't always agree, but we always are agreeable. I mean we have interesting discussions. And I give them a lot of credit for being thoughtful as we go through our CCAR process. And I don't know that $0.30 – if you go above $0.30, you can get some extra scrutiny, which is fine, but I think this is an evolutionary process.

John McDonald

And then, in terms of other uses of capital, obviously, deposit-based acquisitions are out of the question…

John Stumpf

Yes.

John McDonald

Given you're at the cap there. Is there any other role for M&A to play at Wells Fargo? Where would that be?

John Stumpf

Well, you're right, John. On the deposit side, which is the large capital requirement side, that’s where the big dollars are spent. We are – that’s just not on the burner these days.

We like the portfolio businesses we’re in and we think we have a complete suite of products and services that we can provide. There are some products and services, where we are sub-optimized or not as – we’re not as deeply sold into our customer base as we should be.

Credit card would be one of those. We have 10% or 11% of the deposits in the country and 3% of the card outstandings. And only 34% of our customers carry our credit card. Every one of our customers has a credit card. They probably have two or three of them, so a big opportunity there.

(CROSSTALK)

John McDonald

Would private-label card be inconsistent with Wells' model or is that something that is an asset?

John Stumpf

It wouldn't necessarily be on the top of the list. What’s on the top of the list there is to get more of our customers who call us their bank to carry our credit card. I mean that is – as much from a payments perspective as anything else.

Wealth, brokerage, retirement – again, you look at our deposit domination, you look at our loan domination and you look at where we are in there, and we have huge opportunities in that business.

I like the insurance distribution business. When you make more car loans and more home loans and more small business loans, you have this ocean of opportunity to cross-sell there. So, those are areas where if we could find the right opportunity to fit in with our culture, to jump a curb, that would be interesting, possibly asset management.

But, again, don't have to do any of these things. We’re just as happy to keep going the way we are going right now, but sometimes opportunistically you see something that if they fit and helps them and helps us and helps customers.

John McDonald

Although, you’re not in the bank acquisition market right now, are you surprised with the revenue pressures on smaller banks, some of the regulatory changes there isn't more bank M&A?

John Stumpf

Yes. It has – I would have thought you would have seen more activity by now. Sometimes that’s about pricing and sometimes it’s about time in the cycle. And so, right – it would not surprise me if you saw – if we saw that pick up a bit.

John McDonald

Talk a little bit about the core businesses?

John Stumpf

Yes.

John McDonald

You mentioned in a recent presentation your biggest fee income contributor is actually the Wealth Management business and I think some folks are surprised to hear you have the third-largest retail brokerage distribution. What do you see that’s attractive there? How is that helping you grow your business if you’re thinking about Wealth Management?

John Stumpf

Yes. One of the wonderful parts of our Wachovia merger was we had – the old Wachovia advisors and I’ll call Wells Fargo advisors – we have 15,000 team members across the country, who either office in one of our banking stores or office in their own store and provide wealth services and so forth to customers.

As customers borrow less are more invested in their savings for their retirement, what a great platform to have. So, we think that’s an increasingly important part of our distribution and accountings that we provide to customers. So, all things in that area, whether it be trust or trust and investment income, which is the largest noninterest income provider, it is a huge opportunity for us.

Many customers who call us their bank keep their wealth someplace else. And we have a ton of money sitting in our community bank that we’re working closely between the community banks and our brokerage retirement folks to get those customers connected. And it’s part of that plural pronoun working together – us, we and ours – that makes that happen. So, I think there’s big opportunity there.

John McDonald

As always, there's some interest here in your investment banking and your build out there and kind of what are your aspirations and your vision for what you would like the investment banking business at Wells to look like five years from now?

John Stumpf

Today, Wells is the nation's largest middle-market lender, the largest commercial real estate and we do business with most of the Fortune 500. When we sit down with them, it’s helpful to them and helpful to us to have a suite of products that can help them succeed financially. One thing that we have now because of Wachovia, we have investment banking professionals and activities that we did not have in that way before.

In the first quarter, I think it was – the number was 89% of the customers that we did investment banking business with had other products and services with Wells Fargo and the average customer I think had something – 15 years with us. So, this is not about something with a vastly new set of customers, this is doing more with existing.

And it's a – it's about flow business, it’s about a customer that we know. And we view investment banking really as a product. We don't view it as a standalone business. It's a – if we’re already the largest lender to a company and they want to issue debt to buy a – to redo their balance sheet or restructure it or buy someone, who better to issue their debt than us? And plus, we have these 15,000 retail brokers out there who are dealing with retail customers, so it is really a win-win.

John McDonald

The theme in some of the questions that are coming in about size I think given the regulatory focus, some of the themes here, how big is too big? Is there any evidence that there are benefits to scale, when you think of your business, whether it is efficiency capital, ROE? And is there a point, where you just feel like you’re too big, either for your own good or for the regulatory focus?

John Stumpf

So, today, we have – just so everybody knows where we are in size. We have 275,000 team members; 97% of them are in the US. We have 6,200 banking stores. We have another 3,000 stores or so that are not banks per se. So, we have about 9000 in the distribution side.

And you know I’ve talked today a little bit about our market position in different products and services. Incidentally, we don't set out to be number one in anything. If we get there because we're doing a good job, great, but I don't have league tables on anything that – because the size has never been the arbiter for us.

The Company today – I’ve worked for three Wells Fargos. The one was called Norwest. The second one was called Wells Fargo. It was 15 years ago. And now, this new company is four and a half old. It’s by far the best company I have worked for; it has the best products and services, the best people, the best distribution. It has the least risk because it has the most diversity of revenue and diversity of geography and the diversity of types of business.

We run this – even though I’m the CEO, we’re very collaborative. I’m very active in the business, as the rest of us are. We don't get caught up in hierarchy or organizational structure. We try to organize the Company around serving customers.

And I find that, today, the scale we have is an advantage, not a disadvantage. It helps us in serving customers, especially millennials, who bank with us many times using technology. Their distribution points might be ATMs. They want distribution, where they live, where they work, where they recreate, where they travel. That’s true not only for millennials, but for all of our customers.

Also, if you look at how technology has changed the so-called backroom, where you don't have as many plants that do check processing at the end of the day. You do electronic cash letters and so forth. It’s changed a lot, such that it is all about service now.

So, I love the size we are. I love the fact the distribution we have. And now, it’s a matter of doing more with existing customers. That’s – the depth and the cross-sell really is the journey we've been on for a long time and we’re still in the early stages of it.

John McDonald

And to the extent there’s just a tax on getting bigger in the form of higher capital, do you think about plans of how you would address that if that continued to be the case?

John Stumpf

Well, I surely get that part of it, and there’s already – I mean I already have a 1% tax, if you will, because we did get a 1% –

John McDonald

Global SIFI

John Stumpf

Global SIFI. And we’re able to make that work. Our ROE in the first quarter was 13.5%. And now, I don't know, where all of this goes. But, today, the way it is, it’s very workable.

John McDonald

All right. There’s one or two questions in here about auto lending, which has been relatively strong.

John Stumpf

Yes.

John McDonald

It’s a big business for you. What could derail the boom in auto lending? Do you worry about auto lending credit quality?

John Stumpf

Well, the credit quality has been unbelievable in that business. A couple reasons. When you're in the auto lending business, you are a little bit in the used car futures business and used cars has been pretty strong, especially on the leasing side.

Secondly, people bought a lot of their audios in the past using their home equity line. Today, they’re using the auto. And for the most part, it has been a good competitive set. Those offering the products and services have been rational in the business.

If that becomes irrational, either on the term side or the pricing side, we will go do something else. And we’re always thoughtful about that. But autos have been – it‘s been a really strong part of the US economy. I mean we’re probably going to sell 14 million or 15 million new autos this year. That’s a very, very good year.

John McDonald

There’s two pieces of unsettled regulatory business that are coming up here a bit in the questions. On the OLA, living wills…

John Stumpf

Yes.

John McDonald

If you did have to issue some additional debt, how much of a concern would that be? And then, also on the liquidity ratios there, the mix of your liquid assets would have to change and would make you have to hold more of the liquidity that you currently have on the balance sheet instead of reinvesting it?

John Stumpf

Correct. So, OLA is an acronym for Orderly Liquidation Authority as part of Title II. And the theory there is that if an operating subsidiary goes into – gets in trouble, that there would be monies available at the holding company, as bail-in capital to support the operating company, while the FDIC sorts it all out and the taxpayer would not be at risk.

And, again, here we’re much more like a regional bank, a community bank. Most – a good share of our funding comes from deposits. We don't have a lot of debt at the holding company. So, I don't know where all that will come out.

We are – I’m hopeful that companies that have a lower risk profile, that have more of their balance sheet funded by deposits will not be punished by the use of a blunt instrument that says “More debt at HoldCo is inherently valuable to OpCo,” because not all operating companies are the same. Actually, I just don't know where that is all going to turn out.

Now, with the liquidity ratio, again, I don't know where all that will come out and I don't know what the Fed might do in addition to whatever Basel – the so-called CLS versus the LCR, liquidity coverage ratio – but, again, we’re sitting on tons of liquidity and I probably don't need more liquidity today.

John McDonald

In the last 30 seconds, I’m not giving you much time here, but your commitment to the branch store-based model and how you’re just tweaking that as opposed to abandoning that model in 20 seconds.

John Stumpf

Yes, we have about 6,200 stores. We still believe stores are important. The reason we believe they are is because our customers tell us. Even people who are actively online still use stores once in a while. Doesn't mean we need to build the stores of yesterday, which is 5,000 square feet with a full basement and so forth.

We did our first what we call neighborhood store in Washington, DC, called the neighborhood store. It’s 1,000 square feet. It’s an ATM vestibule at night, and it’s a full store during the daytime that uses technology and doesn't have paper. And so, it’s another way to give customers what they need, keep your distribution out there, but in a different cost structure. It’s about 40% cheaper.

John McDonald

Makes sense. John, thanks so much.

John Stumpf

Thank you, John.

John McDonald

Appreciate your time.

John Stumpf

My pleasure.

Question-And-Answer

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