Wells Fargo Management Presents at Barclays Global Financial Services Conference (Transcript)

| About: Wells Fargo (WFC)

Wells Fargo (NYSE:WFC)

Presentation at Barclays Global Financial Services Conference Call

September 9, 2013 9:00 a.m. ET


Tim Sloan - Senior EVP and CFO


Jason Goldberg - Barclays

Jason Goldberg

Good morning. I think I know a lot of you in this room. For those that I don’t, I’m Jason Goldberg. I cover the U.S. large-cap and mid-cap banks for Barclays. Thank you once again for coming out for our financial services conference. We do this every year, and every year it works out to be a big success.

On a lot of the seats there are little devices, audience response system. We kind of pioneered it in terms of the U.S. financial services conference in September of last year. I think a lot of people kind of mimicked it over subsequent conferences. I still think the way we utilize it is a bit more unique than them, and we’ll continue to do that. So after the formal presentations, we’ll open it up to the audience for some questions throughout the day, and let management address the ones that are relevant.

There’s probably not a better company to kick off a financial services conference than Wells Fargo, given the fact that their businesses span really the bulk of financial services, benefitting from a lot of the secular trends that the industry offers, which also allows it to kind of reduce some of the cyclicality that comes with interest rates or volume-sensitive type businesses.

One of the things we also love about Wells Fargo is just the consistency it delivers year in and year out, really since we started following the company over the last 18 years or so. Highly consistent results. I used to say there’s 80 businesses kind of working in tandem with each other. It’s now up to 90, so I guess that’s one minor change, but also it just increases the diversification and adds to the growth opportunities afforded to the company.

We’re very pleased to have Tim Sloan, chief financial officer, and Jim Rhodes, director of investor relations, with us today. With that, I’ll turn it over to Tim.

Tim Sloan

Good morning everybody. Jason, thanks for that thrilling introduction about our excitement at Wells Fargo. I really want to thank everybody for their interest in the company.

The presentation that we’re going to go through in a minute includes certain forward looking statements regarding our expectations about the future. A number of factors, many that are beyond our control, could cause actual results to differ materially from management’s current expectations, so please refer to the appendix for information regarding our forward looking statements and where you can find more information about our risk factors.

At Wells Fargo, everything we do starts with our vision, to satisfy all our customers’ financial needs and to help them succeed financially. It puts our customers first, it’s the heart of our culture, it’s behind every product we design, every service we offer, and every dollar we earn. It unites all of our businesses, as well as all of our team members. It’s just as relevant today as it was when it was written over 20 years ago, and it will continue to guide us over growth and success for the decades to come.

Wells Fargo has over 70 million customers, and we serve one of three U.S. households. We’ve created a broad distribution system to serve these customers when, where, and how they want to be served, whether it’s in person in one of our stores, over the phone, at an ATM, online, or by mobile. This multichannel system provides our customers convenience and contributes to our growth as customers who use more channels tend to buy more things from us.

With over 9,000 stores and offices in all 50 states and over 12,000 ATMs, we have more stores and serve more communities than any other U.S. bank. Over 22 million customers actively bank with us online, and over 10 million customers actively bank with us via mobile, which is our fastest-growing channel.

Over 80% of our deposit customer interactions are self-service. Most customers open their first account and establish their banking relationship with us in a store. That’s why we’ve invested in our store network that provides a Wells Fargo retail store or an ATM within 2 miles of nearly half the population of the United States, including small businesses. That’s a very powerful advantage for Wells Fargo, and it’s also a very powerful advantage for the communities that we do business in.

By focusing on our customers’ financial needs, we’ve grown market share across a variety of products. We’re the number-one small business lender, and we’ve been that way for the last 10 consecutive years.

One in 10 small businesses does business with Wells Fargo. In the first half of the year, we extended over $9 billion of net new loan commitments to small business customers, which is up 25% from a year ago.

We’re the largest auto lender in the country, and generated record auto originations in the second quarter, up 9% from a year ago, while maintaining disciplined underwriting. We’re the largest residential mortgage originator and servicer, funding nearly one of four mortgages that were done in the United States in the second quarter.

We’re also the number one lender to midsized companies, and we’ve grown loans to middle-market commercial customers for the last 12 consecutive quarters. And we’re a leader in serving our customers’ wealth management and brokerage needs, as we’ve focused on growing asset base relationships. Retail brokerage managed account assets grew 19% in the second quarter, compared with a year ago. We are the third-largest full service retail brokerage.

Our balanced business model, which does not rely on any one product or any one service, has enabled us to generate consistent earnings growth over the last few years, in particular in environments that have been fairly volatile.

This benefit is also reflected in our second quarter results and the fact that we’ve achieved 14 consecutive quarters of earnings growth, and the last nine have been consecutive quarters of record earnings.

Our strong performance in the second quarter is demonstrated in this broad-based momentum. We grew pre-tax, pre-provision profit by 3% from a year ago. We earned a record $5.5 billion, which was up 19% from a year ago, and we earned $0.98 a share, which was up 20% from a year ago.

Our core loan portfolio grew by $42 billion, which is up 6% from a year ago. Our strong deposit franchise, which will become even more valuable in a rising rate environment, generated 10% deposit growth from a year ago, where we reduced our deposit costs by 5 basis points. We grew ROA by 14 basis points to 1.55%, and we grew ROE by 116 basis points to 14.02%.

Our consistent performance reflects our strong revenue diversification, with a 50-50 split between spread and fee income, as you can see on the slide. Trusted investment fees were the largest fee category in the second quarter, as they have been for the last five quarters.

We’ve outperformed our peers on fee income to average assets in both the second quarter and over the past 10 years, reflecting our diversified sources of fee income. This outperformance demonstrates our consistent focus on earnings more of our customers’ businesses.

In the second quarter, we achieved record retail banking cross-sell of 6.14 products per relationship, or per household. Wholesale banking grew to 6.9 products, and wealth brokerage and retirement cross-sell increased to 10.35 products per relationship. And our return on assets and return on equity in the second quarter were among the highest in the industry.

Our strong second quarter results were also reflected in our increasing capital ratios. Our tier one common equity ratio grew to 10.71%, up 32 basis points from the first quarter. Our tier one common equity ratio under Basel III increased to 8.62% in the second quarter.

Because of our strong earnings growth, we grew capital even though changes in OCI negatively impacted the ratio by 24 basis points. We expect reductions in unrealized securities gains when rates rise, and this is one of the reasons why we continue to target a capital buffer of approximately 100 basis points that would get us to 9%. Absent another significant backup in rates, we currently expect to achieve this buffer over the next couple of quarters.

And while our consistent results over time demonstrate the benefit of our diversified business model, I want to spend a little bit of time today addressing how the current transitional economic environment may impact some of our key businesses in the near term and over the long term.

While the timing of the challenges and the benefits during periods of transition can vary, the success across many cycles is having a diversified business model and consistent risk discipline. The unique character of this cycle has been a prolonged period of low rates, followed by a sharp increase in long rates.

The 10-year Treasury rate has risen 91 basis points since last year, and the 10-year is also up 38 basis points from the end of the second quarter. This has naturally caused mortgage applications to slow, with the MVA refinance application index down 63% from its peak in early May.

The benefit of our diversified business model is that it provides opportunities to generate earnings growth over a variety of rate environments. Some of our businesses naturally do better in lower rate environments, and others benefit as rates rise. The timing of these benefits may vary and differ, but rates rising for the right reason - and that’s a slowly improving economy - is beneficial for our customers and it’s beneficial to Wells Fargo.

Another closely watched metric in this environment is loan growth. And while the economy continues its slow but steady improvement, lending overall continues to be relatively modest. However, we’ve announced some loan portfolio acquisitions in this quarter, which will benefit our growth, and we’ll talk a little bit more about those later.

Finally, the continued improvement in home prices has been a big economic driver this year. The strength in the housing market was a positive catalyst to our results in the second quarter in a number of ways, including home purchase volume, lower environmental cost, reduced repurchase build, and improved credit quality. Assuming the housing market continues to be strong, our credit performance should continue to benefit.

You’ve heard me say many times that our focus is not on our net interest margin, but on growing our net interest income over time. In the second quarter, we grew our net interest income while our NIM declined, as we benefited from securities purchases, lower funding costs, higher variable income, some loan growth, and the benefit of an extra day in the quarter.

On this slide we show that our NIM has declined 81 basis points since the first quarter of 2010, 64 basis points, or nearly 80%, of that decline of this NIM compression was driven by a $206 billion increase in our deposits. These are valuable new deposits, and the new customers and deepened relationships with existing customers will help drive future growth in lending and fees as we remain very focused on cross-sell, as I talked about earlier.

The remainder of the decline in the net interest margin was due to repricing and the growth of the balance sheet. And remember the slide in this presentation showing our EPS growth for 14 consecutive quarters. We achieved this growth during the same period that our net interest margin declined 81 basis points. This is why we don’t manage the company based upon the NIM.

Our diversified model gives us many ways to be able to grow EPS, even if our net interest margin is declining. However, given the increase in rates that we’ve experienced in the last few months, we’ve opportunistically purchased approximately $15 billion of securities during the first two months of this quarter. That said, we still expect pressure on the net interest margin in this environment, in part driven, again, by our continued deposit growth.

We have over 90 different businesses, and while we’d like them all to grow, the diversity of our revenue enables us to make the right long term decisions and remain disciplined in managing risk, even though some of these businesses will naturally grow faster than others, depending upon the economic and interest rate environment.

Our results in the second quarter demonstrate a strong momentum across many of our businesses, including deposit service charges benefitting from seasonality and account growth, trust and investment fees on strong investment banking fees and higher retail brokerage asset-based fees, credit card fees reflecting credit card and debit card account growth and higher purchase volume, and commercial real estate brokerage commissions, with strong activity in both private and public deals.

While our mortgage business continued to generate strong results in the second quarter, we expect mortgage revenue to decline in the third quarter, with declines in mortgages and originations. This slide shows our mortgage originations and gain on sale margins over the past 14 quarters. As you can see, the gain on sale margins reflects market demand and industry capacity, with margins typically rising as volume increases.

With the increase in mortgage rate reducing refi volume for us and the industry during this quarter, we currently expect our mortgage originations in the third quarter to be about $80 billion. As we’ve stated previously, we expect our gain on sale margin to decline from the historically high levels that we’ve been experiencing.

Although a number of elements, other than just pure pricing activity, that factor into this calculation, such as product and channel mix, we currently expect our gain on sale margin to be about 1.5% this quarter. This would be commensurate with margins that we’ve seen in prior periods given the volumes similar to our projection for the third quarter.

We have an experienced management team in our mortgage business that’s managed through many different refi cycles, and we will continue to make adjustments in the current environment. And while higher rates reduce volume, it does help other parts of the mortgage business, including servicing, which generally benefits from a slowdown in the amortization of mortgage servicing rights.

As we always have, we will adjust the size of our mortgage business based upon production demand. When mortgage volume falls, some costs naturally decline immediately, such as commission expense. Other costs will have more of a lag to them, like personnel costs. We have plenty of experience in adjusting staffing levels, as you can see on this slide. So far in the quarter, we’ve announced reductions of approximately 3,000 FTEs, and we will continue to actively manage our capacity based on volume as we’ve done in the past.

One of the positive trends in today’s environment is credit. Home prices have increased in affordability and affordability remains very attractive. We’re seeing improvements throughout the economy, including job creation, lower household debt, and increasing consumer confidence, and these positive economic trends are clearly benefitting our credit results.

You can see in these charts the significant improvement in loan loss rates throughout our consumer and commercial portfolios, reflecting the improvement in the economic environment as well as our disciplined underwriting standards. In the chart in the upper right hand corner, it shows the residential real estate loss rates by vintage, and you can see in the newer vintages, those originated after 2008, have virtually no losses.

Approximately 45% of our consumer loan portfolio and 50% of our commercial portfolio was originated in 2009 and later. Loss levels have been very low in these newer vintages, reflecting our disciplined underwriting, as well as the improving economy.

Reflecting these improvements, our second quarter provision expense declined $567 million from the first quarter, and included a $500 million reserve release. This was the lowest level of provision expense that we experienced since the third quarter of 2006.

The good news is that the favorable conditions that drove the release in the second quarter have not dissipated, and we currently expect our reserve release in the third quarter to be greater than what we experienced in the second quarter.

As we manage through the transition to the current economic and interest rate environment, our focus remains the same, to grow our customer base and satisfy all of our customers’ financial needs. We have positive momentum throughout many of our businesses to generate future growth, including two loan portfolio acquisitions that we announced during the quarter that totaled $6.4 billion in loans, that strengthen our position as the number-one commercial real estate lender in the United States and provides us with the opportunity to grow in the commercial real estate lending business in the U.K.

We’ve also announced a credit card issuing partnership with American Express, which will give our current card customers greater rewards and benefits, and will allow us to increase our credit card offerings to new customers.

Considering the strong momentum that we have throughout our businesses, we believe in our ability to meet our financial targets, and these include an efficiency ratio of 55-59% - in the second quarter we were currently almost right in the middle of that range - an ROA of between 1.3% and 1.6% and an ROE of between 12% and 15%; and then finally, a total payout ratio of between 50% and 65%, which includes dividends as well as stock buybacks.

In conclusion, our diversified business model has demonstrated strong performance over both the short term and long term, including 14 consecutive quarters of EPS growth. We have a proven ability to manage through a variety of economic and interest rate environments, and we’re making adjustments as we transition through the current environment.

We remain well-positioned for the future, focused on the benefits of our industry leading prods and distribution, diversified revenue sources, expense management opportunity, our low-cost deposit base, and our very conservative risk management culture. Our growing capital levels position us well, and we remain focused on returning more of our capital to our shareholders.

And now I would be pleased to answer your questions.

Question-and-Answer Session

Jason Goldberg

Actually, before we take questions from the audience, we’ll go to our automated response questions. If we could put those up, please.

First, for those in the audience, if you currently don’t own shares of Wells Fargo [unintelligible], which of the following would be most influential in changing your mind: 1) more attractive valuation, 2) greater clarity in terms of how it hopes to offset the decline in mortgage volume, 3) a stronger loan growth environment, 4) increased capital return, and 5) greater clarity around outstanding legal [unintelligible] issues? I’ll give you 10 seconds to respond.

Let’s see, 30% would choose 1, the valuation, and then mortgage and loan growth, kind of all three pretty much tied around that. I know valuation you can’t fully control, Tim, but in terms of how you think about the mortgage environment, I know you kind of touched on it, but I guess talking about a pretty strong [unintelligible] in originations in the third quarter, lower gain on sale margins, how quickly could you actually get out the cost base? And how much further, given the origination outlook, would you expect headcount to decline?

Tim Sloan

Well, as you know, we’ve been in this business for over 30 years, and we’ve seen cycles in terms of the growth of the business and the decline of the business. In fact, the 14-quarter period that we showed on the chart, you saw pretty significant volatility in almost half of those quarters.

Generally, our experience has been that it takes anywhere from one to two quarters to get the costs out of the business relative to the size of the originations. So the reductions that we’ve announced so far this quarter, and that we’ve made, will come out of the expense base on a run rate basis in the fourth quarter. Now, as I mentioned, the commission expense is reduced almost immediately.

So it will take one to two quarters to adjust to this type of environment. Again, it’s something that we’ve seen in the past. I think the important thing is that if we’re not a monoline mortgage business, even though we’re the largest mortgage originator in the country, we have a lot of other levers that we continue to pull and push, some within the mortgage business. As I mentioned, we’re hopeful to see some increase in our servicing income in the quarter.

In addition, as I mentioned, credit continues to improve pretty significantly. And then, as you saw in the second quarter, some really nice increases in terms of our other businesses from a fee standpoint, that I mentioned. So the expenses will come out over the next couple of quarters, and again, we’re hopeful to be able to grow earnings over that same period.

Jason Goldberg

Before we go to the next question, just this issue. We had the exact same question last year, and for those that don’t remember, in terms of more exact valuation, we had 30% this year. Last year was similar, around 27%. In terms of handling the decline in mortgage originations, that was 44% of the people. That was the number one reason last year. So the number’s actually declined to 30%, and the accelerate of loan growth was 19% of people said that last year. Now it’s 29%, and the latter two remain at 6%.

If we go to the next ARS question, which of the following, in your view, poses the greatest threat to the future share price appreciation: 1) mortgage, 2) loan growth, 3) uncertainty around legal environment, 4) lower than peer asset sensitivity, and 5) end of its record EPS growth streak?

And the answer is, 44% the one about the soft loan growth environment. I guess Tim, you talked about some acquisitions to kind of help supplement the challenges there. What are you looking for in terms of, say, more robust pickup in loan growth and in terms of what you think are the bigger constraints holding that back?

Tim Sloan

I think the biggest constraint in terms of loan growth is just underlying economic growth. The economy’s growing at plus or minus about a 2% rate. We’ve been able to grow loans even ex-acquisitions over the last year at about twice that. If you look at our core loan growth in the second quarter, year over year we were up about $40 billion. So we haven’t seen any major changes in underlying demand for loans in the third quarter relative to the second quarter. It continues to be slow but steady.

And so our expectation, because we’ve been in this environment for a while, is that our core loan growth should be at a multiple of underlying economic growth. We’ll continue to see some decline in our liquidating portfolio, though the level of that decline from an absolute dollar standpoint has continued to decline as that portfolio is lower, and then we’ll see opportunities from time to time which we’re pleased to be able to take advantage of in terms of making acquisitions.

So when you put it all together, we feel like we can continue to grow loans over time, and we’ve been able to demonstrate that over the last few years.

Jason Goldberg

Thanks. And then the last ARS question, which type of acquisition would you like to see Wells Fargo undertake: 1) continued asset purchases of U.S. nonbanks, like Tim talked about, 2) credit card, 3) refrain from acquisitions, 4) auto, 5) insurance, 6) international, 7) investment banking?

And the answer is, number one, U.S. assets. And number two was refrain. And then let’s see, number three would have been credit card. You were active in asset purchases, then kind of slowed down, and it appears to have maybe picked up again in the current quarter. Maybe talk about how much more you see coming from that as European banks continue to deleverage.

Tim Sloan

We saw a significant opportunity in 2011 in terms of buying the domestic assets from some of the European banks, particularly the Irish banks, in the summer of 2011. And then we made some additional acquisitions through the early part of ’12. But the liquidity facilities that the European banking authorities put in place really reduced the flow of opportunities that we’ve been seeing since those facilities were put in place.

And so I wouldn’t say that just because we announced two acquisitions this quarter that it’s meant that there’s a big pickup in acquisition activity. I think it just tends to be pretty slow and steady right now. I wish it were greater, because we’d love to be able to grow the loan base with good quality acquisitions, and we’re going to do as many as we can, and we’ve been very pleased to be as successful as we have been over the last couple of years, and hopefully that will continue, but the level of activity has been pretty stable over the last year or so.

Jason Goldberg

And with credit cards toward the top of the list, I know that’s a business you’ve talked about kind of expanding on, and more deeply penetrating the retail banking customers. Just maybe talk about your appetite to acquire more scale in that business.

Tim Sloan

Well, we don’t think we need to make any acquisitions in the credit card business to be able to successfully grow the business. Our primary focus in that business over the last few years has been to increase our penetration rates with our existing customer base. And you’ve seen that our folks in the retail bank on Carrie Tolstedt’s team have done a great job in terms of increasing penetration so that we ended the second quarter with about a 35% penetration rate.

In addition to that, we’re very pleased with being able to announce the partnership with American Express. And the goal there is to just expand the card offerings that we have to new and future customers, as well as in terms of improving our rewards program. That doesn’t mean that we don’t want to continue to have a good relationship with Visa. We have a great relationship with Visa. We just want to have more offerings from our customer base.

So with all that, we’ve got a lot of opportunity to be able to grow the credit card business. That said, if the right acquisition comes along, like it’s done in our commercial real estate business, or like it did in our asset-based business, or like it did in our energy business last year, we’d be happy to take a look at it. But we don’t feel that we need to make an acquisition to be able to grow that business.

And you saw that in our results, because our fee income in card was up on a double digit basis year over year, and our oustandings were up about the same. So it’s been good.

Unidentified Audience Member

A number of your peers have been significant sellers of mortgage servicing rights. I was just wondering what Wells’ plan is in that regard.

Tim Sloan

I think the primary driver for many of the mortgage servicing rights sales in the industry over the last few years have been for capital reasons. And we don’t really have a lot of pressure on our capital. As I mentioned, our tier one common equity at the end of the second quarter was 8.62%. So it’s well above the minimum requirement, and already into the buffer that we want to operate within.

Having said that, we’ve seen a real shift in the demand for mortgage servicing rights, because an industry has been created that wants to buy mortgage servicing rights. And so the market’s much more attractive from our perspective. So I think it’s likely that over the next few quarters that we’ll want to test that market.

This is different than selling our reverse mortgage servicing portion of that business, or selling some of the [IOs] and the like. So we don’t want to test that market. I wouldn’t read anything more into that, that it would make sense for us to go ahead and test the market, so that if we ever get into a period where we have to sell, we’ve already gone through the process. I think that’s just good from a risk management standpoint.

So again, look for us to potentially do something in the next couple of quarters. It won’t be significant. It will primarily be focused, if we go ahead and execute on mortgage only customers who we don’t have any confusion from a relationship standpoint.

Unidentified Audience Member

I think you mentioned you were hoping to grow earnings over the next couple of quarters as you work these mortgage costs out. Is that sequential or year over year, first of all? And then second, could you talk to us about the drivers behind that? You mentioned several of them, I think, in the presentation, with servicing and credit, etc.

Tim Sloan

Well, I’m hopeful that we can grow on a year over year and sequential basis. We can’t promise you that’s going to happen. But I think the good news is that, again, notwithstanding the decline in mortgage origination revenue, which I talked about, I think it’s important, if you look at those 14 quarters, you could overlay the two slides together and you could see in six of those 14 quarters where we’ve experienced earnings growth, we’ve had a decline in mortgage origination revenue.

We think that over time we can continue to increase servicing income, just in the mortgage business. We are looking to take costs out of the mortgage business as we’ve talked about. But again, that’s just the mortgage business.

As I mentioned, credit continues to be a very strong tailwind for the company. You saw that in our decline in our loan loss rates from 72 to 58 basis points. I’m hopeful that they will continue to come down over the next few quarters. We talked about the fact that we think our reserve release is going to be greater in the third quarter than what we experienced in the second quarter.

And then to me, if that wasn’t enough, the other exciting thing is that we’ve got 89 other businesses across the company that hopefully will continue to grow. I don’t know exactly which one is going to grow the most or least, but the factors that drove the year over year growth that we saw in the second quarter in many of our businesses haven’t stopped. They’ve continued to provide a tailwind for the business. So we think we can grow our other businesses too.

Unidentified Audience Member

Will Wells have to issue incremental debt to comply with orderly liquidation authority rules?

Tim Sloan

I don’t know the answer to that, because I don’t know what the rules are going to look like. Clearly there’s been a lot of discussion about what an orderly liquidation authority might look like, and whether or not there would be an incremental long term debt requirement.

If you look back seven, eight months, there were discussions that the total levels of capital plus debt would have to be between 25% and 30%. That was kind of the high end of the range. I think that’s probably unlikely. I can’t promise you for sure, but I think that’s unlikely. I think the regulators have been very responsive to a lot of discussion that the industry and in particular we’ve had with them.

And we’re hopeful that whatever final rules occur, and whenever they occur, that they’re risk-based, so it’s not a one size fits all kind of structure, and they’re also reflective of the losses that the industry actually experienced in the last downturn.

Because if you look at the averages, the industry in total experienced some pretty significant losses, but when you factor out a couple, two, three, four different firms, that losses for diversified financial institutions, particularly banks like ours, were much less than even the capital levels that we have today, let alone capital plus long term debt.

So long answer to your question. I don’t know for sure. It’s something that we’ve been spending a lot of time on, but it’s not something that we’re overly concerned about right now.

Unidentified Audience Member

Looking at the falloff in mortgage originations that you’re expecting, looking in the details, how much of that might be some renewed deterioration in the housing market?

Tim Sloan

I don’t think we’ve seen any sort of deterioration in the housing market. That said, I don’t think it’s logical to assume that, even with the improvement in the housing market, that it’s logical that we’re going to have double digit improvements in housing prices for the rest of our lives, right? At some point, they’re going to start to slow down. Year over year, I think the last numbers showed about a 12% increase in housing values.

Again, I don’t know if that’s sustainable, but we do believe that housing price appreciation at some leverage is sustainable, and we don’t believe that the recent increases in mortgage rate are going to, in any way, shape, or form snuff out the housing recovery that we’ve had. Because when you look at any sort of statistics, and certainly the demographics in terms of household creation, as well as household affordability, they’re still very attractive, and should drive a continued recovery in the housing business.

Unidentified Audience Member

We’re in the beginning or the middle of a debate in Washington on Fannie and Freddie and how those two organizations will be structured, and what their role will be in the mortgage market. Do you have any opinion on that? And assuming they are sort of wound down, will that be positive for Wells Fargo, or negative?

Tim Sloan

First, we think it’s good that we’re going to have a conversation about what should happen with Fannie and Freddie. It’s too bad it’s taken this long, but now we’re having a conversation, which is good. It’s a conversation that we’re very involved in, because as the largest mortgage originator, we’d obviously have a little bit of an opinion in terms of what mortgage finance might look like.

We do think that it makes sense to have some sort of a government program. It doesn’t necessarily have to look like Fannie and Freddie today. It could be smaller, and it could but much more focused on an FHA-type program, VA-type programs.

But one of the missing links today in terms of this whole discussion is that we don’t have a robust private mortgage securitization, we don’t have that kind of activity, and that’s because we haven’t fully finalized the QM, and we haven’t finalized the QRM rules.

Once that occurs, than that’s going to provide a base for private mortgage securitization. That’s fine from our perspective. We operate in that environment. That will be okay. But we can’t really do that in volume until we see the final rules. The final rules are now out for comment, at various levels in both of the rules.

The fact of the matter is, given the size of the mortgage market in the U.S., it’s likely that when the dust settles, we’ll have some sort of government programs, that we hope are done on an a make-sense basis. We’ll have a private mortgage securitization business, and then we’ll have on balance sheet activity.

And when that occurs, we don’t know. We’ve been able to operate very profitably in the mortgage business in any of the environments. But we’re going to be involved in the discussion, and we’re going to have an opinion about it.

Unidentified Audience Member

Just in terms of resi mortgage lending standards, you mentioned QM and QRM as being a big factor. Are there other factors that are keeping lending standards so tight right now? And what’s your outlook for that?

Tim Sloan

Yeah, I think it’s fair for folks to say that lending standards seem tight, because we went through a period, say since 2000 to 2007, where lending standards just got out of control. And that’s the most recent comparative timeframe that we have to compare today to. I think if you look at the lending standards today, they’re much more comparable to what we saw 10 years ago, 15 years ago, and 20 years ago. And these are the standards that we’re going to live with. QM is going to be a big driver for that.

There certainly will be some non-conforming lending that occurs. It’s going to need to occur at companies other than Wells Fargo. We’re not going to do a lot of nonconforming lending, with the exception of the jumbo mortgages that we provide that we put on balance sheet. So I don’t really anticipate the standards changing a whole lot, given that QM is going to be the new standard for the industry.

Jason Goldberg

With that, please join me in thanking Tim for his time.

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