Timothy Sloan – Senior EVP and CFO
Wells Fargo and Company (WFC) 2014 Credit Suisse Financial Services Forum Call February 12, 2014 9:30 AM ET
Good morning, everyone. We're very pleased to have with us Wells Fargo. Wells has built what can only be described really as an extraordinary bank franchise with significant presence in the most attractive markets in both the West and the Southeast, some areas in between as well as a number of very strong national businesses.
One of these is the mortgage business, highly topical today but company has a dominant share and has built what I will consider a very high value low coupon servicing book, again while building a dominant share in that business. Some challenges that have manifested in the current low interest rate environment I am sure something that Tim is going to talk about.
We're very pleased to have Tim Sloan, Senior Executive Vice President and CFO. Tim has been regular at this conference since he has been CFO and I think he has been with Wells for 26 years, I think okay. We are very much looking forward this presentation. He's joined at the front of the room by Jim Rowe and John Campbell from Investor Relations and we look forward to the presentation.
Thanks very much and obviously we're happy to be here. It's a great conference I am sure everybody is here for the call, either presentations and not because of the weather. But we really appreciate your interest in Wells Fargo.
Let me get through just a little bit of the housekeeping and that is that this presentation includes certain forward-looking statements regarding our expectations about the future, number of factors, many beyond our control could cause actual results to differ materially from management's current expectations. So if you would refer to the appendix for information regarding our forward-looking statements you can find more information about some of these risk factors.
At Wells Fargo everything we do starts with our vision, we want to satisfy all of our customers' financial needs and help them succeed financially. This puts our customers first. It's the heart of our culture, it's behind every product we design, every services we offer and every dollar that we earn. It's all of our many businesses. It's just as relevant today as it was one of which it was written 20 years ago and this will continue to guide us through our growth and success for many decades to come.
Wells Fargo has over 70 million customers and serves one of three U.S. households. We clearly, what we believe is to be the best in class distribution systems to serve those customers when where and how they want to be served whether it's in person, over the phone, at an ATM, online or by mobile.
This integrated system provides customers convenience and contributes to our growth as customers who use more channels have higher product purchase rates. With over 9,000 locations in all 50 states and over 12,000 ATMs we have more locations and serve more communities than any other U.S. bank.
Almost 23 million customers actively bank with us online and almost 12 million access Wells Fargo mobile banking, our fastest growing channel. While over 80% of our deposit customer interactions are self-service, most customers open their first account and establish their banking relationship by visiting one for our stores. That's why we've invested in this network that provides a Wells Fargo retail store or an ATM within two miles of nearly half of the U.S. population and small businesses within our footprint. It's a very powerful advantage for Wells Fargo.
By focusing on our customers' financial needs we've grown market share and have a leading presence across a number of key products that we offer. Within wholesale banking we're the largest commercial real-estate originator and we're also the number one lender to mid-size companies. We've been the largest small business lender for the last 11 consecutive years and in 2013 we extended almost $19 billion of net new loan commitments to small business customers, up 18% from a year ago. We're the largest auto lender in the country and we generated record auto originations in 2013, up 26% from a year ago.
We're the largest residential mortgage originator and servicer funding nearly one of five U.S. home mortgages in 2013. We've continued to successfully grow deposits with a 4.7% increase in primary consumer check-in account customers in the fourth quarter compared to a year ago and we are a leader in serving our customers wealth management and brokerage needs and we focus on growing asset based relationships.
Retail brokerage managed account assets grew 23% in the fourth quarter compared to a year ago and we are the third largest full service retailer brokerage in the country. Because of our balanced business model and focus on our vision we've been able to consistently grow earnings over the past five years with earnings up 16% on a compounded annual basis since 2009. This includes 16 consecutive quarters of earnings per share growth and 11 consecutive quarters of record EPS.
During this period we faced many economic regulatory and interest rate challenges the yield curve has been steep and it's been flat, the unemployment which remained high as improved slowly and GDP growth has turned from negative to slow growth that has started to accelerate.
And while each quarter has been different we've been able to grow while investing in the future because our diversified business model, our customer focus vision, being disciplined on risk management and making sure that we're making good long-term decisions for our shareholders.
During the past five years we've grown loans by $43 billion and our core deposits are up a $199 billion. We're also generating strong returns with our ROA growing to 1.51%, up 54 basis points and our ROE increasing 399 basis points to 13.87%. These results generated strong capital growth and enabled us to increase our total annual payout, including dividends and common stock repurchase by $9 billion since 2009.
We’ve been able to generate strong growth because of our diversified business model. This slide is important because it demonstrates the breadth and depth of our model with over 90 businesses driving our results. In 2013 we generated earnings of $21.9 billion and earnings per share of $3.89 both up 16% from 2012.
Average core deposits grew 5% and we grew our core loan portfolio by 6%. Credit performance continued to improve with charge-offs down 50% and we had strong returns and capital continued to grow. In the fourth quarter we earned $5.6 billion or $1 in earnings per share, both up 10% from a year ago. These strong results were broad-based with higher net interest income and non-interest income, lower expenses and continued improvement in credit quality.
I will now spend some time drilling down in the specific drivers and how we performed compared to with some of our peers. This slide compares our fourth quarter results to our large and regional bank peers. As you can see that we had industry leading linked-quarter loan growth, the positive and pretax, pre-provision profit growth and our ROA remained among the strongest in the industry.
Our strong loan growth was very broad-based with period and loans up over $26 billion or 3% from a year ago. We've now grown our loans on a year-over-year basis for 10 consecutive quarters despite the run off of our liquidating portfolio. And let me highlight some of the drivers behind this specific growth.
Compared with the fourth quarter of 2012 foreign loans grew $9.9 billion or 26% and included growth in trade finance and the UK commercial real-estate acquisition we completed in the third quarter. C&I loans were up $9.4 billion or 5% as we successfully grew loans in asset backed finance government banking and corporate banking. Real estate 1-4 family first mortgage loans grew $8.6 billion or 3% even with the run-off from our liquidating portfolio and included growth in high quality non-conforming mortgages.
Auto loans were up $4.8 billion reflecting record originations and credit card balances were up $2.2 billion with strong new account growth. In addition to growing loans our outstanding deposit franchises continued to generate strong deposit growth. Demonstrating the strength of our deposit franchise we've successfully grown deposits while reducing our deposit cost for 13 consecutive quarters. Our deposit costs were only 11 basis points in the fourth quarter down five basis points from a year ago and were among the lowest in the industry.
More than 70% of our funding comes from deposits, which is among the highest in the industry. This will position us well when the short end of the curve eventually increases. And while our strong deposit growth which is very valuable over the long-term has put pressure on our net interest margin it's little impact on our net interest income which we grew in the fourth quarter to $11 billion the highest it's been in five quarters.
Our ability to grow net interest income on both the linked-quarter and year-over-year basis while our net interest margin has declined is why we don't manage to the NIM but instead focused on growing net interest income. And while we believe that we can continue to grow net interest income over time given that they are going to be two fewer days in the first quarter it's likely that net interest income will be down compared to the fourth quarter. Recall net interest income was also down in the first quarter of 2013 but we were able to generate net interest growth throughout the rest of the year and that's what we think we'll be able to do this year too.
Turning to non-interest income, while mortgage production revenue was down $2 billion from the fourth quarter of 2012, non-interest income excluding mortgage production revenue increased from a year ago. Deposit service charges were up 3% benefiting from strong deposit growth and increased treasury management services to our commercial customers.
Trust and investment fees were up 8% and I'll highlight the drivers in the next few slides of that growth. Card fees increased 12%, benefiting from strong account growth and increased usage in both our credit and debit card businesses. Mortgage servicing fees increased $459 million as prepayment speeds have slowed.
We currently expect mortgage origination volume to decline in the first quarter, reflecting seasonality in the purchase market and lower refi volumes. But we expect the rate of decline to slow from the levels that we saw in the third and fourth quarters of last year. We do expect the gain on sale margin in the first quarter to remain within the range that we saw in the second half of 2013.
As I mentioned an area that has been very strong, it has had very strong growth for us is trust and investment fees. Trust and investment fees now account for 34% of our total non-interest income up from 28% in 2012 and it's our largest fee category. Managing more of our customers' wealth and investment banking businesses an important part of our vision of meeting our customers' financial needs and that is why we've been focusing on and investing in these businesses. Trust and investment fees are driven by a number of different businesses serving a variety of customers. Our results in our brokerage advisory fees benefited from the improvement in markets and strong net flows.
Retail brokerage managed account assets grew to $375 billion at the end of the fourth quarter, up 23% from a year ago. Our investment banking business continues to have strong growth reflecting the success we've had by focusing on our relationship base model. Investment banking revenue from commercial and corporate customers alone was up 16% in 2013. And our asset management business which is part of wholesale banking had an outstanding year in 2013 with assets under management growing go $487 billion up 8% from a year ago reflecting net client inflows and increased market valuations.
Another area of fee growth for Wells Fargo has been card fees. We grew credit card, new credit card accounts by 29% from the fourth quarter of 2012 and we grew household penetration to 37%, up from 27% two years ago. This account growth and increased purchase volume has resulted in strong balanced growth and we grew at 5.6% compound annual growth rate since year-end 2011. This increased activity in our credit card business along with continued growth in our debit card business which has benefited from strong account growth and increased usage has resulted in strong fee growth with a 6.7% CAGR since year-end 2011.
Another way to see the benefit of our diversified sources of revenue is to compare our asset productivity to our peers. And as you can see on this chart we performed well relative to both large and regional banks. This outperformance demonstrates our consistent focus on earning more of our customers business. In the fourth quarter we achieved record cross-sell across the franchise with retail banking cross-sell of 6.1 products per household, wholesale banking grew to 7.1 products per relationship and wealth brokerage and retirement cross-sell increased to 10.42 products.
Our efficiency ratio is among the best in the industry as we improved our ratio by 62 basis points in the fourth quarter to 58.5%. While we will have seasonally higher personnel cost in the first quarter we expect to have lower project spending and lower mortgage expenses reflecting a full quarter run rate from the reduced staffing that we announced in the third and the fourth quarters.
We current expect our efficiency ratio will remain within our target range of 55% to 59% in the first quarter. You can see on this slide the significant improvement we had in credit quality over the past five years, as net charge-offs reached historical highs in 2009 and declined to historical rose of only 47 basis points in the fourth quarter. This improvement reflects our long-term focus and the benefit from the improving economy especially in the housing market. We had $600 million reserve release in the fourth quarter and given current favorable conditions we continue to expect future reserve releases absent significant deterioration in the economy.
We grew our estimated Tier 1 common equity ratio under Basel 3 to 9.78% in the fourth quarter. This is 78 basis above our internal target of 9%. While we've been building capital we've also been focused on returning more capital to our shareholders. We increased our dividend by 31% in 2013 and we purchased 124 million shares. We remain committed to returning more capital to our shareholders and our 2014 capital plan requested an increase in our dividend and share repurchases as compared with the 2013 capital plan. Of course our request is subject to Fed review and non-objection.
We established these financial targets at our last Investor Day in 2012: efficiency ratio of 55% to 59%; ROA of 1.3% to 1.6%; ROE of 12% to 15%; and a total payout ratio of 50% to 65%. And as you can see on this slide we performed well against these targets even with the continued economic and interest rate challenges we faced since we established them in 2012.
In conclusion our diversified business model has demonstrated strong performance over both the short-term and the long-term including generating 16 consecutive quarters of earnings per share growth. We have an experienced management team with our CEO's direct reports having an average tenure at Wells Fargo of 28 years. We work as a team and this team work and experience has benefited us as we manage through a variety of different economic and interest rate environments. Experience and culture really matter to performance and we believe that our team is the best in the industry.
We also believe that we've never been better positioned for the future and we're excited about all the opportunities ahead for our customers, our team members and our shareholders. Now I'll be happy to take your questions.
Thanks, Tim. I guess maybe we'll start up with loan growth. You had a slide which showed a number of the categories that were particularly robust in 2013. If you kind of look out over the next year or two would you expect those same categories to be what drives loan growth or are there any differences that you want to highlight as you look forward?
Good question I think we had good, as you mentioned, good loan growth that was very diversified in 2013. The fourth quarter was really strong loan growth which we were \very pleased with. And I think one of the themes that you see in every given quarter there is going to be some differences among the various businesses but overall we still believe that we can continue to grow loans in this environment.
We believe that we can continue to grow loans at a faster rate than the industry and underlying economic growth. And we continue to believe that they are going to be fairly diversified. So there's not necessarily one that I'll call out. I mean clearly when you look at the foreign loan growth that was a little bit outsized year-over-year because of the impact of the acquisition that we had in the UK. So may be foreign loans will grow but not as much. Again there may be an acquisition out there I don't know. But I think the diversification story not only applies to the overall company but clearly applies within the loan book too.
When you look out at the opportunities to make acquisition of loan portfolios, are there any kind of themes or any kind of categories, I mean obviously some of this over the years has been foreign banks, but what else is out there and what seems to be of interest to Wells Fargo?
The loan portfolio acquisitions particularly in an improving economy tend to be less thematic and more opportunistic to be honest with you. And so we have a team of folks that continue to call on all the potential sellers that may be out there. And generally those calls and those meetings end up with everybody shaking hands and looking forward to seeing them again, without a specific deal but every so often a deal will come up.
I would so on average that the opportunities are probably a little bit slower than may be we experienced over the last couple of years but there were periods last year that I would have said the same thing, and then we had the opportunity to buy the Eurohypo portfolio which has turned out just to be a terrific acquisition, not only in terms of the quality of the loans that we purchased but also in terms of building that team in London.
One of the areas in which you had really strong internally generated growth, in contrast to some of your peers has been the credit card area and I believe that's a business that you mentioned up to 10 point increase in your penetration of your existing customers. It's not a national business right now, are there any desires to create a more national business?
Well let me clarify. It's a national business in that we are primarily focusing on our existing customer base and new customers that come in through the stores and other ways as potential credit card customers. We don't have any specific plans to go not only Wells Fargo customers who don't otherwise have the relationship and the primary reason for that is twofold, the primary season is twofold. First, that's an expensive way to acquire new relationships, number one.
And number two, the opportunity that we have within our adjusting customer base as exhibited by the improvement in their penetration is pretty significant. Now you were kind in saying that we had seen some good growth. Part of it and candidly is because we started with a relatively low base. Having said that we are very pleased with the performance that we've seen now over the last few years. What's even more exciting about the credit card business is that with the continued relationship that we have with Visa as well as the new relationship that we have with American Express we will have more product offerings to our customer base.
So we think that the opportunities to grow the credit card business are going to continue to accelerate and we're pretty excited about that. And there is no reason to believe that we can't continue to grow at a pace that we've seen over the last few years.
Okay, got a question over here. Wait for the mic, that's coming over.
Tim, in the good old days before Wachovia you guys did 500 plus NIM. You've got a different business mix now and then you've got the liquidity requirement and so on. Is that margin changed forever or with normal interest rates we get back to 500 plus or something in that neighborhood?
I think that the net interest margin when you look back at the time we bought Wachovia was significantly high and part of the reason was just at the time that we saw in the economic climate and the interest rate climate we were in. When short-term rates increased and they will even though today it feels like they never will, just like a year ago or two years we thought [loan rates] would never increase and they did, may be but at some point they will.
That would be a big benefit for us because our loan book is going to re-price faster than our deposit book and so that will allow us to increase the margin. But again we just we don't manage the margin. We are managing to net interest income and that’s what we talk about all the time how can we grow our net interest income. We do that by growing loans which you've seen us do and we do that by taking any excess liquidity that we have and reinvesting it in good quality securities and you've seen us do that too.
That last part has been a little bit tricky just because rates have been low and have been volatile various times and we want make sure we're making the right decision. But over time it should go back to a higher level than what we see today. I just don't know actually when that’s going to occur.
Thinking about how much capital intensity you have in order to generate the net interest income I mean you guys think of all those things. So you got to understand what the margin is for any product that you put on the books, any funding you put on the books.
We do and we've done that for as long as I've been at Wells Fargo because we push down and allocate capital on a real time, when I want say real time but we don’t do it just every day but we don’t have an extra amount of capital at the parent so to speak that's not borne by the businesses. And we think that's a really good discipline so that when capital rules change and they have and we have to reallocate capital the lines of business appreciate the returns they need to get for that capital usage.
Okay. You talked a little bit about the margin a moment ago in response to Patrick's question how do you think about the pace at which the rates on your deposits from that 11 basis points are going to increase as short-term rates increase and how do you think about the persistence of your deposit base in that environment?
Well it's a good question and I think that we've got a tremendous amount of historical data available because we've been obviously in deposit business for long time and it's been a primary driver for our liabilities. I think the challenge we have is that every cycle is a little bit different and while we are not overly concerned about it but I think we need to take into consideration that the rate of deposit growth in this last cycle has been historically outsized.
That said most of the deposits that we have, our customer deposits they've got a good relationship with the company and so our best guess is that when we see that the rate of deposit growth in the industry will probably be slow a little bit because of the tapering that the Fed will do. We think that we can continue to grow our deposits relative to the rest of the industry. We believe that when the short end of the curve rises we'll be able to re-price as I was just mentioning. But I think we've got a plan for some sort of deposit outflows as economic growth continues and so we're prepared for that. And we think we've got more than adequate liquidity to be able to meet that demand for deposits.
You talked a little bit in your prepared remarks about the mortgage banks and your kind of expectations for revenues in the near term. May be talk a little bit about longer term how do you see that evolving what's gone on with I guess some of the banks retreating from the wholesale part of the business and then some other entrants kind of coming up and how do you see Wells Fargo's market share there? And also the cost side with respect to how you've kind of retool that?
I think that the mortgage business has been through a pretty interesting period. For us it's been a really good period for certain. And I think it's important to remember that the reason that we got to the place that we are today is because we made really good long-term decisions, 5, 10, 7 years ago. And it's not just because we woke up in 2012 and found ourselves with almost 30% market share. And so I think you've got to take into context that the thing to be successful in the business you got to make sure you're taking a good long-term approach in making sure that you are making good long-term decisions.
Having said that, we're clearly through the refinancing, the big refinancing phase of the cycle. Our market share has come down from about 30%, down to about 20 which makes sense because it's more of a purchase money market. So our expectation about the future is that we should focus very much on the purchase money market. We think that, that plays to our strength even though our shares down a bit because we've got the best distribution and sales system in the industry whether it's through the retail stores or through the mortgage only stores so that's good.
And so it's going to be about driving those relationships as the purchase money market grows. It feels like the underlying to that is that you've got a housing industry that continues to improve it's not improving at a rapid rate even though prices are up certainly. And so our expectation is purchase money market, improving housing market and so there is going to be some growth there. But like any of our businesses we need to think about how to improve efficiency. And the primary way to improve efficiency is going to continue to be by putting more technology in the hands of our team members both from origination and the service sides.
So we think we can continue to reduce cost in that business as we think we can in all of our businesses.
From standpoint of our capital, you've just under 10% B tier 1 one common ratio at the end of the year where do you see that -- to what number you're going to manage that and how does that kind of impact your…
It's really good question because we've made a big point a couple of years ago saying that we thought we needed about 9% and now we're above that. There is a governor on that to some extent its decisions base that we make but also because of the CCAR process which we need to appreciate. We would like to get down to a 9%. We think that's sufficient for the company. So we're going to work toward that. I can't promise you that is going to happen this year or next year but until the business model fundamentally changes or risk in the industry changes we think that 9% looks pretty well. So that's the number long-term that we're going to plan on managing too.
When you think about the CCAR process over the last several years it seems like even though the industry as a whole probably hasn't an added a ton of risk it seems like that the standards from the Fed get tightened up this time a little bit. So even with that I guess you are still confident that 9% is the right target.
Over time. Again I wouldn't want to promise that it's going to happen this year but there is nothing that we know today that would lead to conclude that it would be impossible to get there. And I would say that the biggest governor that we have in terms of distribution and the methodology that the Fed is using right now is the assumption in the supervisory stress case that we would continue to pay out whatever dividend rate and repurchase whatever amount shares that we would repurchase in a non-stressed environment.
And so there may be and hopefully some change with those assumptions over time and that would be beneficial. It's not how draconian the assumptions that the Fed has stretched too.
And kind of in that same vein, during 2013 you kind of were probably towards the lower end of the range that you've set out in terms of capital return. How do you think about whether you are going to be kind of at the lower end or towards the higher end of that range as we go forward?
Well we've said that 50% to 65% range a couple of years ago we've conveniently didn't set specific timeframe by which we would get there. But clearly we want to get within that range and again you can debate whether we're looking at gross or net. But we returned $11.4 billion on a gross basis to shareholders last year. We think we can do more this year. And so our goal is to continue to move forward within that range. Once we are comfortably in that range if we continue to perform and we're above that 9% level then we're going to and we don't need it for growth or acquisitions and we want to return it to all of you.
Okay. May be acquisition's not a bad question talk a little bit just about we talked about portfolio acquisitions already but are there any other types of acquisitions of companies that makes sense at this point?
Clearly we are not able to buy it under deposit to any institution but we can continue to grow our deposits as you've seen. We are open to any sort of acquisition that can bring more, can broaden our existing customer base or bring new customers to Wells Fargo. And I would add that we've been a growth company for a long period of time; part of that growth has come through acquisition. Clearly the types of acquisitions we can do today are different than in the last cycle but we've got a group of folks and that's what they do all day along is look for opportunities.
So across the board we are happy to take anything that comes across the way.
Any other questions from the floor? I have still got one or two more. One of the things you actually alluded to I think in discussion to trust the investment management is when you -- one of the things came with, I guess the Wachovia acquisition was your brokerage business and that was something for a while you actually thought about selling, in fact and then decided to retain that right. I mean that can you talk a little bit… talking to other people I don’t recall that, but that's okay. Could you just may be talk a little bit about that business but I think that's become a pretty important piece.
It has it's when you acquired or merged with Wachovia that retail brokerage business was in the midst of an integration consolidation too because if you recall that was a conglomeration of a number of First Union and A.G. Edwards and then they were buying the [pool] business and the like.
And so that integration was completed a little bit before our integration of the entire company that was completed, so that was good. And so the opportunity that we see in that business is to continue to connect, that customer base that has a brokerage-only relationship and with the other products and services that we have in the company and that’s good for everybody, it's good for the financial advisor because it makes that relation stickier, if they broaden their number of products that they have with their customer and the cross sell number that I referred to showed 10.42 products per relationship in wealth brokerage and retirement in the fourth quarters that's a good example of the improvement there.
The other opportunity within the brokerage business is to continue to move more of that revenue stream from a transactional revenue stream to an asset based or recurring revenue stream. And the team in brokerage has done a great job. I think if you look at wealth brokerage and retirement in total I think David Carroll and team have that portion of the revenue base that's recurring, their revenue basis for occurring now up to the high 70s which is absolutely terrific.
So we're excited about that business there are still lots of opportunities within that. And we continue to see it grow. Obviously it's the benefited by the improvement in the equity markets and more transactions that take place but you got to manage the business assuming that's not going to continue.
We're just about out of time please join me in thanking Tim and we'll be doing a breakout session across the hall immediately following this. Thanks.
Great, thank you.
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