Wells Fargo & Co. (NYSE:WFC) Goldman Sachs US Financial Services Conference 2018 December 4, 2018 7:30 AM ET
Tim Sloan - President and Chief Executive Officer
Richard Ramsden - Goldman Sachs
Okay. So, good morning, everybody. My name is Richard Ramsden and I head up the Financial Services business unit here at Goldman Sachs. On behalf of the firm, I am delighted to welcome you all to our 29th Financial Services Conference. Over the next two days, we have 90 companies presenting and as of this morning, we have close to a thousand clients registered. So, thank you all very much for coming along. We really do appreciate it.
To kick off this year’s conference, and in keeping with a longstanding tradition, we are very delighted to welcome back, Tim Sloan, President and CEO of Wells Fargo. We think that Wells Fargo is in a position to return both more capital and generate more operating leverage that any bank that we cover as we head into 2019.
Tim is going to give a brief presentation and then he is going to join me for a fireside chat to talk about both the outlook of the economy as we head into 2019, as well as his priorities for Wells Fargo in the coming years. So, Tim, thank you very much for joining us. I really do appreciate it.
Great, thank you, Richard, and good morning, everyone. It’s good to be here. Thank you for inviting us. I appreciate your time. Just couple of provisos. The presentation that I am about to give creates and it has certain forward-looking statements regarding our expectations about the future. A number of the factors, many beyond our control could cause results to differ materially from management’s current expectations. And if you would, please refer to the Appendix for information regarding our forward-looking statements and where you can find more information about our risk factors. Information about any of the non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can be found in our SEC filings at Wellsfargo.com where you can also open an account by the way.
This is an updated version, this first slide of our Vision and Value slide that we’ve been using at the start of our presentations for over a decade. It highlights our consistent vision of satisfying our customers’ financial needs and helping them to succeed financially. It also includes our vision, our values and the six goals that we established last year.
Our vision values and goals are the foundation of our future success. We want to become the financial services leader in customer service and advice, team member engagement, innovation, risk management, corporate citizenship, and shareholder value.
I’ll update you on the progress that we’ve made toward each of these goals in 2019 and then our plans to continue to make progress on these goals and our priorities for 2019. But first, let me summarize our third quarter results which included an ROE of 12.04% and ROTCE of 14.33%.
We generated positive operating leverage on both a linked-quarter and a year-over-year basis and we continue to have strong credit quality, high levels of liquidity and capital. And to Richard’s point, we have more than doubled our capital return to shareholders compared with the third quarter last year.
We also have positive business momentum in the third quarter, which included primary consumer checking account growth which was up 1.7% from a year ago, increased debit and credit card usage with both debit – credit card – or debit card purchase volume up 9% and then consumer general purpose credit card purchase volume up 7% from a year ago.
We had higher loan originations with auto up 10%, small business up 28%, home equity up 16% and personal loans and lines up 3% from a year ago. We also had growth in our C&I loans with corporate and investment banking loans up 9% driven by increases in asset-backed finance and corporate banking. Commercial capital was up 5%, which was driven by Capital Finance and our Equipment Finance business.
With less than a month to go in 2018, let me highlight some of the trends we’ve seen so far this quarter. We remain modestly asset-sensitive and we currently expect net interest income to be up slightly for the full year with the fourth quarter being relatively stable plus or minus compared to the third quarter. Based on balances through the end of November and actually through last week, we are seeing consistent growth that we saw in the third quarter.
We currently expect C&I loans to increase while CRE loans are expected to continue to decline. Consumer loan balance should reflect higher credit card outstandings given typical seasonal trends, but we continue to expect declines in home equity and auto loan balances, although auto loan originations are expected to increase from the third quarter.
First mortgage loan balances will reflect the sale of a $2.5 billion of unpaid principal balance of pick-a-pay PCI loans in the fourth quarter, which we expect to result in a gain in line with the approximately $600 million that we realized in the third quarter.
In terms of deposit betas, we continued to experience strong competition in our Commercial businesses and Wealth and Investment Management, while retail deposit pricing remains relatively stable.
In terms of mortgage trends, as we indicated in our third quarter earnings call, we expect fourth quarter originations to be down reflecting seasonality in the purchase market, but in line with the industry, which is expected to be down approximately 15%. We also indicated that we expect the production margin in the fourth quarter to be within this year’s quarterly range of 77 to 97 basis points and we currently expect it to be approximately in the middle of that range.
Turning to expenses, as you all saw, the FDIC Special Assessment which cost us approximately $165 million in the third quarter will be eliminated starting in the fourth quarter and we are on track to achieve our 2018 expense target of between $53.5 billion to $54.5 billion, which includes approximately $600 million of typical operating losses and excludes litigation and remediation accruals and penalties.
Let me now turn to our longer term focus and the hard our team is working to transform Wells Fargo. While there is a lot more work to do, I am confident that the substantial progress we’ve made on our six goals this year are building a better Wells Fargo for all of our stakeholders and will drive our future success.
We highlight a few of our major accomplishments for each of the goal on these next few slides, starting with Customer Service and Advice, we sent an average of more than 36 million zero balance in customer-specific balance alerts per month during this year. This is just one example of the customer-friendly initiatives we’ve implemented which are helping our customers better manage their accounts.
The changes we are making are having a positive impact including retention of our primary consumer checking customers which reached the five year high in the third quarter.
In terms of team member engagement, which is our second goal, earlier this year, we increased the minimum hourly rate for our U.S.-based team members to $15 per hour which benefited approximately 36,000 team members.
We also reviewed pay for team members whose salaries were at or slightly above the new minimum wage and we increased the base pay for an additional 50,000 team members. We also granted an award of restricted stock rights for approximately 250,000 team members with a two year vesting period, which helps to tie their success with what’s important to our shareholders.
Our efforts to make Wells Fargo a better place to work also reflected in our voluntary team member attrition in the second and third quarter being at the lowest levels that we experienced in five years. We will continue to make improvements in team member engagement based upon the feedback that we receive from our new team member experience survey.
We’ve also continued to introduce industry-leading innovation using technology to provide our customers more control and transparency. In October, 28% of all of our retail mortgage applications were done through our new online mortgage tool. We also recently lost – launched, excuse me, Control Tower. I’ll talk about that more in a minute, which provides customers’ control over their Wells Fargo accounts and the response to the newly enhanced Propel card has exceeded our expectations.
We are working very hard to transform how we manage risk at Wells Fargo and our goal is not only to meet, but exceed regulatory expectations so that we have the best risk management in the industry. During the year, we hired new leaders in key roles including our new Chief Risk Officer, Mandy Norton; a new Chief Compliance Officer, Mike Roemer; a new Head of Regulatory Relations, Sarah Dahlgren and a new Chief Operational Risk Officer, Mark Weintraub.
We continue to have constructive dialogue with our regulators and we are taking their detailed feedback and making changes to our operational risk and compliance risk management structure. A key milestone in this process is our newly enhanced risk management framework, which transforms how we manage risk throughout the organization in a comprehensive, integrated, and consistent manner.
Leadership and corporate citizenship is one of six goals, because we believe that Wells Fargo should play a role in building stronger communities. According to a recent survey on corporate giving by the Chronicle of Philanthropy, the Wells Fargo Foundation was the number two corporate cash giver in the United States last year.
We are also – have been a large donor in this year, the Foundation announced that we are going to target $400 million in contributions in 2018 to communities across the U.S., a 40% increase from a year ago and we are on track to achieve that milestone.
For example, we recently announced a total of $1.7 million in donation to support relief efforts to the California wildfires. These donations are going to be distributed among a multiple of organizations in Northern and Southern California to help with housing and disaster recovery, fire fighter and first responder support, small business recovery and community relief.
Another example of our focus on Corporate Citizenship is the commitment that we made earlier this year to finance $200 billion in environmentally and socially beneficial business opportunities by 2030.
As part of our goal to delivering long-term shareholder value, we are committed to generating high returns and returning more capital to shareholders. This commitment was demonstrated in our most recent CCAR results with the shareholder returns included in the 2018 capital plan being approximately 70% higher than our previous four quarter capital actions.
In this third quarter, we increased our quarterly common stock dividend by 10% and we reduced our period-end common shares by approximately 4% when compared to a year ago. This year we’ve also established dollar targets as we’ve talked a lot about for non-interest expense for 2018, 2019 and 2020 to help our shareholders better track the progress in terms of us becoming more efficient.
So we are on track as I mentioned earlier to achieve our expense targets of $53.5 billion to $54.5 billion this year, $52 billion to $53 billion in 2019 and $50 billion to $51 billion in 2020. Each of these annual expense targets includes approximately $600 million of typical operating losses and excludes litigation and remediation accruals and penalties.
Our expense targets reflect our commitment of improving efficiency. The transformational changes that we are making across the businesses as well as changing customer preferences including the adoption of digital self-service capabilities. And while we are focused on reducing our expenses we’ve continued to invest in the future including increasing our investment in technology, which includes spending on regulatory and governance, safety and soundness, innovation, IT simplification, business support and growth and data management.
We expect total technology expense to increase by 10% this year spending a total of approximately $9 billion, which includes approximately $800 million specifically for cyber security. We believe the investments we are making today to modernize data and to accelerate the pace of innovation will lower cost in the future, while protecting our customers’ information and improving the customer experience which will enable us to grow and build more long-term relationships.
As I mentioned earlier as part of our six goals, we are focused on innovation and this slide highlights some of the new products and services we’ve launched or piloted during 2018. We’ve enhanced our ability to deliver personalized advice, increased our digital acquisition and improved our customers’ control over their payments activities.
There is a lot of examples on this slide, but let me just highlight a few of them. We recently launched our greenhouse pilot in select markets, which is a new standalone mobile banking app with money management tools.
The greenhouse app comes with two different deposit accounts, one for bills and one for day-to-day spending that’s tied to a debit card with bill money separate from spending money, customers are less likely to accidentally spend money intended for important bills. This experience is designed to help new to banking customers, including students to spend with greater confidence and stay on track with personalized modifications and reminders to help them along the way.
Control Tower, which I mentioned earlier, provides customers with a single view of their digital financial footprint including their Wells Fargo debit or credit card or account information where account information is connected including importantly recurring payments. It also allows customers to quickly turn on and off their credit and debit card from their mobile device.
We offered a debit card on and off functionality earlier this year and now over 90% of debit card on and off requests are handled digitally. Since late September, when we launched Control Tower with the added functionality, approximately 2 million customers have interacted with Control Tower and over 80% of those customers are going to the recurring payments list.
Our Enterprise API platform, Wells Fargo Gateway which integrates our services with partner platforms now has ten times the API traffic ahead at the start of the year. Our commercial customers are also actively using our new biometric login, which we fully rolled out in April with approximately 46% of our CEO mobile active users – excuse me – utilizing this new feature by the end of the third quarter.
We’ve accomplished a lot in 2018 and I am more excited than ever about the opportunities that we have in 2019 as we continue to transform Wells Fargo. Our priorities are anchored on our six goals and include continuing to execute on our consumer strategy which I highlighted in detail at Investor Day and our streamlined approach to serving our wholesale customers.
We are using feedbacks from the recently completed team member survey to improve the team member experience. We are attracting new customers and deepening relationships with our customer-focused innovation which I just gave you few examples of. We are enhancing compliance and risk management and exceeding the expectations of our regulators.
We are also focused on customer remediation and next week, we expect to resume remediation for customers who may have been impacted due to issues related to the automobile collateral protection insurance policies purchased through a third-party vendor on their behalf.
We are continuing to be a leader in corporate citizenship which includes our goal of donating 2% of our after-tax profits to Corporate Philanthropy starting in 2019 and in order to increase shareholder value, we are focusing on achieving our 2019 expense targets and returning more capital to our shareholders.
We are building a Wells Fargo to be the most customer-focused, efficient and innovative Wells Fargo ever, characterized by a strong financial foundation, a leading presence in selected markets, focused growth within a reasonable risk management framework, operational excellence, and above all, a highly set of engaged team members.
So, thanks very much. Now we’ll take some questions.
Q - Richard Ramsden
So, perhaps we can start off with a broad question around your economic outlook for the next year. There is obviously a number of conflicting signs from financial markets. There is a lot of concern around where we are in the cycle. When you look across your platform both on the Consumer or on Corporate side, do you see any red flags on the horizon? And how do you think the environment will change next year?
Yes, it’s a great question and it’s something that we talk about a lot. We are in the late innings of a long cycle. It’s unclear exactly how that long that cycle is going to last. But today, we don’t really see a lot to be concerned about. Now, we are concerned anyway. That’s what we do. But when we look at the Consumer, the statistics that I gave in terms of debit card and credit card activity continues into the fourth quarter.
I was just looking at yesterday some of the holiday season numbers and they are up in the high-single-digits. My guess is that’s what you are going to hear from folks over the next couple of days. We continue to see employment increasing. We continue to see wages increasing.
In fact, the biggest concern that I hear from our customers, small business, middle market corporate customers is their inability to hire enough workers, employees to execute on their growth strategy. So, our expectation is that we will continue to see good wage growth. We are not really seeing any sort of cracks from consumer delinquency or consumer loss standpoint in any of the product types.
On the Commercial side, again, it’s more of the same. I think, there was – we had a little bit of concern when we saw energy prices declined and what that might – impact that might have on the energy portfolio. But now they’ve come back a bit and it’s much more resilient than it was before.
But we are really not seeing a lot of cracks. So there is a lot of things to be worried about. But overall, I think we continue to be cautiously optimistic for not only the fourth quarter, but for 2019 though it’s probably unlikely that we are going to see the same GDP growth that we saw in the second and the third quarter.
Great. So, perhaps we can move on to the consent order. You’ve talked about having a good dialogue with the Fed and you’ve also talked about planning to operate under the Cap for at least the first part of next year. Can you update us on the progress in terms of getting that lifted? And I guess, the most important question is, is there anything that you would be doing strategically that you cannot do as a result of the consent order?
Sure, there is really nothing new to report in terms of the timing or the dialogue with the regulators whether it’s related to the consent order or any other area. We have introduced our new risk management framework that’s up and operating. We are continuing to improve compliance in operational risk. We’ve got a little bit more work to do.
But we are executing the plan as opposed to designing it and so that reflects a fair amount of progress. We are still planning and operating under the asset caps for the first part of next year. It’s really not impacting our ability to serve our customers in any of the businesses today. We’ve talked about that a lot. I appreciate why that continues to be a question. But it’s really not having much impact.
And it’s not really impacting what else we want to do. We are continuing to innovate. We are continuing to invest. We are continuing to hire really high quality people. So, so far so good.
Okay. So, perhaps we can talk a little bit about capital returns as well. So, $23.5 billion buyback announced this year?
What do you think about that?
I think it’s great. The question is…
Nobody in the room guessed that, by the way. That’s real pretty smart too.
Despite the fact that you are on track to return over $20 billion of capital this year, your capital ratios are actually flat at 11.9% and your target is 10%. So, two questions, the first is, what’s your ability to both grow the dividend and the buyback from here? And perhaps you can talk about that in the context of the NPR that Governor Quarles put forward on the SCB?
Sure. So, let’s maybe start with SCB. There is an NPR out there, which I know you are all familiar with. It seems unlikely that stress cash capital buffer will be implemented for this next CCAR and maybe the CCAR after that. But I do think it’s prudent to take it into consideration when you are thinking about capital planning for next year and the year after that which is when we hand in our capital plan for next year it will include both of those periods.
So, we got to be thoughtful about that. But, and so we haven’t deviated from what we said a year ago and that is that our goal is to get down to what we believe is an appropriate level of operating capital with a little bit of a buffer. Again, the stress capital buffer could have some impact on that. That’s uncertain right now. And to your point, we are at 12% right now.
There was a little bit of recalculation in the third quarter related to consumer or commercial real estate loans which had about a 20 basis point effect. But because of the fact that our balance sheet has remained relatively similar, it hasn’t grown a bit, because of the asset cap and we’ve had some loan run-off which we talked about.
Most of that were risk-related reasons from our perspective or because of the run-off of legacy portfolios. We still have excess capital. And our plan continues to be in the next couple of years to get down to that low 10% level. And so, I think your expectation should be that we are going to continue to return capital at a fairly aggressive rate, because we can, okay.
So, let’s segue to some of the business trends. So I guess, two questions. The first is, I think you’ve now grown checking customers for four straight quarters. Can you talk a little bit about some of the trends across the consumer side of the business? And whether you think that the business has started to inflect from a growth standpoint?
And then, secondly, you did talk about operating leverage. I think the third quarter was the first time that you actually had positive operating leverage in two years. What’s your ability to continue to drive that operating leverage into 2019?
So, in terms of the Consumer business, we are seeing good growth. I mean, we clearly turned from where we were a couple of years ago. You highlighted checking account growth and primary checking account growth is, now a year ago, it was about 0.7% or 0.8%, 0.9% and now it’s 1.7%. We still believe we have the ability to grow beyond that.
I think that reflects the impact of the changes that we’ve made in our Retail business. We changed the management team. We reduced the number of layers. We changed compensation. We improved training. We got new products and services. And we are really seeing a slow, but steady improvement in that business and our expectation is that is going to continue in 1.7% primary checking account growth is not enough.
If you look at some of the other consumer businesses, where we’ve talked a lot about the auto business. Now, we saw the originations flatten out in the second quarter, grow in the third quarter, our expectation is that they are going to grow in the fourth quarter. We are doing that by not opening up the credit box and taking a whole lot more risk. It’s really just getting back to the basics in that business given the restructuring that we’ve done in the business.
The mortgage business continues to be good. I would say, it’s not great just because we’ve had an overcapacity in the market today. That’s not new news. We will get through it. Our diversified model means that we’ve got better ability to compete than maybe others. And the credit card business, with the result of some of the new products like Propel that we offered this summer, as well as some seasonality, an improvement is going to mean you are going to see some continued growth in the credit card business.
So, overall, we continue to be optimistic about our ability to grow. Now, having said that, you are going to continue to see a decline in the legacy pick-a-pay portfolio, that’s running off or we are selling it. And you are going to continue to see a decline in the home equity portfolio. At some point, we’ll see an inflection in the next year or so. But home equity demand is actually pretty good. And the last question or keep going.
Perhaps, can you just expand a little bit on the loan growth outlook? So, I think, this year, I think your loans are going to be roughly flat, give or take, and as you said there is various moving pieces in that. How do you see that evolving as you head into 2019?
We’ve seen some good growth in C&I throughout the year and it’s accelerated a bit for us. You saw growth in some of the portfolios that I highlighted, Corporate and Investment Banking and Commercial Capital in the third quarter, we are continuing to see that momentum in the C&I portfolio. So our expectation is that we will see that growth. We will see growth in 2019.
Commercial real estate continues to decline though the rate of decline is slowing down a bit. Again, we love Commercial Real Estate. It’s an important business for us. But I think that’s one of the portfolio – or one of the product types that we are being relatively conservative about.
As it relates to the rest of the consumer portfolio, it’s more or less what I’d said and it continued. Our expectation is sometime mid next year you will see the inflection in our - the size of our order portfolio. So, actually the total balances will increase and we continue to believe that we are going to see increases in first mortgages, even with slightly higher rates and credit cards.
Okay. So, perhaps we could talk a little bit about the deposit outflows in Q3. So the industry broadly saw outflows in terms of non-operating deposits, I think it’s roughly 5% in the third quarter. Does that in any way change your view around asset sensitivity? You talked a little bit about deposit competition remaining intense in parts of the Corporate and Wealth Management business. What are you seeing on the Retail side? And are you concerned that you are going to see deposit beta to perhaps ramp more quickly as we head into 2019?
Well, I think it’s prudent to plan for an increase in deposit betas, because I think it’s logical to assume at some point that the rates that we are providing to our customers will catch up and start to move a bit faster than what we’ve seen. And that’s really what we’ve seen, to your point, so far in 2018.
Deposit beta, if you look at the point from – in 2015 or 2016, when the Fed started to increase rates from where we are today, the deposit betas are up on a faster rate this year than they would be for the average of that entire period. But it’s a tale of three cities in – or three portfolios. In the basic Retail business, we are not seeing much of anything. It’s low-single-digits.
And I think more of that competition is actually occurring in our marketing spend and whether that’s new offers to open account or some sort of a tie-in to another product. We are seeing an uptick in terms of rates on one year market rate in CD product. I think you are seeing that across the industry. But our expectation is that, that on the retail side, deposit betas will still be lower than maybe what all of our models would indicate.
And I think that that really reflects the fact that unlike, maybe in the last cycle, so much of our – what we are offering to our customers is free. And you think about a free checking, right, with very little usage or with deposit activity. You think about the innovation that we are providing and others are too, in terms of Control Tower or real time balance alert. There is real value to that and I think customers are appreciating that.
So, our expectation is that while betas might increase on the retail side, they probably won’t reach the heights that what we saw in the last cycle. But we will see. On the Wells side, we are seeing betas in the mid-30s, which is a slight uptick. I think that’s pretty consistent with the market.
What’s interesting is that, where the deposits are not actually leaving Wells Fargo, they are going into other investment products and to me, while that is a little bit disappointing, because deposits are down, it’s actually not because it’s the right thing to do for your customers to get them into the right products. We are seeing higher betas in the kind of mid-60s in the Commercial business and that really hasn’t changed that much.
So, credit costs are running at 30 basis points that they are being relatively stable not for a long period of time and I think that’s roughly half your estimated normalized level. What sort of economic environment does it take for you to get back to normalized losses? So, for example, if we saw unemployment increase by 150 to 200 basis points, if economic growth slowed close to zero even when slightly negative, what do you think that would do to your credit portfolio in terms of loss rates?
We haven’t run that scenario. But we can. I’ll go back. My guess is, is based upon the quality of the portfolio today. If it happened, for all that happen tomorrow, it would probably portend more problematic economy and so we could imagine it over time than after that getting back to kind of that mid-60s loss rate.
What you are describing is a scenario where over a reasonable period of time we get to that levels, I don’t think it would significantly impact and the reason I say that is, look back to where we were two years ago which was more or less the environment that you just described and our losses were not increasing. They were continuing to decrease.
Okay. So, we have a few minutes. Let me see if there is any questions from the audience. Perhaps one more from me then. You’ve sold a number of businesses over the last few years.
Sold some branches this weekend, yes.
So, where are you in terms of going through the business, rationalize the business, and in terms of divestitures? And I guess, conversely, I appreciate you can’t buy a deposit-taking institution, but other acquisitions that you would consider perhaps on the technology side or in terms of non-deposit taking financial institutions?
Yes, so, we have step back and looked at all the businesses that we are in, in the company and concluded to your point that there are some businesses that are worth more to someone else and worth more than we think that they are valued on our platform or not long-term or medium-term going to provide appropriate returns from a shareholder standpoint.
And when we see that, and that’s the case, we will exit the business. We are focused on making sure that not only do we get a good price, but that the team is taking care of and to the extent that whatever business we are selling, it also continues to have an impact on our remaining customers that we make sure that we sell it to someone that we are comfortable not only will give us a good price but will treat our customers well. And so far, that’s been the case.
We will continue to apply that discipline to the company for as long as I am associated with it. I just think that’s prudent management. And businesses change, customer tastes change. So, you’ve got to be a little bit flexible. I don’t think there are significant changes that we are going to make to our platform. But at the margin we are going to continue to have that discipline.
On the technology and innovation front, I don’t necessarily think that the only strategy that we would want to employ would be acquisition. When we think about innovation, we look at, does it makes sense to build it ourselves? Does it make sense to partner with somebody like we’ve done with Blend for example with the mortgage – or the online mortgage application. Does it make sense to make an investment or does it make sense to make an acquisition. And I think any one of those strategies is appropriately employed and you will see us continue to use every one of those strategies.
Yes, okay. We have time for one question from the audience if there is one. Okay. One at the front.
Hey, Tim. Thanks for being here. Could you talk a little bit about your thoughts on, on pooling excess liquidity given the uncertainty and higher yield curve and whether you started to add duration in that book continuing up here. A commentary on that would be helpful.
Yes, you know what, it’s interesting. We haven’t added a lot of duration. We’ve talked about it a fair amount. But, what’s interesting is that, because the yield curve has flattened a bit, the cost of not investing, right or not adding duration is really going down. And it’s allowed us to have a little bit more flexibility. So, a long answer to your question, we haven’t added a lot of duration, but we are seeing an improvement in the yields and particularly on the short-end.
Okay. Tim, thank you very much.
Thank you. Appreciated.