Release Date: April 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Solid financial results reflect progress in improving and diversifying financial performance and strength in the U.S. economy.
- Investments across the franchise contributed to higher revenue with an increase in noninterest income offsetting a decline in net interest income.
- Wealth and Investment Management business benefited from higher equity markets.
- Continued execution on efficiency initiatives, including reducing headcount, which has declined every quarter since Q3 2020.
- Strong capital position with a commitment to returning excess capital to shareholders, including repurchasing more common stock in 2024 than in 2023.
Negative Points
- Net charge-offs were higher than a year ago, although stable from the fourth quarter.
- Average commercial and consumer loans were both down from the fourth quarter due to higher rates impacting demand and a strategic reduction in exposure in certain portfolios.
- Increase in expenses from a year ago driven by higher operating losses, FDIC special assessment, and increased technology and equipment expense.
- Consumer delinquencies continue as forecasted, with certain commercial office properties showing weakness.
- Regulatory pressures remain high with the risk of further regulatory actions until all risk and control work is complete and validated by regulators.
Q & A Highlights
Q: What are your thoughts on the journey to the mid-teens ROTCE goal and how do you see the 12% return on tangible common equity this quarter?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) We are on a journey to achieve returns like the best of our peers. To get closer to a 15% ROTCE, we need to optimize capital and balance sheet, see returns from investments in our businesses, and continue to drive efficiency across the company. We have confidence in reaching our goals. (Charles W. Scharf - Wells Fargo & Company - President, CEO & Director) We acknowledge that we were out-earning when NII was rising, and we are focused on sustainable returns. We are optimistic about improving business performance, continued capital return, and managing within our risk appetite.
Q: Is the current CET1 ratio around 11% where you expect to operate going forward?
A: (Charles W. Scharf - Wells Fargo & Company - President, CEO & Director) We continue to think through our capital needs. Our regulatory minimum plus buffers is at 8.9%. We are conservative but also recognize that holding too much capital is not beneficial. We will learn more about Basel III endgame and adjust accordingly.
Q: Given the excess capital and the pace of buybacks in Q1, should we expect this pace to continue?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) We have significant excess capital and flexibility. We will continue to evaluate capital requirements, risks, and client activity each quarter before deciding on the pace of buybacks. We expect to repurchase more common stock this year than in 2023.
Q: Can you provide additional color on market share opportunities in corporate capital markets and the level of investment needed?
A: (Charles W. Scharf - Wells Fargo & Company - President, CEO & Director) We are underpenetrated in investment banking and are investing in talent and technology to strengthen our position. The investment is embedded in our current spending, and we do not anticipate a step-up in expenses. We see opportunities to grow in debt and equity capital markets and trading by leveraging our platform and relationships.
Q: Can you discuss the dynamics of deposit repricing and the last mile of deposit mix shift?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) On the commercial side, pricing is competitive and will likely remain so until the Fed moves rates. On the consumer side, standard pricing is not moving much, but customers are spending from checking accounts or moving to higher-yielding products. The pace of migration has slowed, and we will continue to monitor this.
Q: How do you view the potential for loan growth given the current interest rate environment?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) We expected loans to decline in the first half of the year and see modest growth in the second half. Loan demand is low due to cautious client behavior and anticipation of lower rates. We are focused on areas like credit card loans, which continue to grow.
Q: What is the base case interest rate environment for your net interest income outlook?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) Our baseline forecast includes around 3 rate cuts this year. We are not guessing what will happen with rates but are considering various factors including deposit balances, mix, pricing, and loan demand.
Q: How should we think about the potential cost savings from risk and control work and the reinvestment back into the business?
A: (Charles W. Scharf - Wells Fargo & Company - President, CEO & Director) We are not focused on efficiencies from risk and control work at this time. Our priority is to complete the work and build it into our culture and processes. We are focused on existing inefficiencies within the company, separate from risk and control spending.
Q: Can you provide insights into the NII guidance and the expectations around it troughing towards the end of this year?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) We expect NII to trough towards the end of the year based on asset repricing, loan and deposit behaviors, and stabilization in deposit mix. It's difficult to call the exact date, but we are getting closer to that point.
Q: How do you contextualize the potential benefits once the asset cap is lifted?
A: (Charles W. Scharf - Wells Fargo & Company - President, CEO & Director) The lifting of the asset cap is more about reputational improvement than pure economics. We have limited certain activities to manage below the cap, such as financing for trading clients and accepting sizable corporate deposits. Lifting the cap would allow us to grow in areas we are confident in and take full advantage of our franchise.
Q: What is the expected long-term normalization level for noninterest-bearing deposits?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) It's difficult to say with certainty where noninterest-bearing deposits will stabilize. We expect it to stabilize as the mix of consumer deposits reaches a core operating balance.
Q: How should we think about the operating leverage if market-sensitive revenues are higher than expected?
A: (Michael P. Santomassimo - Wells Fargo & Company - Senior EVP & CFO) In wealth management, the cost-to-income ratio is stable, with cost-to-revenue being a little less than 50%. Operating leverage is good, and we do not see significant pressure points on costs if revenues exceed expectations.
