Wells Fargo & Company (WFC) 24th Annual Financial Services Forum (Transcript)

Wells Fargo & Company (NYSE:WFC) 24th Annual Financial Services Forum February 14, 2023 8:35 AM ET

Company Participants

Mike Santomassimo – CFO

Conference Call Participants

Susan Katzke – Credit Suisse

Susan Katzke

So, good morning again to everybody in the room. For those of you with us virtually, I’m Susan Katzke. I cover the large-cap banks for Credit Suisse, and our next presenting bank this morning is Wells Fargo, again this year, a topic pick in the bank space, given both the progress and the increasingly clear potential for this bank to materially improve the returns that you generate.

I’m pleased to be joined once again by CFO, Mike Santomassimo, year three in this role at this conference. So we’re going to jump right in. We’ve got a lot of ground to cover over the next 40 minutes here.

Question-and-Answer Session

Q – Susan Katzke

And let’s start really by level-setting around the macro. Let’s talk about the operating environment and what, if anything has changed in your view around the macro in the four to five weeks since earnings?

Mike Santomassimo

Yes, well, thanks again for having us, great to be here in person, again. Look, I think the data and you can see it again this morning, the data has been quite mixed. You’ve got a really strong job market that continues to outperform probably where everybody expected it to be and then you’ve got some weakness in a lot of other areas, particularly as you look at through the industrial or even consumer side.

And so, you’re left with what’s going to really happen. You can see the CPI print this morning again was a little bit higher than what was expected there. But I think what you’re seeing underneath that is, you’re seeing what you would expect. You’re seeing some slowdown in many different sectors. And so, we would expect that to continue across the different portfolios we have now. Overall, things are in still pretty good shape.

You’re seeing good performance in the consumer and the commercial side, but you’re certainly seeing a lot of mixed data, which I think is people are having a hard time digesting to see what that really means for the macro across the rest of the year, and I think we’re seeing lots of interest rate volatility still. Every time, I know it feels like we talk about that every time at one of these – in these sessions and in earnings and other things.

And every time you think it’s going to kind of stabilize and you got a direction, things change. And we’ve seen that again just in the last few weeks. And so for us, we’re still thinking that it’s going to get worse and as we go throughout the year, we got to be prepared for a whole bunch of different scenarios of what that means.

Susan Katzke

Okay and so as you prepare for the scenarios, I’m curious, when you look into your customer behavior, when you look at whether it’s consumer spending or commercial borrowing and line utilization, what are you seeing from your clients right now?

Mike Santomassimo

The spending data is still really healthy. If you look at debit card spend, it was up about 3% year-over-year in January versus, I think, December was more like 1% up and so good activity there. The beginning of the month was a little stronger than the end of the month. We’ll see how that continues, if that continues. And it’s really driven by the same drivers we’ve seen over the last number – last couple of quarters.

Travel, entertainment is up a lot in terms of where people are spending their money. And so, I think that excess savings that was in the system continues to be spent through what we’re seeing. On the credit card side, we were up almost 20% in the month year-on-year. Again, some of that may be outperformance, given our new product lineup that we’ve got. So the industry maybe a little bit different and it’s really across the board in categories that we’re seeing.

So the consumer side, people are out there still spending, and you can see that in your day-to-day life, and trying getting a restaurant reservation in most cities these days, right, it’s really hard if you want to do something last minute. And so, I think we’re seeing people out there. On the commercial side, in the commercial bank, line utilization has stabilized now probably for three, four months at least. So, we’re not seeing this big increase in utilization.

Where we’re seeing still good activity is on growth of new customers and some new facilities that are out there for customers, but we’re not seeing a lot of utilization changes in the commercial banks and similar in the corporate and investment bank, where we’re not seeing a lot of activity there. Obviously, we’re going to have certain portfolios like commercial real estate are going to be impacted a little bit differently. But overall, the consumer side is still pretty healthy in terms of activity and the commercial side is pretty stable.

Susan Katzke

Okay and so just to be more, clear in terms of the macro and your central case that you would still be looking for mild recession at some point this year?

Mike Santomassimo

Yes, whether it’s going to be a recession, mild, not mild, it’s like – that’s a hard thing to really get right. But what we would expect is things are going to continue to get a little worse.

Susan Katzke

Okay.

Mike Santomassimo

Yes and you see that in small ways as you look across different portfolio, but we would expect it to get worse throughout the year, and that will have an impact both on the consumer and the commercial side.

Susan Katzke

Okay, fair enough. So let’s then take this operating backdrop to the kind of hotter topics, if you will, of NII resilience, operating efficiency, consent order remediation and we’ll start with NII resilience. So kind of along the lines of deposit flows, mix and beta, we know from the H8 data, the deposit balances industry-wide are down first quarter to-date. And clearly, all deposits are not equal, how is your deposit growth tracking? And how have the flows in consumer, commercial wealth kind of deferred and progressed in your portfolio?

Mike Santomassimo

Yes, what we’re seeing is what we expected to see, right, and it’s a continuation of what you saw at the end of last year, and as rates have gone up so much, you’re seeing normal behavior. And it’s different across the different portfolios. And as you said, the H8 data would say in aggregate, the system’s down a little less than 2%, large banks a little more. We’re tracking in line with that and if you go across the different businesses.

We’re seeing the most percentage of – most rate-sensitive deposits in our wealth business moving. And so, I’m sure most people in the room and on the webcast are doing similar things, whether you’re buying T-bills or money market funds. And so, you’re seeing a continuation in the wealth space of those deposits moving into cash alternatives. And we can see the activity, where they’re moving from cash to those alts or they’re taking risk out of other positions and they’re adding it into cash alts today.

And so we’re seeing that continue into the quarter. On the consumer side, it goes back to what we’re talking about a little while ago. It’s first and foremost spending. People are consistently out there spending some of those deposits. You see, there’s always a consistent amount that’s going into other providers, whether it’s Internet banks or other alternatives, but it’s changing a little, but not super significant.

The biggest driver is spending on the consumer side. And on the commercial side, we’re seeing a little bit of stability there in the balances, both in the CIB and in the commercial bank, where you’re seeing more stability on those balances overall. And so, deposits are largely tracking the way we thought they would track at this point.

Susan Katzke

And with that consumer spending, I gather that means you’ve got more noninterest-bearing deposit runoff?

Mike Santomassimo

For sure and you’re going to continue to see that. If you look at where we ended the quarter – last quarter we were at about 34%, I think, of non-interest bearing as a percentage of the total. And if you go back a few years, we were probably more in the 25%, 27%, 28% – high 20 percentage point range. And so, I would expect over a period of time, we could track back to that which again is what you would expect to see, I think, given what we’re seeing in terms of the spending and also just overall trends.

Susan Katzke

Well, that’s good, you answered my next question. So, going back to towards 25%, but if I think about kind of how you progressed back there, having not had as much excess deposit inflow as you managed to keep your balance sheet within the parameters of the asset cap, I assume your migration might be slower than others who had all of the excess come into play?

Mike Santomassimo

Yes, we’ll see how that progresses, right, and I think the – when you look at the – it’s really a function of what you’re going to see from both the competitive environment, the rate environment and sort of what the spending data looks like that, but the pace, we’ll see and how that compares to others, it’s hard to predict, but it could be.

Susan Katzke

Well, so if we switch from mix to beta and pricing and the competitive environment, I’m curious in that interest-bearing component, would you expect your beta to outperform? And how are you thinking about how you want to retain and build consumer deposit balances? How competitive are you willing to be?

Mike Santomassimo

Yes, look, there’s a lot that goes into that and outperform, underperform, it’s sort of I try hard not to make predictions of that because it’s all relative to what you think. But the — what we’ve seen happen so far is the commercial side of the deposit, the betas had been pretty high for a couple of quarters and that will continue. But we’re pretty comfortable that we can compete effectively for those deposits where we want to, and we’re really focused there on core operational deposits that help support a lot of the business that we do with those customers.

And so we feel good with our ability to do that pretty effectively. On the consumer side, you really didn’t see pricing move until the fourth quarter, which again is kind of what we expected to happen and where we’re focused there is first thinking about what’s the right way to handle our client base is over a longer period of time. And I think you’ll see, so far, the betas have probably overperformed, where we had modeled they would be.

And we’ll see how that progresses throughout the year, and I think a function – that’s going to be a function of what we see in terms of spending levels, competitive environment and a whole bunch of other factors that go into it.

Susan Katzke

Okay, so let’s switch from deposits to loan growth and talk about the demand that you’re seeing and really, the health of the demand that you’re seeing?

Mike Santomassimo

Yes I mean, the loan growth demand really has moderated quite a bit and you can see depending on which angle you look at the Fed data, on like it’s sort of flattish to down a little bit quarter-to-date end of period through the last week or two is certainly down across the industry, and I think that’s what we’re seeing as well. And when you go talk to clients about it, I think there’s, certainly a number of them that are continuing to invest through the macro-environment we’re in.

But certain others are also sort of hunkering down a little bit and being a little more – a little bit more conservative as well, and each of the portfolios is operating a little bit differently. We’re seeing growth in card we are seeing shrinkage in auto. Some of that is the returns that are in that portfolio just aren’t very attractive. Some of it is credit tightening that we’ve been doing, and the commercial bank continues to grow as I mentioned before really because of new client growth and new facilities, not the line utilization.

And so it’s moderated as we thought it might. You really – we really saw outsized growth last year, particularly in the first and second quarter, and it really has been much more moderate since then and so that’s what we would expect to see right now.

Susan Katzke

Okay, fair enough. And then in terms of pricing on the commercial side in particular, I know that’s been an area of discussion, pricing getting any better?

Mike Santomassimo

It’s a bit – a little bit of an odd area of discussion honestly, but the shorter answer is, like it’s not much has changed. And I think it’s still a pretty competitive environment for the clients, our target client base. And so, we’re not seeing loan spreads move much at this point. Obviously, it’s a little different by portfolio, where you see a little bit of – you might see a little bit of expansion in certain portfolios. But overall, in aggregate, it’s not moving that much at this point, and I wouldn’t expect it to move significantly just given the competitive nature of the environment we’re in.

Susan Katzke

Okay. So let’s go to guidance, because I know that’s really your favorite topic?

Mike Santomassimo

Yes.

Susan Katzke

So, if we consider deposit flows and loan demand, and I know it’s early in the quarter, we’re only halfway through, you guided to no material step-down beyond the cost of day count for NII in 1Q ’23 relative to 4Q ’22, so are you still comfortable with that statement?

Mike Santomassimo

Yes, I know at this point, I think we’re tracking where we thought. The day counts are closer to a couple of $100 million. And so you adjust for that, we’re in that neighborhood. And so, we’re pretty close to that. So, I think – it’s still the case. And then when you broaden out for the full year, we’re still comfortable with our up 10% guidance that we gave.

Susan Katzke

Okay, perfect. So before we close out the – this side of the balance sheet, let’s talk a little bit about earning asset composition, because we did loans we did deposits, but on cash in the securities portfolio, where do you see those settling out, assuming the asset cap remains in place for the duration?

Mike Santomassimo

Yes I mean, I think if you take out some of the noise that happened during COVID, particularly on the cash side, the percentage of cash and securities has been pretty consistent over a number of years. And so that’s probably – if you look at the historical averages and you take out the excess that we saw in cash in particular, that’s probably not a bad way to think about it.

Our first priority is, of course, being there for clients and really helping support them and that means loans. And then to some degree, securities will be the outlet for what we think the excess liquidity that we have and – but as a percentage of the overall, thinking about it in terms of what those historical average has been is probably not a bad way to model it.

Susan Katzke

Okay, and because it’s always a lot of fun to go to this next question, I’m not sure fun is the right word, but what do you think your balance sheet would look like without the asset cap in terms of that mix of loans of securities and actually also of trading assets, which has been a business that was shrunk in part, because of the asset cap?

Mike Santomassimo

Yes, you know I like the, what ifs. But I think the – you have to start with the actions we took during COVID in particular to make sure we manage under the asset cap. And then really, there were two things that we focused on mostly. First was deposits and we pushed a lot of deposits, particularly in the commercial and corporate investment bank side off, and those were our most rate-sensitive deposits.

So that really helped to position our balance sheet pretty well coming into the rate environment, which we’re seeing the benefit of, on the asset side, really we shrunk the trading assets and shrunk the markets business in particular. And so, I think those are the areas that we had to take some action on. And so, I think as we progress, we’ll see how those grow and once we get to the point where the asset cap is lifted, it will be somewhat of a function of what the environments like too where we see those opportunities.

And then, we’ll see how that progresses and I would just caution everybody, when we get to that point, it’s not a light switch kind of moment right. So, this will – whatever the end state looks like, it will take some time to get there, but we think there’ll be opportunity when we do.

Susan Katzke

Okay. So let’s switch gears into operating efficiency. Your guidance is very clear, $50.2 billion is starting point for 2023, and I think you and Charlie have been very clear about savings opportunities, efficiency opportunities, your determination to invest and to improve upon your efficiency ratio, which we’ve seen you do year-to-year. So on the efficiency ratio, there’s been a lot of improvement. Are you thinking about – do you want to share some thoughts on where the efficiency ratio ought to go in time?

Mike Santomassimo

Lower, but I think if you look over the last few years, the efficiency ratio is an important output, but where we’ve been really focused is getting the absolute dollar of spend down and to where we want it to be. And then I think and the efficiency ratio obviously is, there will be a function of where we get expenses, but also there is a revenue element of that as well.

So we’ve been focused on getting absolute dollars of cost out of the system and then really embedding the disciplines that we want into sort of how we operate the place every day, because over time, like that’s going to be what’s most important is that people come in every day thinking about how to make the place more efficient, how to make sure we’re making the investments for growth in that the efficiency ratio will take care of itself over time.

I think when you look at where we’re going to continue to get savings it’s all the places we highlighted in our earnings. And we still think as we go through this year, there is still a lot of opportunity to get more efficient over time. And it just takes a little bit of time to sort of get there as you sort of whether you’re automating, you’re consolidating, you’re – there’s lots of – and we’re exiting real estate.

There’s a whole – it’s really across the whole company where those opportunities still exist, and we still very much believe that our businesses should operate, should be as efficient as their best peers and obviously, ultimately, you will see that not only in efficiency ratios, but you’ll see that in the returns of each of the core businesses. And we think will – but it just takes some time to get there. As it goes to this year, we feel good about the guidance we gave.

But I’d also say, as you look at quarter-to-quarter sometimes, that can be a little bit different. We still have seasonal cost in the first quarter. It generally is around $600 million from fourth quarter to first quarter. And so, you got to sort of keep some of that in mind as you do the modeling, but we still feel as confident as we have around there’s more opportunity to get more efficient, and the efficiency ratio will continue to improve hopefully over time.

Susan Katzke

Is there a level that, that efficiency ratio has to get to, to sustain a 15% ROTE?

Mike Santomassimo

It’s just one piece of getting to that 15% ROTCE, and we made – we feel like we’ve made a lot of progress to sort of get to from where we started this conversation back in the fourth quarter of 2020. But it’s one piece of it and I think we’ve got to continue to execute there. And if you look at what we’ve done in the efficiency program, we said we would deliver about $10 billion of gross saves.

For ’21 and ’22, we delivered $7.5 billion you add in the $3.2 billion that we said we would deliver this year. So we’ve exceeded what we said we were going to do there by the end of the year. And so, we’ve got to keep on it while we continue to make the investments that we need to make to grow each of the underlying businesses. And so, it’s one element of it, but we’ve got to continue to do that. We’ve got to continue to optimize the capital, we’ve got and we’ve got to get some of the benefit of the investments we’re making.

Susan Katzke

Fair enough. And just to stay with efficiency and optimization as part of that for one moment, on home lending, are you making the progress that you had anticipated? And where are you in terms of the market for the MSRs? Is there a market for the MSRs right now? And what’s the benefit of shedding those assets?

Mike Santomassimo

Yes, I mean still, we’re very – it’s only been a short amount of time since we made the announcement, right, so in early January. And so, there were really two pieces of it. First is, we announced we would exit correspondent. And we’re largely done with that. We’ve got some pipeline sort of work through over the next few months. But for the most part, we’re not taking in any new activity there.

So that’s largely completed and that’s going to have a very small impact on ongoing revenue in that business, but it certainly helps reduce some of the complexity that’s there. On the servicing side, that’s going to be a longer journey as we do that, and really the goal there is to simplify the servicing environment that we’ve got, which we think over time will actually improve the profitability of that business quite significantly.

And so that’s really the goal. And then for MSR, we’ve said we’re going to shrink that and we’ll – there certainly is a market for MSRs and the right portfolio of loans underneath it and so we’ll see how that goes, but that will take some time to work through.

Susan Katzke

And I gather with that being done that in terms of kind of the core franchise of Wells with Asset Management gone and Corporate Trust gone, that this is it?

Mike Santomassimo

For the most part, I think in – any company, you’re always looking – you’re continuing to look at some of your businesses and make sure there’s nothing else that you want to do in terms of optimization, but when we started this journey, the focus was really how do you make sure you’re focused on what’s important for your core client segments that you’re going after. And that’s really what drove the simplification of Asset Management and Corporate Trust.

And I think at this point, we feel like we’ve got all the pieces we need to continue to compete effectively. The only thing we’ve talked about in the past is our rail business that we continue to optimize, but overall, we’ll continue to look at the overall business mix, but we feel comfortable with where we are.

Susan Katzke

Okay, so let’s take that into kind of consent order remediation, litigation risk, legacy issues and I think simplification is one part of driving towards progress against all of that and as we sat here over the last three years. I think your role and where you spend your day has clearly shifted as you’ve made more and more progress in addressing the legacy issues? I am just curious qualitatively, as you kind of think about your to-do list and Charlie’s to-do list and how you spend your time on remediation versus BAU where are you now?

Mike Santomassimo

Well, I would say the highest priority we have across the Company still remains like completing the work we’ve got to do on the risk and regulatory build out that we’ve got. And that’s going to be the highest priority we have across the management team until it’s done. And having said that, we continue – as we make progress, we continue to focus energy on continuing to build out the capabilities and the businesses that we have across the company.

And not all parts of the company are as – the intensity is not as great in all parts of the company on some of that work. And so, we continue to make progress on both, but we’re going to continue to make sure that we focus and make the risk work the highest priority and until it’s all completed.

Susan Katzke

Okay. So in terms of risk, let’s talk about the RPL that you spoke to on the January earnings call. I think I just about fell off my chair, expecting that we would have to wait until the 10-K came out to get an update along those lines with that number and validate an assumption that we had that in the work that you had done in the second half of 2022?

The charges you were taking and the settlements that they were sufficient to materially reduce Wells Fargo’s litigation risk. So you spoke to $1.4 billion is the expectation of where the RPL would be when you were going to – when you would file your 10-K, which I assume you will file soon, but any update around that number?

Mike Santomassimo

No news, no update, no news around the number and I think it’s a — we felt it was important to put out that earnings for that very reason, right, is it’s a hard, it’s…

Susan Katzke

Wanted to see if I would fall off my chair?

Mike Santomassimo

I did actually, now that – I didn’t know that you did, so I’m actually happy that it worked. It’s hard for us at times to show the progress to folks. And so that’s one data element, one piece of data that we can show some of the progress that we’ve made as we sort of put some of these issues behind us. And it is important for us to put these issues behind us to kind of move forward.

I’ll give you all the right caveats around the number. It’s a point in time and it could evolve and there’s still work we have to do to – kind of work through the rest of the issues that could change that number. But we feel good that we were able to put a lot of things behind us in the second half of the year.

Susan Katzke

And I think it’s important to understand that, I don’t think you would have given that number to us if you weren’t highly confident at this point in time with where that number?

Mike Santomassimo

Well, I would hope that would be for any other numbers we give you, but…

Susan Katzke

Yes, fair, that’s fair.

Mike Santomassimo

We try not to give too many guidance or numbers or expectations that we don’t believe we are highly confident. And so hopefully, we’re very focused on making sure we set expectations that are reasonable and we deliver on those and that’s our focus the last few years.

Susan Katzke

Yes, okay. So we’re going to leave that topic unless there’s any other update on consent orders and progress. Okay, so let’s go to capital management. I think here too, we saw some good progress and good news watching your CET1 build over the course of last year. And even in midst the macro uncertainty that you speak to that you’ve got a willingness to buy back stock. You spoke to that willingness in the January earnings call. So have you begun to buy back stock?

Mike Santomassimo

We have. Look, we’re in a fortunate position where we’ve got a really strong capital position. And last year was certainly quite a year as we went through all the volatility that we saw particularly in the middle of the year, but certainly as even in the latter part of the year. And we’ve been very proactive to manage not only sort of the interest rate volatility that we have, but also the other risk-rated assets that we have across the firm.

And so, we’re in a very fortunate position to have a significant amount of excess capital. And so, we felt – we feel comfortable we have started buying back shares in the quarter and we’ll see. We’re still going to be very prudent with that, and so there’s lots of things that are out there that we’ve got to continue to sort of think about from a capital perspective, whether it’s we’re in the middle of CCAR.

We’ve got the Basel III end game, Basel IV requirements still to get sorted. You’ve got other changes around how CECL gets integrated in the CCAR. You’ve – as well as all the other volatility around interest rates and other that’s out there and also sort of the slowing economy. And so, we’ve got to weigh all that, but we feel good about the position we’re in.

Susan Katzke

So, you weighing all of those uncertainties, et cetera, you spoke to a 100 basis point buffer over the 9.2% CET1 requirement. If not mistaken, that’s more – a more kind of normal buffer than where you had been at 100 basis points to 150 basis points?

Mike Santomassimo

Yes, I’m not sure, normal, but what we’ve said is, like, we feel really good about where we are and like we’ll manage to plus or minus 100, and that may be different in any given quarter, could be higher, could be lower depending on what’s happening in that quarter, but we feel good about, like where we are and getting closer to that level.

Susan Katzke

Okay.

Mike Santomassimo

And all the risks that are out there.

Susan Katzke

And I assume, I mean, it’s somewhere between conservative or necessary given whether it’s CCAR or Basel IV and the macro risk?

Mike Santomassimo

Yes I mean, there’s certainly lots of things that need to get the play-out over the coming quarters to see where we end, right. And again, you highlighted CCAR, we’ll see how that – there’s pluses and minuses in terms of the severity of the scenario related to CCAR. We’re only a few days into having it. So, we’ll see how that plays out over the next number of weeks.

And then all the Basel III finalization work still needs to play out, and there’s, so many uncertainties on how all those different factors come in. And – but we feel good about our ability to deal with whatever comes given our current capital position and also what we see over the next couple of quarters.

Susan Katzke

Is there any clarity that you’re seeing in terms of where the Basel IV comes out?

Mike Santomassimo

No, not really. I mean, there’s a lot of factors that drive it, and I think there’s just so many moving pieces to it that we’ve really got to wait till the rule comes out. And I know the regulators are being very thoughtful about it. And so, we’re hopeful that it will come out and be reasonable, but there’s – even when you take the broad strokes of operational risk or credit risk changes or broadly sort of all the capital markets-related changes.

There’s, a lot of technical aspects of it underneath and how that will play into the stress capital buffer regime. And so, I think there’s, a lot of nuances that are hard to predict exactly where they’ll come out. But having said all that, we feel like we’re in a really good position to deal with whatever happens.

Susan Katzke

Okay. So let’s switch gears to credit costs and you’ve spoken to incremental risk in commercial real estate, in the Office segment, in particular. What else are you watching more closely as you speak to deterioration in the economy over time?

Mike Santomassimo

Yes I mean, we’re looking at all of the portfolios in a lot of detail and trying to look at not only the actual performance, which again has been quite good, but also what the leading indicators could look like. And when you really drill in, if you start on the consumer side, it’s still a mixed bag. You’re certainly seeing a gradual deterioration in performance, but it’s been really gradual. And month-to-month, the indicators can be quite mixed, like some are positive, some are negative, and – but it’s not translating into real significant changes in performance yet.

You’re certainly seeing credit card delinquencies increase a little, you’re seeing charge-offs increase a little. You’re seeing some noise in the auto portfolio. But overall, it still feels okay, and it’s moving in a very gradual pace in the consumer side. In commercial real estate, there’s certainly a lot of potential stress in the office market. It’s a long movie, though.

We’re still pretty early in the movie. And so it’s going to take a while for that to play out. It hasn’t really translated into any significant loss content at this point, but it’s certainly something we’re very focused on. You certainly see newer, higher quality properties perform a little better than older, lower quality properties.

Generally speaking, you’re still looking at certain cities across the office space, whether it’s San Francisco or L.A. or Washington, D.C. or cities that have lower overall lease rates for various reasons. But overall, it hasn’t quite translated yet into any significant losses. And I think – but we’re expecting that to get worse over time, and we’re proactively managing it.

Susan Katzke

And what – if we think about kind of a cyclical turn, what might be different about the progression of loss rates in your portfolio this time around understanding both business mix? And really what’s been an excellent legacy track record on credit risk management?

Mike Santomassimo

Well, certainly, if you go back to the great financial crisis, the portfolio is very different than it was back then in terms of much higher quality. And so, I think that’s a good thing. Consumers and our commercial customers have come into this environment in a very different position than they have in the past as well. And I think for the most part, we’ve all been wrong so far about the progression of this. And so, we’ll see, but so far, what we’re seeing is gradual deterioration on the consumer side.

On the commercial side, you’re seeing stress on margins and in certain sectors. But again, it hasn’t quite translated yet into significant loss content. So, we’ll see how things go. And if we continue to see a strong labor market, that will be helpful as we go through the rest of the year. And so, we’ll see how it goes. But it’s hard to predict because we’ve all been a little off so far, and it’s performed much better than I think we would have all guessed at this point.

Susan Katzke

Which is a good place to be?

Mike Santomassimo

Yes, absolutely better. I’ll take it.

Susan Katzke

So, in terms of broader risks that you’re watching right now, whether it’s within the banking industry or really adjacent to the banking industry, how are you feeling about your non-bank financial lending book? I know that sometimes is one that’s in focus for us and otherwise. With all of the risk around the non-bank financials, how are you feeling there?

Mike Santomassimo

Yes, on the non-bank financials, if you break the portfolio down a little – and first of all, the portfolio has been performing quite well and it’s performed well for a very long period of time. About roughly 40% of it is with asset managers and both alternative asset managers and traditional asset managers. And the biggest chunk of that is related to subscription and capital call facilities to very – for the most part, big alternative managers.

And so – and that’s performed quite well over a very long period of time. And there are some other pieces of it. If you look at the next biggest chunk, it’s lending against investment-grade loans or other types of corporate credit. Again, very good underwriting over a long period of time that’s about, call it, 30% of the portfolio. So between those two, that’s about 70% of the portfolio.

And then there’s some lending we do against – whether it’s commercial or resi mortgage loans as well and then there’s, some other smaller pieces of the portfolio. But overall, we feel it’s performed quite well, and we’re very conscious of ensuring that we’ve got the right coverage and the vast majority of it is all secured at really good attachment points. And so, we feel good and it’s performed quite well so far.

Susan Katzke

Okay. So we’ve had a pretty complete update here. And as we wind down the clock, we have covered a lot of ground. We’ve made tremendous progress over the last several years here. And there’s now this line of sight that’s, I think, pretty clear to a 15% ROTE for the bank. So, let’s assume less of an interest rate tailwind in somewhat more normal level of credit cost, though I think we all struggle to define what normal is? What needs to happen to realize that sustainable 15% ROTE? How much growth? How much operating leverage? How do you get there?

Mike Santomassimo

Yes, I mean it’s really a little bit of all those things, right, that sort of help us get there. And if you go back to where we start – again start of this conversation a couple of years ago. We came out of 2020 at about 8%. If you adjust for the operating losses that we had in the fourth quarter of 2022, you’re in the teens, right? And so we tried to be very clear in January that we didn’t think that was a sustainable number for the things that you talked about.

We’re probably over-earning on NII given where rates were and pricing is. You have credit costs to normalize more and so you can – reasonable people can pick what number they think we’re at, and I’m sure everyone’s got their own opinion. And so, we feel like we’re – we’ve got really good visibility to get to that 15%. And I think it will be a little bit of all the things we talked about. We got to continue to execute on the things we can control, which are the efficiency, work and capital optimization, both in terms of buybacks.

But also continuing to optimize the balance sheet, and what we’re doing in the mortgage business helps to some of that as well. And then it’s getting some of the benefit of the investments we’re making. You’re seeing us start to see a little bit of that in the credit card space, where we’re getting good traction on the new products. It hasn’t really translated into big earnings growth yet because you’re still in the intra-APRs and you’re – but that will start to come soon.

We’re continuing to build out the investment banking business that we have, particularly focused on our commercial bank customers and some of the large corporates where we already have exposure. And we’re – and that’s – but that will take some time in the market – it’s a little market-dependent. We’re continuing to make progress in our wealth business, both in the recruiting side, but also the capabilities we have there.

And part of that is also getting better integration with our consumer banking business and our premier – our Wells Fargo Premier offering that we launched last year. And so it just takes – it takes time to sort of get the benefit, but it’s a little bit of all those things that help drive it. And we still feel very good about getting there in the medium-term.

Susan Katzke

Great. Well, each year that you’ve come here, you’ve come with a good bit of progress under your belt. So, I look forward to sitting here at this time next year, and I assume that path to 15% will be all the more clear.

Mike Santomassimo

Well, we appreciate that.

Susan Katzke

Thank you for joining us.

Mike Santomassimo

Yes.