Wells Fargo & Company (NYSE:WFC) Goldman Sachs 2022 US Financial Services Conference December 6, 2022 8:00 AM ET
Company Participants
Charlie Scharf – Chief Executive Officer
Conference Call Participants
Unidentified Analyst
Okay. So, I’d like to welcome everybody on my behalf to the 33rd Goldman Annual Financial Services Conference. We’re delighted to have our first external speaker who is Charlie Scharf, President and CEO of Wells Fargo. I think Charlie is well known to everybody here. He’s got over three decades of experience working in the financial services industry. He had senior positions at J.P. Morgan, followed by serving as CEO of Visa and Bank of New York, and I think you’re now in your third year as CEO of Wells Fargo. So, thank you very, very much for joining us.
But I thought we could start off with a broader discussion just about the macroeconomic outlook. And I know there’s a lot of unknowns. There’s a lot of uncertainty. But what’s your base case for economic growth next year? How are you thinking about the path for interest rates from here?
[Technical Difficulty]
Charlie Scharf
There is a slowdown happening. There’s no question about it. When you watch CNBC and Bloomberg and read the newspapers, it can be a little bit confusing because the slowdown is across industries.
When we look at our own consumer spend information and we talk to the companies that we bank, there’s some that are doing quite well. And there’s some that are struggling more. And the fact is, people bought a lot of goods, exercised a lot of the freedom they had in discretionary spend over the last couple of years, and those purchases are slowing and you’re seeing significant shifts to things like travel and restaurants and entertainment, and some of the things that people want to do.
Net-net-net, the growth is shrinking that we’ve seen in card, albeit they’re still growth. Debit card spend is about flat, with transactions being down a little bit, offset by inflation. So, average ticket size is up a little bit. So, all in all, if you just took a snapshot of where we are, it’s still quite strong relative to where we could have been at this point. But it doesn’t change the belief that these return to normal trends that we see will continue. And some individuals and companies will be more impacted than others.
Unidentified Analyst
And then in terms of consumer and corporate balance sheets, have you seen any noticeable changes over the last few months, especially, I guess, on the lower cohorts in terms of liquidity on consumer balance sheets?
Charlie Scharf
The one thing, I think, which has surprised me, is the fact that it really hasn’t changed all that much. And it just does speak to the strength with which people went into this period with. And so, we have seen certainly more stress on the lower end consumer than on the upper end consumer.
On the corporate side, again, it’s much more industry specific. But it hasn’t spread as quickly as we would have thought. And it hasn’t deteriorated as quickly as we’d have thought, albeit there is a continuing trend of balances coming down and spend levels coming down. So, again, as we think about what will happen, it’s hard to see anything that will stop those trends from continuing. And as long as there’s not some material acceleration, it certainly should be all manageable, albeit as we think about where we are in this point in the cycle, we will see normalization.
Unidentified Analyst
Okay. So, let’s talk a little bit about your priorities. You’re three years into the job. Can you talk a little bit about what you’ve been able to achieve so far, maybe give yourself a scorecard if you want to. You don’t have to.
But I think what would be more interesting is to talk about what your broader priorities are now that you’re three years into the job outside of, obviously, dealing with the consent order [indiscernible]?
Charlie Scharf
Listen, I feel great about the progress that we’ve made. I would say we as a management team, and I’m particularly our own biggest critic, so I could make the list of all the things that we would have wanted to have done sooner and all these other things, but the fact is, the company is just run entirely differently today than it was three years ago.
Now a lot of that just has to do with the turmoil that the company has been through and changes in leadership. So, the fact is, when you look at the management team, we have, I forget, what, 13 or 14 out of the 17 operating committee members are new to the company. And I think every one of the others who’ve been at the company for a period of time are in a different role, in roles that they’re extremely suited to. We run the company as one. Those of you that have followed Wells Fargo might have known that we used to talk about the federalist model, which basically meant that businesses could do it on as long as they were performing well, which might have worked at a certain period of time, but totally ignores the benefits that we get as working as one Wells Fargo across the company. So, we have significant initiatives to leverage the entire franchise and work together. That is what just several of us having differentiated value proposition in this country which is what’s great about [Technical Difficulty].
The way we’re dealing with our problems from the past are also entirely different. I’ll put those in two categories. Number one is just thinking broadly about our responsibility to serve communities and individuals. And we do have historical things that do continue to come up that you read about, which we’re still working hard to put behind us. But in terms of how we’re acting and how we’re behaving, we come in every day really working hard to do the right thing and serve a broad set of kind of individuals and companies which I think will continue to increase the reputation across the company.
And our work on just fixing the infrastructure relative to the risk and control. The amount of – we often just talk more about it. I’d say the amount of time that it’s taking us is certainly a statement of how much work there was to do. But we are making a significant amount of progress, albeit we’re not perfect and there is a lot to do. So you look at all those things.
Probably other than the risk and control work, the second most important thing is what are we doing about business franchise. And I think there was a four or five-year period where it wasn’t the focus of the company. We were focused on our financial results, but it’s really less about growth of the company. Today, when we look at it, you look at all the different lines of business, every one of them has opportunities to grow, every one of them has initiatives in place, we can go through and talk about each of them if you’d like. But the focus on getting our historical problems behind us, as well as investing for the future and building off of the great market positions we have is, I’d say there’s an energy and enthusiasm in the company that certainly wasn’t there three months ago. And it’s because we’re bringing things to market.
Unidentified Analyst
So, look, I appreciate you can’t say much on the consent order because it’s confidential supervisory information, but maybe you can talk a little bit about how your management team’s approach to dealing with a consent order evolved since you’ve been at the company.
Charlie Scharf
Sure. Listen, the consent order is – so we have multiple consent orders, that all relate to the same series of things for the most part, which really relate to internal controls built out consistently and effectively across the company. So, put aside any individual consent order, our job is to build the appropriate infrastructure for a company of our size and complexity. And I would say that what we’ve been doing since I’ve arrived at the company is accepted that responsibility as a management team, understanding that we have to do all that’s necessary. So, we as a team, spend significant amounts of time every single week going through all that work, making sure it’s on track. And our involvement means that everyone in the company has to be involved.
So, I think when I first got to the company, I said I was probably spending two thirds to three quarters of my time on that. It’s less today, but not significantly less. I’d probably say it’s 50% to two thirds of the time. And again, it’s not just about fulfilling the consent order, which people are focused on. It’s us as a management team making sure that we’re running the company in a way that those who own the stock or those that we can [Technical Difficulty] across this country would expect us to.
So we’re held to very high standards as we go forward and complete this work. And as we do this, I think we’ll certainly come out a better company. But I think we will come out of this with controls that should be amongst the [Technical Difficulty] of the companies out there. And so, that’s just a fact of life of what we have to do.
Unidentified Analyst
Maybe you can just talk a little bit about the management team. I think there’s obviously been very significant changes in the management team at Wells Fargo over the last [Technical Difficulty] years, where have you got to in getting the right people in the right roles? And how do you go about building the cohesive culture and also what the attributes of the [Technical Difficulty] culture would look like?
Charlie Scharf
Here too, in terms of how we run the place and work together, our operating committee is a – we are one cohesive group. We meet at least twice a week. And once a month for an entire day. Everyone participates. There aren’t fiefdoms across the place where people just talk about their own areas. There is – I don’t want to say confrontation, but there’s a candor which we expect from the entire company that didn’t exist in this company before. We were a very polite place. No one was ever expected to push each other in meetings. It was always done more privately. And we all understand that we all – our success will be dictated by the success of the company, not any individual business. Everyone on the operating committee, at least 50% of their compensation is based upon the performance of the entire company, not just their individual performance or their business performance. And ultimately, if something doesn’t work, right, that will override everything else as well. So, everyone understands that.
By the way, it’s a very collegial group of people. So the people on the operating committee here, they would talk about how well people get along, how much they respect each other. And out of that becomes the natural things that we all should be working together that we never focused on before.
So, take our consumer bank and our wealth management business, they were running completely separately. And just look at what some of our competitors have done and I’ve had results where when you look at the affluent customers that exist in your consumer branch and we were treating them the same way as we were treating every other customers, not leveraging the strengths that we had in our wealth management business. And now, we’ve launched something entirely new in Wells Fargo Premier to take a lot of the competitive benefits that we have – we’re having one of the biggest wealth management businesses in the country – and working in partnership between the two to serve our customers better.
When we look at the opportunity to serve our commercial banking clients with investment banking products, I’ve mentioned this before to some of the folks that have followed us since we got here, when we looked at the company, we saw that we were doing extraordinarily little corporate investment banking product through our commercial banks. And all you need to do is look at what a Goldman has done or a J.P. Morgan or some of the others and say, obviously, there’s huge potential. And so, we looked at the amount of [Technical Difficulty] that our customers – our customers, not customers in the markets where we are, we looked at our fee – our customers and what fees they are paying to the Street, and it was something like $4.5 billion and we were getting paid a tiny, tiny portion of it because we never focused on it. Our bankers were never licensed, it was never a strong partnership between the two. That’s changed dramatically. And that’s a significant opportunity.
And I can go on and on and just talk about these – these lines of businesses that we have are artificial boundaries. We need to have them because we do need product expertise, running a big, distributed sales force is very different than running on the consumer side is very different than running a more centralized investment banking business. But these opportunities to work across the company are extremely significant and relate to how we think about the company.
And as I said before, when we look at competitively what we have, there, really – we believe this – we do have a lot of strong competitors. And we’ve got to respect a lot of people, but they’re really only a couple of us that have all of the things that we have, which if we run the place properly, to ultimately benefit our customers and want them to do more with us. And so, as we think about our opportunities to increase the returns of the company and become more efficient, yes, we’ve got opportunities just on the expense side. But just getting more fee-based business out of this franchise is something that is a meaningful opportunity today that everyone rallies around because when we look at our results and we see what we’re doing, it’s incredibly obvious.
Unidentified Analyst
So let’s talk a little bit about the revenue picture, both in the near term, but also as we think about 2023 and 2024. NII, obviously, has been a very significant driver for revenue growth, obviously, for you, but for the industry more broadly. Deposit betas, though, are increasingly coming into focus. And your deposit betas have been amongst the lowest in the industry, partly because of your mix, partly because of the changes you’ve made in terms of deposit funding, but also because of your skew towards consumer. What are you seeing in terms of deposit betas at the moment? And given that Fed funds is now at 4%, how are you thinking about the evolution of the deposit betas as we head into 2023?
Charlie Scharf
Sure. So just for those that don’t follow us regularly, it’s just important to note that we actually entered this rising rate period in a different position than we probably otherwise would have, in a way which has benefited our deposits. Because we have an asset gap with [Technical Difficulty] we actually have been limited on the deposit side with the strong inflow of deposit and the cash that came along with it. So, really over the past couple of years with all of the liquidity that existed in the system, we’ve actually had to be fairly choosy mostly on the wholesale side, almost entirely on the wholesale side, but not entirely, about limiting non-operational deposits. And so, as we entered this period, what we said is we would have expected our deposit betas to be less than others have seen because they haven’t had those limitations, and we have seen that.
As we sit here today, we’ve obviously been strong – significant beneficiaries from rising rates. But there’s no question that, as time goes on, as we sit here today, betas will increase. And I would say not just because of the competitive environment out there. We’re not looking at using rate in a way to significantly attract new customers. But we are looking at rate as a way to make sure that we’re protecting the franchise value inside the company. And so, there is a deep analysis that you need to do about how much can you get away with in terms of not passing on rate in the shorter term versus what do you lose in the longer term for just not treating customers properly? And so, we’re working hard to find the right balance because, as rates go up, most customers should get paid in a way that they weren’t paid before and we spend a lot of time looking at the data as to how customers are reacting at different affluence levels at different deposit concentration levels. And so, that’s a very long way of just saying that we do expect betas to go up.
So when we look at our own NII, we certainly would expect next year’s net interest income to be higher than this year’s net interest income, but I wouldn’t take the fourth quarter and analyze it either. And we’re going to spend more time at our fourth quarter earnings call and talk about that. But we wouldn’t look at it like – not look at it like it’s a natural progression of passing on a portion of the rate increase to those that are really franchise customers of ours.
Unidentified Analyst
What about the loan growth? It’s, obviously, again, been very strong this year. I think your loan growth is up 6% year-to-date. I think you’ve talked about loan growth moderating in Q3. What have you seen in Q4 and what are you expecting for next year? And do you think there’ll be more of a bifurcation between consumer loan demand and corporate loan demand over the course of the next year?
Charlie Scharf
I think, first of all, overall, it really, really is driven by what we see in terms of the strength of the economy or not. I would say, we are not significantly pulling back in any way, shape, or form in a wholesale way in any one of our businesses. But we are trying to be smart at looking at any kind of credit on the fringes of our credit and envelope just to make sure that we’re being smart because you can’t sit here and say that you expect the slowdown to occur and not to take that into account as you think about what you’re willing to underwrite. And so, that’s a relatively small reduction in the volume relative to what we would have done in the past. But I think that’s smart, we think, over a period of time.
And like I said, for the most part, it’s going to be driven by what we see in the economy. On the commercial side, we’re still – what we’re seeing is our customers are nervous. They’re nervous about the ability to continue to pass price on as inflation continues to increase their cost of goods sold. They are nervous about the liquidity in the marketplace, nervous to the point of just wanting to ensure that they have liquidity and that they’ve got the appropriate lines and the ability to borrow from us.
And so, I would describe that as a continuation of what we’ve seen, not a marked change, but not something which has surprised us. So, we still continue to see some demand there. And we see demand on the card side, where we just have new products, which continue to attract extremely strong credit prospects because of the value propositions that we’re offering today.
Unidentified Analyst
Maybe we can talk a little bit about the fee side of the equation as well. So, wealth management, investment banking, mortgage, obviously, several important initiatives in all of those. Can you talk about either the revenue opportunities or challenges you see in each of those businesses heading into next year?
Charlie Scharf
Yeah. So, let’s put mortgage aside from wealth management and investment banking, as you describe it. As I referenced earlier, I think, first of all, we need to start with our corporate investment banking.
We think the corporate investment bank for us, first of all, has been – I should say, this is not a material change in strategy. We have a very strong corporate investment bank, which is important to our company. When you look at our results, we break it out as a separate line of business. And you’ll just see how important it’s been. We’ve just not spent a lot of time talking about it for a whole bunch of different reasons. But it’s a core part of who we are, what we’ve been, and we’ve been very selective about expanding the product set in which we choose to compete, meaning that we have a core set of customers that are predominantly US based. They aren’t global. So we do have a set of global payment capabilities, but they’re very focused on serving that customer base for the most part. And we’ve made the shift from using our own balance sheet to being a meaningful representative for them in public markets. And so that means building an M&A franchise, that means corporate bond underwriting, it means equity underwriting, and you see that in our results.
So the opportunity for us is to be clear about – we have the interest continuing to grow that business in a way that takes advantage of the risk we’re already taking and we get paid more for it. So as we think about what we should be in the corporate investment bank, we’re not talking about any material changes to the risk profile. But again, when you look at the fees and what we get paid, the amount of risk that we take relative to others, it’s just not what it should be. And that’s opportunity. I would say we’re bringing a sharper point to that in terms of how we run the place and what the opportunities are that we have in front of us.
I think you put all those things together, add to that the middle market opportunity that we have, and we feel great about our prospects to build the business not in an exponential way. I would describe it as a very linear, well thought out, focused on certain industries and certain products where we have incredibly strong relationships and people want to do more business with us.
Wealth management, it’s another place where, I would say, we’ve gone from defense to offense. To be fair, the business was, actually, of all the businesses that we’ve had was probably the most impacted by our name being in the newspaper. But no more so even than our consumer business in a lot of ways because of just the knowledge that that customer base and our advisors have and the sensitivity to things being written about us. And so, as our reputation has improved and we brought in a new team there that totally understands the business that is working to invest properly in the business – I think if you were to talk to our advisors, they would feel very different about what we’re bringing to market for them and the products and the things that we’re building for them. And you can just see that in terms of a bottoming out of our advisor count and our ability to recruit advisors from the outside that we wouldn’t have been able to recruit a couple of years ago.
So we love the platform that we have because we’ve got a platform within the bank branches, which is significant and under-penetrated. We have our advisor platform where people are Wells Fargo employees with a full product set. We have an independent channel that we have, but hadn’t invested in historically as people have become interested in becoming independent. And that’s something that we have capabilities. And we have our digital platform.
So I think when you look at those different pieces we have, people we compete against have some of those not, but not all of those. And so, the opportunity to invest and build all those platforms – and we love the wealth space and we love the platform that we have.
Mortgages just entirely different creature. Just running a big mortgage business inside of a large bank is very different than it was 10 or 15 years ago, the people we compete with are very, very different. The home lending products are important to our customer base. But it is a very, very difficult business to run really well over a cycle. So we’re committed to it. But it won’t look like it looked in the past. And you see that just in the natural downsizing that we’ve seen as we’ve gone through the cycle. And so, while it’s important to us, I would not expect that to be something that we would put on the pages, would be something significantly different or significant opportunities, albeit it’ll still be important to us, but in a very different way.
Unidentified Analyst
So let’s talk about expenses. And I know you’re going to get a detailed update in January. But bigger picture, how should we think about the trajectory of the broader categories of expenses? And look, how’s your thought process about the long-term efficiency ratio for the firm evolved over the last year?
Charlie Scharf
I think certainly as time goes on, I think we get a much clearer picture of what we see is what we have to do and what the opportunities are. There’s no question when you look at our business and our company that we feel that the company still is far less efficient than it should be, even though we continue to deliver on the savings that we said we were going to deliver. And so, that’s both on a gross basis. But we’ve also seen net decreases in expenses, as we have created efficiency, but also continue to invest in the place. So, as we look out over – I’d say, first of all, over the shorter term, we’re not looking to save any money when it comes to the risk and control work that we have. And just as an aside, that added billions of dollars to the expense base. Billions. It’s not incredibly efficient, but it’s incredibly important. And our commitment there is to spend whatever is necessary to get the work done as quickly as we can at the highest level of quality that’s possible. Now again, we’re not just throwing money up against the wall. We’re trying to be very smart about adding it where it can pay off, but it is a significant draw of our expenses.
The second is on the technology side. And I’d say we are fighting – we’ve been fighting very hard and continue to fight very hard not to use technology in the shorter term as a place to drive just our efficiency ratios lower. There’s no question in our minds that we will get much more efficiency out of technology as we continue to build out all of our digital capabilities and migrate things to the cloud. But in the shorter term, we need to invest both in our product capabilities and in the infrastructure to both be additive, but also over the long period to get those saves. So, in those first two categories, as we look out over the longer term, there should be things there. But we’re not close to talking about what those are.
Let me take everything else inside the company and there’s no question that we’re still incredibly inefficient. And that’s where we’re getting both the gross and the savings that translate on a net basis to what we see falls to the bottom line.
As high as attrition has been over the last year, year-and-a-half, it’s actually made our job somewhat easier relative to being able to just right-size lots of areas of the company. We have a lot more focused on the efficiency of our branches. We’re probably several years behind what others have done in terms of just looking at the efficiency of their branch network, not just in terms of numbers of branches, but staffing inside those branches. When we look at just the processes inside the company, when we look at things that we’ve created, we still see the ability just to drive expenses downward. And what we’ve said is, we certainly hope, and we’ll give an update when we get to the end of the quarter that on a net basis, that continues to trend downward, albeit we still have some of these lumpier legacy things which are going to come through and we’ll call those things out as they do.
And there’ll be a point at which revenue should help those numbers as well because, as I said, there’s no question when you look at just not just our revenue growth, but just the mix of revenue and how much we’re getting paid, we’re not where we should be. So we put all those things together and just from a management perspective, and we think about what we can impact, we kind of put the interest rate increases to the side, we understand that credit losses are going to go up, and let’s not fool ourselves, we spent a lot of time focusing on what we can do to impact the company, and the things I mentioned, we think, create a very, very strong platform for increased efficiency and stronger growth that we’ve really not seen from the company over the last five, six years.
Unidentified Analyst
You mentioned credit. So let’s talk a little bit about that. Obviously, credit losses at 30-year lows. We really didn’t see much of a deterioration in the third quarter. So a couple of things. The first is, are there any specific portfolios that you’re monitoring more closely today? What are the leading indicators that you’re watching perhaps the most closely? And maybe you can talk a little bit about the sensitivity of the allowance to some of those risk factors and how we should think about [Technical Difficulty]?
Charlie Scharf
Mike [ph], I talked before about some of the things that we’re doing predominantly on the consumer side about just tightening up around the edges, which, again, I think is just you expect us to do, and it’s a smart thing to do. But, again, what we see is still extremely strong credit performance on the consumer side with an expected level of normalization. But I would describe it as, you do need to – if you’re looking at the graphs of delinquencies, you do need to make the change the scale to really see it. But it is very, very clear. And again, there’s nothing in there that would suggest that it’s – the curves are turning in a more negative way. It’s consistent return to normal, and we’ll see where that gets to.
When we think about our most significant exposures on the wholesale side, I would say, first of all, we’re trying to be diligent about looking across all the different pieces. There’s certainly some inflation sensitive industries that we’ve been very aggressive in trying to get ahead and working with clients on. And for us, we’ve spent a lot of time looking at our own commercial real estate exposure.
When you look at commercial real estate, I would just encourage everyone to look beyond the headline number. Not all commercial real estate is the same. You need to look at the type of commercial real estate. So, huge difference in residential versus commercial versus office. Office is the most stressed. But there’s also a huge differentiation in office, depending on physical location, meaning city by city, location within city, whether it’s an A property or B property or C property. And then the structure of transactions will certainly dictate the loss content over a period of time. And so, whether it’s LTVs or other structural things that we have in place. So, office is showing deterioration in terms of just what you’re seeing in terms of like occupancy trends like that. Hopefully, we’ve been thoughtful about it relative to how we think about it and our allowance. And what it translates to in terms of losses over a period of time, I think, will be very uneven across the industry. The industry defined very broadly as large banks, much smaller banks, and non-banks, because people have very different types of exposures.
Unidentified Analyst
So, we’ve got a few minutes left. Maybe you can talk about capital. You’re actually in a position of excess capital, which is different to some of your peers. Can you talk a little bit about how you’re thinking about redeploying that excess capital in terms of redeployment back into the business versus returning that? And then, perhaps you can comment on how you’re thinking about how your capital requirements could evolve over the next few years? Obviously, there’s been a few speeches from Michael Barr suggesting that requirements could go up, how does that factor into your thinking in terms of the appropriate level of capital to run this today?
Charlie Scharf
Sure. So as you mentioned, we do have very strong capital levels. We have significant buffers on top of the buffers that the Fed has out there. But we’re also just trying to be quite honest, very, very conservative, relative both to our position as well as what we see in the world. And so, again, what we said on the third quarter that we are trying to put some of these historical matters behind us. I’ve pointed this out multiple times. It’s lumpy. We don’t control the timing of it. And we certainly would expect there to be some more of those things in the future. We don’t think they impact the ongoing earnings power of the company. But we certainly want to those things shouldn’t be a capital issue for us. And so, just being smart about not making it issue, we’re not even having a big concern for people we think it’s important. We live in an uncertain environment. And so, I’ve talked about what we see in terms of like a natural progression towards a return to normal and then a downturn. But you never quite know. And, again, we just want to be conservative when it comes to capital. And we read the same things that you read. And so, there’s no question that there’s an ongoing debate about whether banks have the appropriate levels of capital. We certainly feel like we have more than enough capital. But ultimately, it’s not our decision. And so, we just don’t want to be in a position where we need to just react in a way that surprises everyone, if those things weren’t to pass.
So I think we’re just trying to be very smart about managing our current capital base, making sure as we think through the future and how we want to position the company, that if there are changes to capital rules that we’re not impacted in a way which surprise people. So I wouldn’t call it it’s not a concern in any way, shape, or form. It’s just trying to be prudent. And so, we still generate significant amount of capital. And so, we’ll be able to deploy that in terms of increasing dividends and buybacks. And it’s just a question of just making sure that we sleep at night really, really well and get through this period in a way that capital never has to be a question.
Question-and-Answer Session
Q –
Unidentified Analyst
Okay. I actually think, with that, we’re out of time. So, Charlie, thank you very, very much for joining us. And hopefully, we’ll see you again next year.
Charlie Scharf
All right. Thanks, everyone.
Unidentified Analyst
Thank you.
Be the first to comment