Wells Fargo & Company

Good morning. My name is Catherine and I will be your conference operator today. At this time, I'd like to welcome everyone to the Wells Fargo first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, please press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Please note that today's conference is being recorded. Thank you. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Catherine. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, John Shrewsbury, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risk and uncertainty. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8K filed today containing our earnings release and quarterly supplements. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings in the earnings release, and in the quarterly supplement available on our website. I will now turn the call over to Charlie Scharf.

Good morning. I'm going to open the call with comments on the current environment, the actions we're taking, our business performance, and ongoing work to transform the company. Then John will provide more details on the first quarter results before we take your questions. Let me start with some remarks about the current environment. I first want to start by saying that our thoughts, are with those directly impacted by COVID-19. This includes those who have contracted the virus, health care workers who are on the front lines helping those directly impacted, and all of those who provide essential services to ensure the country continues to function. As difficult as this is, the response by government, companies, and individuals has been extraordinary. We understand that Wells Fargo plays an important role in providing stability to the financial system and the economy more broadly. And while there's still much to do, I'm incredibly proud of the efforts across the entire company, particularly those on the front lines. Let me start by discussing what Wells Fargo has done. First, I'll start with our customers. We've been aggressive in our actions to ensure we can best serve customers while also prioritizing employee and customer safety. First, on access, we've temporarily closed approximately 1,400 branches, which is about one-fourth of our network nationwide. choosing locations to close based on the historical branch traffic and the physical design of each branch that would allow appropriate social distancing. Consumer and small business contact centers remain open in all other U.S. locations to serve our customers, though wait times are higher. And we've deployed social distancing and safety measures in all sites to ensure we keep our employees safe. We've been rapidly expanding digital access and deploying new tools, including error limits for mobile deposits and wires, new digital mortgage deferment tools, and expanded e-signature support. Customers are adopting these new tools as demonstrated by a 52% increase in dollar volume of mobile deposits in March 2020 versus March 2019. We're providing significant credit to our clients. In the month of March alone, Our commercial customers utilized over $80 billion of their loan commitments, and we're providing accommodations for clients in need. Through April 10th, we helped more than 1.3 million consumers and small business customers by deferring payments and waiving fees. We deferred over 1 million payments, representing almost $2.8 billion of principal and interest payments, and provided over 900,000 fee waivers exceeding $30 million. We've suspended residential, property foreclosure sales, evictions, and involuntary auto repossessions. And we continue to work with HUD, the GSEs, our trade groups, others in the industry, as well as government officials and not-for-profits to identify other ways to assist customers facing financial challenges in the current environment. We've expanded our participation in the PPP program and hope to provide significant relief for our small business customers. We're quickly wrapping up our processing capacity to respond to the significant demand we've seen. Through April 10th, we've received more than 370,000 indications of interest from our customers. We're working with industry groups and the U.S. Treasury in preparation to distribute millions of economic impact payments to Americans as quickly as possible. For those that receive checks, we've implemented changes to our ATMs and mobile app to make it more convenient to use those depository options instead of going into a branch. Now turning to how we're operating the company and our employees. We have enabled approximately 180,000 employees to work remotely. For jobs that cannot be done from home, in addition to modifying branch formats, We've taken significant actions to ensure safety, including enhancing social distancing measures, staggering staff and shifts, and implementing an enhanced cleaning program. We continue to pay all employees. We made a one-time cash award to approximately 165,000 employees who make less than $100,000. Additionally, as a way of recognizing the unique contributions of our employees that work on the front line, we're making additional payments to those employees. We've made changes to our benefit plan to support those who are being tested or those who have the virus. To assist our employees who need childcare, we granted eligible employees up to five paid business days off so they can find childcare. We're also providing financial support to eligible employees for those seeking childcare through their own personal networks. And we made a $10 million grant to the We Care Employee Relief Fund, which is available to employees affected by coronaviruses. especially those with limited resources to help them get back on their feet with basic necessities. And we're supporting our communities by directing $175 million in charitable donations from the Wells Fargo Foundation to help address food, shelter, small business, and housing stability, as well as providing help to public health organizations fighting to contain the spread of COVID-19. Turning to what we've seen over the last month in the markets, As you all know, the health crisis has had a swift and severe impact on the financial markets. But the banks, including Wells Fargo, are financially strong and have done a great job, as many other industries have, in providing continued service while many of our employees have been unable to access their offices. We also have navigated huge disruptions we saw in liquidity in most asset classes for several weeks. HQLA bid-ask spreads, daily volatility and credit spreads, increased 100% to 500% versus normalized levels prior to the crisis. Activity remained reasonably order in HQLA, other loss remote credit assets, and high-quality corporate primary issuance, but most other markets saw forced selling, high intraday volatility, and bid asks widening meaningfully. Fed programs designed to support smooth market functioning and effective transmission of monetary policy immediately improved risk pricing, increased dealer balance sheet capacity, decreased market volatility, and lower transaction costs. Large-scale asset purchases in treasuries and agency MBS improved secondary trading flows in HQLA, while credit-sensitive assets lagged at the recovery. All of this, as well as the effective shutdown of the economy, directly impacted our results. Turning to the quarter, you can see that results were materially impacted by loan loss reserves, impairment of securities, and redemption of preferred securities. Our results included a reserve build of $3.1 billion for loans and debt securities, $950 million of securities impairment, predominantly related to equity securities, and a negative 6 cent impact related to the redemption of our Series K preferred stock. Within our community bank, as would be expected, branch traffic significantly slowed as March progressed. We had approximately half the teller volume at the end of March compared with the same period a year ago. ATM transactions were also down significantly, down approximately 17% in March compared to a year ago. On the lending side, we originated $48 billion of residential mortgage loans, 52% for refinancing. Auto originations declined 5% from the fourth quarter with strong originations early in the quarter, more than offset by a slowdown in March. Credit card purchase volume is down 13% from the fourth quarter and down 1% from a year ago. That strong volume early in the quarter was more than offset by declines in March. Within wealth and investment management, period end deposit balances increased 13% during the quarter, driven by higher retail brokerage sweeps reflecting higher client cash allocations. Retail brokerage transaction revenue increased 12% from the prior quarter. And despite market declines, Wells Fargo Asset Management, AUM, still grew 2% during the quarter, driven by strong inflows into money market funds. I'll turn to our wholesale businesses now. In trading, markets businesses were up nicely year over year in the first two months of the quarter, but performance was mixed in March. We had strong performance in macro trading as well as in equities due to volatility and increased flows, However, our performance in spread products suffered due to the market dislocation. Commercial loans grew $52 billion, or 10% from the fourth quarter. And overall, global debt capital markets activity was the strongest on record, driven by high-grade offerings from U.S. issuers whose volumes were up 63% compared to a year ago. Wells Fargo's high-grade debt capital markets lead table rankings improved from fourth to third, with 9.2% fee-based market share during the quarter. While focused on our efforts around COVID, we continue to make significant changes inside the company. We continue to add talent to the senior leadership team. Ellen Patterson joined us several weeks ago as our general counsel, and we expect several more additions to the team in the coming quarter. Even with the significant amount of time being devoted to our COVID response, we're not reducing our efforts on our regulatory commitments. and we continue to move forward on improving the processes, structure, and cultural change necessary to get the work done. As a reminder, during the quarter, we announced a new organizational structure with five lines of business reporting directly to me. I've also spoken of our business reviews we've had put in place. Those agendas have changed and are now oriented towards issues related to operating in the current stressed environment. As we settle into this environment and have some line of sight to recovery, we will reengage with the work I discussed last quarter. Let me turn to the asset cap now. John will provide more details on how we're managing in this environment given the constraints, but here are some highlights. We're focused on doing all we can for our clients while satisfying the requirements, and to do this, we make decisions each day on balance sheet allocations. As a reminder, the asset cap is measured on a two-quarter daily average basis and must be below $1.952 trillion at the end of the quarter. On March 31st, that calculation was an estimated $1.943 trillion. In mid-March, as the crisis began to evolve, we first saw slow increases in deposits and drawdowns in committed lending facilities, and both of those accelerated as the crisis deepened. At the end of the quarter, we had $1.981 trillion in assets. John will discuss this in more detail, but we're taking a number of actions to ensure we stay below the cap. We started the quarter with a strong capital position, including a CET1 ratio of 11.1%. With the strong growth in assets during the quarter, materially wider spreads, as well as lower earnings, our CET1 ratio declined to 10.7%. still above the regulatory minimum of 9% and our current internal target of 10%. As you know, we suspended our share buyback as we focused on helping our customers get through these challenging times. I'm sure you'll want to discuss our capital plans going forward, but as you know, we submitted our 2020 capital plan earlier this month, and the results will be published by the Federal Reserve Board in June. As I think about what the future holds, here are a few thoughts. We've entered into a world we haven't seen before. Much of the economy is essentially closed. Consumer spend is down over 25% year over year this past week, with food and drug increasing and other spend down significantly. New auto sales in the month of March were down 32% from February. Manufacturing has turned downward significantly. with ISM March reading of 49.1% as businesses cut back on orders. Commodity prices are down 24%, speaking to the weakness in global demand. Unemployment has grown beyond what we've traditionally modeled. And while there is hope that this is time-bound by shelter-in-place orders, we don't know what the timeframe is or how quickly the economy will recover when these orders are lifted. What we do know is the contraction is real, and we must do all we can to be safe and to ensure we do our part to help recover as quickly as possible. It's equally important to note the response is also beyond what we've historically seen. Banks have provided significant amounts of credit and liquidity. Banks have deferred payments on loans, waived fees, made numerous other accommodations for customers in need. The response from the Federal Reserve has been fast, comprehensive in scope, and significant in size, and the response of Congress has been equally impressive, and their actions are just beginning to provide the support necessary for many, but will unfold quickly. The question remains what this means for our future. What's important is controlling the spread of the virus so the economy can reopen. We're hopeful that our actions, those of others, and especially government support should provide needed relief and help many customers bridge this difficult period, but the length of the shutdown will ultimately determine the severity. What we do know is our strong levels of capital and liquidity position enable us to support our customers and the broader U.S. economy. We will be closely evaluating our assumptions regarding our allowance for credit losses as we move forward, and the actual level of losses we incur will be driven by how long this period lasts and the effectiveness of the support from government and private industry. Sitting here today, there are many unknowns, and the year will look quite different than we expected the last time we spoke. But as I said, we're focused on delivering for our customers and communities to get through these unprecedented times, and we remain committed to the financial and performance improvements we've discussed as we get beyond this crisis. Thanks again to all my partners at Wells Fargo that have been working tirelessly, and I'll pass it on to John.