Wells Fargo & Company

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Third Quarter 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 would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations, starting to begin the conference.

Thank you, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, John Shrewsbury, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third 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 risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement. 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 the quarterly supplement available on our website. I will now turn the call over to Charlie Sharp.

Thanks, John, and good morning, everyone. I'll make some brief comments about our third quarter results, provide some commentary on the operating environment and our direction. I'll then turn the call over to John to review third quarter results in more detail. Let me start by acknowledging that this will be my last earnings call with John, who announced his retirement in July. John has served as an excellent financial and strategic leader for our company and has been incredibly helpful to me in my first year at Wells. John, thank you very much for all you've done. You will be missed. As you know, Mike Santanasimo will be joining Wells Fargo this week as CFO. Mike has more than 20 years of leadership experience in banking and finance and most recently served as the CFO of BNY Mellon. And I'm looking forward to Mike hitting the ground running. I'm going to start by making some comments on the markets, economy, and operating environment that impacted us this quarter. Most market and liquidity trends are strong and continue to improve in the quarter. Despite modest credit spread widening that followed volatility in the equity markets, market spreads have continued their steady improvement since the peak of dislocation and remain significantly tighter than the levels observed in March. Corporate new issuance volume remains elevated. HQLA bid ask a measure of the cost of transfer risk and daily volatility have improved and are now below pre-crisis levels. And the Fed's pledge of unlimited support has improved risk appetite, tightened spreads, and deepened market liquidity. The economy has materially improved due to the gradual reopening, but also the significant monetary and fiscal stimulus, as well as the significant accommodations made by financial institutions and other businesses. Labor markets clearly reflect momentum, with the third quarter average jobless rate improving to 8.8% after posting a 13% rate during the second quarter. However, there's still a long way to go, and there remains significant risk to the recovery. The pace of job growth and the rebound in consumer spending have slowed, and the diminished pace of reopening and the end of some stimulus programs are presenting headwinds. The powerful rebound in the third quarter still leaves the economy well below its pre-COVID peak including restaurant sales 50% lower, real GDP 4% lower, and unemployment 7% below pre-COVID levels. Clearly, the recovery is in process, and while the gains we've seen this quarter are important, the path to full recovery for all remains uncertain. Let me now turn to our performance this quarter. We reported that income after tax of $2 billion, or 42 cents a share. Revenues benefited from very strong mortgage banking, and most other fee-related items also improved over the prior quarter, with the exception of trading, which while down from the exceptionally strong second quarter, still produced strong results. NII declined, reflecting the impact of the lower interest rate environment and lower loan balances, primarily driven by weaker aggregate demand across our commercial client base. Expenses were elevated and impacted by two significant items. $961 million in customer accruals, and a $718 million restructuring charge. Charge-offs declined from the second quarter, and our allowance was largely unchanged. Credit performance across almost all loan products was stronger than we would have anticipated a quarter ago. However, it's certainly too early to draw conclusions yet. The actions from the Fed are Our government and financial institutions I referred to earlier have clearly helped consumers and companies of all sizes. But much of this is ending, and until the risks of COVID are behind us, these individuals and companies are still at risk without more support. Having said that, the fact that we are in a better place than expected is a good thing, and that shouldn't be lost. Our top priority continues to be the implementation of our risk control and regulatory work, but we're also taking targeted actions to improve the experience for our customers, clients, communities, and employees. I will discuss this later. We continue to add talent to the senior management team in key roles to strengthen the foundation of the company. In addition to Mike joining as CFO, Ather Williams is joining Wells Fargo this month to lead our strategy, digital, and innovations group and will report to me. He will lead corporate strategic planning, define and manage digital platform standards and capabilities, and manage innovation priorities, opportunities, and company-wide efforts to drive transformation. We added other senior leaders, including a new head of home lending and several key risk leaders as part of our enhanced risk model to further strengthen the independent oversight of all risk-taking activities and provide a more comprehensive view of risk across the company. We announced that Mark Chansey was elected to the company's board of directors. Mark has more than 30 years of banking and financial services experience with an impressive combination of business, operational, and finance experience. He serves on the board's audit committee and risk committee. In the third quarter, we also launched Clear Access Banking, a new low-cost, convenient bank account with no overdraft fees. Clear Access was off to a strong start with over 100,000 accounts signed up so far. and is proving very popular with people under 25, a big part of its intended target population. This is part of our broader efforts to simplify our products and services and create clear, easy to use and better experiences for our customers. As part of our simplification efforts, we will be reducing the number of different consumer checking accounts we offer, making it easier for both our customers and our bankers, while also reducing expenses associated with supporting legacy products. We continue to have over 200,000 employees working from home, and we don't anticipate this changing until at least December. Just under 20% of our branches remain temporarily closed, but we've opened more of our branch lobbies to enable our customers to come in and have conversations with our bankers instead of just using our drive-through for transactions. And our teller and ATM transactions increased 8% from the second quarter. Wells Fargo was recently recognized as leading the U.S. financial services industry in COVID-19 safety, according to a nationwide study. This is great recognition for the work of all those at Wells who've worked tirelessly to keep our employees and customers as safe as possible. We continue to make significant accommodations for our customers. Since March, we've helped more than 3.2 million consumers and small business customers by deferring payments and waiving fees. The trailing seven-day average of new daily payment deferrals granted as of September 30th has declined 97% from their peak in early April. Debit card spend has remained strong since returning to pre-COVID levels in May, and in the last week of September was up approximately 10% from the same week a year ago. Consumer credit spend improved throughout the third quarter, but still decreased. is down approximately 4% in the last week of September compared to a year ago. An improvement from the beginning, an improvement from being down approximately 10% from a year ago as of the end of June. This reflects steady improvement across a variety of categories, but despite a rebound, hard hit segments like travel, entertainment, and fuel remain significantly lower year on year. Commercial card spend remains significantly lower throughout the quarter and was still down approximately 30% in the last full week of September compared to the same week a year ago. Digital usage trends continue to be strong. As an example, mobile deposit dollar volume was a record high in the third quarter and was up 110% compared to a year ago. Let me take a moment to expand on the conversation I started last quarter on expenses. We believe that our franchise is capable of earning far more than we're earning today. We continue to believe there's nothing structural in our business to stop us from having a competitive efficiency ratio, though we are far from it today. Prior to 2016, Wells Fargo had an efficiency ratio that was far more competitive with our peers. As you know, we've had to make significant investments in people and technology to address prior underinvestment and risk and controls. and also have an outsized litigation and customer remediation expenses. This accounts for part of our elevated expense base. We also believe that we have significant opportunity to take targeted actions that are focused on improving the experience for our customers, clients, communities, and employees. These actions should also improve operational and financial performance. We've also lagged behind our competitors in revenue performance, and we also believe we've got significant opportunities to make substantial improvements here as well. To be clear, our focus starts with running the company more effectively and efficiently. This includes reducing bureaucracy, simplifying our products, processes, and our organization, reducing redundancy in manual work, and migrating customers and employees to digital solutions. All of this will also improve our control environment. Lower expenses will be a byproduct of doing these things. We're taking an organized and structured approach to reviewing this across the entire company. We've established dedicated teams in each of our lines of businesses and functions. We're reviewing near term, medium term, and long term actions. We're already working on the near term actions, including streamlining management ranks through spans and layers and other business improvements. Again, these are driven at making it easier for us to serve our customers and each other. These actions We're the primary driver of the $718 million restructuring charge we took this quarter. These actions should reduce gross run rate expenses by over $1 billion annually. We also identified many medium and longer-term actions that will take some time to fully implement. These include simplifying products in many of our businesses, optimizing operational and client service delivery, and continuing to downsize our corporate real estate portfolio. I understand that many of you would like more specifics on our plans. The reviews we're conducting across the entire company continue, and we are in the midst of the 2021 planning cycle. We need to be thorough in our work, and it's important that we understand three pieces before providing specifics to you. The magnitude and timing of the initiatives I've just discussed, where we think the need to invest to drive improved operational and financial performance, and most importantly, understanding the investments necessary to complete the build out of our risk and control infrastructure, which will ultimately satisfy our regulatory commitments. I cannot stress the importance of this work enough. We cannot and will not do anything to jeopardize this work. It is also important that Mike have a chance to review our plans, which he will do immediately. All that said, we should be in a position to provide more specificity regarding 2021 expense expectations on our call next quarter. While there is much work to do and it will take time, our ultimate goal is to build a best-in-class business and hope to show progress along the way. This includes both competitive level of expenses and competitive revenue performance. Finally, I want to thank all of our employees for their continued hard work and dedication to making Wells Fargo better. I will now turn the call over to John.