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 fourth quarter 2020 earnings conference call. All lines have been placed on you 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 this time, simply press star and then the number one on your telephone keypad. If you'd 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. Sir, you may begin the conference.

Thank you, Catherine. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Sharp, and our CFO, Mike Santamassimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement, and presentation deck, 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 FTC filings, including the form 8-K filed today containing our earnings materials. 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 and the earnings materials available on our website. I will now turn the call over to Charlie Sharp.

Thank you, John, and good morning to everyone. I'll make some brief comments about the operating environment, our fourth quarter results, and I'll discuss our priorities. I'll then turn the call over to Mike to review fourth quarter results in more detail before we both take your questions. I'm going to start by making some brief comments about the economy based on what we're seeing. The benefits from both fiscal and monetary stimulus continue to provide important support for many, and the additional $900 billion stimulus is an important step in helping those who are still in need. Though there was solid economic growth in the fourth quarter, we continue to see an uneven recovery and increases in COVID cases towards the end of the quarters negatively impacting the path to recovery. Overall, our customers continue to be in much stronger position than we would have anticipated when this crisis began. But unemployment levels remain high, inventory levels remain lower than pre-pandemic levels, and confidence to invest is dependent on an effective bridge until broad-based vaccination can be accomplished. Given this, we expect 2021 will get off to a slow start, but there is great potential in the second half of the year for a strong 2021, especially if there is another significant stimulus package. Before turning to our performance this quarter, let me discuss our new business segments. One of my early observations when I joined the company was that we were not managing the company at the level of granularity necessary. As a result, we've made significant changes to the management structure, most notably having more of our businesses report directly to me. That change also drove us to completely alter our internal reporting to provide us with more transparency into our performance and underlying business drivers and give us the data necessary for us to create plans to improve our performance. This is how we now manage the company with reporting and reviews conducted at a business level at which decisions are made, a big change from what had been the practice. As you can now see, we've also made meaningful changes to our external reporting with the goal of giving our investors a clear understanding of our results, as well as the ability to compare our businesses on a more like-for-like basis to competitors and track our performance as we do internally. What you see now is what we've been reviewing internally. Our strengths and weaknesses should be clearer to you than ever, but the potential for improvement should also be clear. The changes go well beyond the addition of business segments. We've reevaluated capital allocation, how we do funds transfer pricing, as well as our internal expense and revenue allocations. We have also added more detailed revenue and performance metric disclosures to help you have more transparency into our results. We think these disclosures are an important step forward in showing you the size and scope of our businesses, as well as forming the basis for how we talk about them going forward. We hope you find it helpful as you evaluate our results and our potential. I'm going to let Mike take you through the results of the fourth quarter in detail, but they continue to be affected by the ongoing impact of COVID, as well as our actions to improve performance and put our past issues behind us. While rates have begun to move upward, the overall level and shape of the yield curve continues to be a significant drag on our net interest income. And for now, we have limited flexibility to offset these headwinds with balance sheet growth, given our constraints of operating under an asset cap. In terms of major business trends, corporate loan demand remains soft, driven by continued strong capital markets conditions and an improving but still uncertain economic backdrop. Credit continues to perform well as both consumers and companies have benefited from accommodations, ongoing fiscal and monetary stimulus, and an improving economic outlook. Actual charge-up rates are at multi-year lows, but again, the ultimate timing and magnitude of losses depend on the broader recovery. On consumer spending, we're seeing a continuation of the trend observed in the second half of the year. Debit spend is up double digits, while credit volumes have largely stabilized at flat to down low single digits compared to the prior year. Recently, we've seen the impact of the new stimulus with roughly half of the dollars that were deposited into accounts being spent. All in all, our returns remain significantly below where they should be or what this organization is capable of, but we are taking significant actions. Our agenda is clear and we're making progress, though it will take some time. Our focus is as follows. Number one, building the right management team. Number two, making progress on our risk and control build-out and satisfying our regulatory obligations. Number three, put our significant historical issues, including legal and customer remediations, behind us. Number four, reviewing our business exit activities that are non-core and focus our efforts on building our core scaled businesses and capitalizing on the power of an integrated Wells Fargo. And lastly, identifying and beginning to implement changes to make us a better run and more efficient company. I will briefly cover each of these. First on the management team. We've transformed the team by elevating strong internal talent while bringing in people with the experience and skills necessary for our success. Our operating committee, which are the 18 senior-most members of the company responsible for running it, is an entirely new management team. Over two-thirds are new to the company or their role. Of the 17 members other than myself, I've hired nine leaders from outside the company, Four others are in different roles, and four were relatively new to the company when I joined. Each member has expertise and experience in their area of responsibility and brings a diverse set of skills, backgrounds, tenures, and perspectives toward discussions and decisions. Our broader group of senior leaders is also a new team. Nearly half of our top 150 leaders are new to their role from the start of 2020, including over 40 who are new to the organization. regarding our risk and control build-out. In 2020, we announced an enhanced corporate risk organizational structure to provide greater oversight of all risk-taking activities and a more comprehensive view of risk across the company. We made a number of important hires throughout the year. In just the fourth quarter, a new chief compliance officer and new chief risk officers in consumer and small business banking, commercial banking, and wealth management have joined the company. These and the many other leaders that joined the company in 2020 who have done similar work at other institutions have been critical to the early progress we are making. As we announced last week, the OCC terminated a 2015 consent order related to the company's Bank Secrecy Act anti-money laundering compliance program. This is just one accomplishment for us, but it's evidence of the progress we're making and our ability to build the right risk and control infrastructure and remediate our legacy issues. However, this is a multi-year journey. Progress may not be a straight line. We still have significant work to do, but we are diligently doing what's necessary, issue by issue. It will continue to be our top priority to dedicate all necessary resources and make meaningful progress on this critical work. In addition to the continued investment we're making to build out the risk and control infrastructure, we're also moving with urgency much more than had been done before I arrived to put our substantial legacy issues behind us. This includes working through our legal and customer remediation matters, which are almost entirely tied to our historical issues. In doing this work, we're committed to treating customers fairly. To provide some context, this work is complex, oftentimes involves going back many, many years and looking across multiple platforms and systems. We've also had new leaders come in this year, and as a team, we've been diligently working through issue by issue. It requires this level of rigor. We've made significant progress over the course of 2020, and it's absolutely critical that we get this work done so we can do what is right for customers and move our organization forward. Over the past year, I've discussed our businesses with an eye towards assessing strategic fit to the company, assessing risk return profiles, and creating a roadmap for improved operational and financial performance. Our goal is to be the preeminent provider of core financial services in the U.S. and in doing so seek to reward all stakeholders, including investors, employees, customers, and the communities where we do business. We believe our business model as a fully integrated U.S. bank with significant scale and breadth of capabilities positions us to achieve our goal and that we are one of only a few who have this position, though we do compete with thousands. Our strategy is about becoming even crisper about our target market and taking actions necessary to leverage our strong competitive position. We are clear on who we are. Our core target market is U.S. consumers and businesses of all sizes. We do have capabilities outside the U.S., but these activities are predominantly to support our core U.S. customers with their global needs or are in domains where we have scale and expertise to compete locally. We provide the same capabilities for both consumers and companies of all sizes, though the words we use to describe what we do is sometimes different. We are a trusted advisor and provide core banking services, including deposits, capital, payments, and investments. Capital includes both private and public access to debt and equity. Our scale and sophistication allows us to have a differentiated physical presence and technology platform few can compete with. The importance of scale is clear and will continue to increase. We have the right businesses at Wells Fargo to achieve our goal. Our individual businesses are strong and valuable. We have excellent individual franchises that compare favorably to all competitors, large and small. We have the products, services, people, and scale to be a leader in each. And each has opportunities to serve customers more broadly and improve its own financial profile. I wouldn't confuse our recent underperformance with our great franchise value and how our business fits together to put us in a great competitive position. And then there is the great power of an integrated Wells Fargo. While our businesses are strong individually, they're even more powerful when working together. Though we talk about separate lines of business, we operate as one company in our communities. Our branches serve our consumers and small businesses, as well as commercial banking and corporate clients. Our ability to support our local communities is based on that breadth locally, but also by the support and resources of Wells Fargo nationally. At times, our lines of business has served as artificial boundaries for us, delivering the very best for our customers and clients. we're breaking down those barriers to more effectively serve our customers, and each should add to our profitability and returns. We have opportunities across our entire franchise, but just a few examples include serving low to moderate income, as well as more affluent consumers consistently across our platform, payments, and investment banking for our commercial clients. We've completed the review of our businesses and are taking action for those that are at core to our mission. In the past few months, we've announced sales or intention to exit the student loan business, international wealth management, and direct equipment finance in Canada. We are also in the process of exploring options for asset management, corporate trust, and our rail portfolio. As I said, we're focusing all of our efforts on our core scale businesses, and these other activities, which may be good businesses, are not consistent with the core strategic priorities I just outlined. and we're taking actions to run a better company which is far more efficient. I've acknowledged many times that our returns are below where they should be and what this company can deliver. I pointed out that our efficiency ratio is not competitive. You can now see this by line of business as well, and it is an important data point to guide us to drive efficiency and simplicity in how we manage the company. As we do this, we will reduce complexity and risk, and our expenses should decrease even as we continue to reinvest in building our infrastructure and growing the company. As we look at financial goals, today we're targeting our overall expense level and return on tangible common equity. And just to be clear, we will spend whatever is necessary to complete our risk and regulatory build-out. We have started to take significant actions. Mike will share the details of our initiatives and our expense outlook, but I would like to emphasize that that we will continue to be cautious about putting firm timeframes around our goals. We're making dramatic changes to put us in a position to capture our full potential, but we do have constraints today that impact our ability in the shorter term to realize our earnings and return potential or commit to firm timelines. We remain subject to an asset cap as part of our consent order with the Federal Reserve, and we must prioritize balance sheet usage more so than if it was not a limitation. a significant constraint, especially given the current operating environment. But we believe we're making meaningful progress. There is substantial work to do. We're also temporarily limited in our ability to return capital to shareholders due to special restrictions placed on the largest banks by the Federal Reserve due to the uncertainties around COVID. As the path to economic recovery becomes clear, these restrictions should be lifted, and we will be able to return excess capital to shareholders through a combination of higher dividends and share buybacks. And the negative impact to our results from COVID is clear and will likely continue until broad-based vaccinations allow for a clear and even economic recovery. As these headwinds abate, our earnings and returns should benefit materially. We're taking action for things in our control, but we'll remain cautious until there's more clarity around when these constraints will recede. That said, we're hopeful that our actions to increase efficiency in the company and the ability to return excess capital to our shareholders creates a clear path to a return on tangible common equity in excess of 10%. Beyond that, the ability to grow our balance sheet, higher interest rates, and executing on additional efficiency and growth initiatives presents a path to longer-term ROTCE of around 15%. Again, it's hard to put specific timeframes around these goals with any confidence today, but we're confident that our franchise is capable. I mentioned we continue to have significant excess capital above our regulatory requirements. Last month, the Federal Reserve authorized the nation's largest banks to pay common stock dividends and make share repurchases in the first quarter that, in aggregate, do not exceed an amount equal to the average of the firm's net income for the four preceding calendar quarters. Based on this criteria, we have the capacity to return approximately $800 million in the first quarter. Assuming the Board declares a first quarter dividend consistent with the past two quarters under the Federal Reserve's criteria, we expect to have common stock repurchase capacity in the first quarter of approximately $600 million, including repurchases for employee compensation. Returning capital share to shareholders remains a priority. Our board of directors has also approved an increase in our authority to repurchase common stock by an additional 500 million shares, bringing the total authorized amount to 667 million shares. In summary, we're taking meaningful actions and believe we have line of sight to a double-digit ROTCE ratio. While returning to low double-digit ROTCE would mean an improvement from where we are operating today, As I've said before, I continue to believe there's no structural reason why we shouldn't be able to generate comparable returns to our peers over the longer term, and that continues to be the goal. 2020 was certainly a challenging year for all, but I'm proud of what Wells Fargo and my more than 265,000 partners have done to support our customers, our country, and our communities. We've begun a multi-year process of transforming Wells Fargo, and I look forward to making more progress in 2021. I want to thank everyone at Wells for what they've done through an extremely difficult set of circumstances, and I look forward to a better 2021. I will now turn the call over to Mike.