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 second quarter 2021 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 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 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, Regina. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santamassimo, will discuss second quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second 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 SEC 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.

Thanks, John. Good morning. I'll make some brief comments about our second quarter results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review second quarter results in more detail. Let me start with the second quarter. We earned $6 billion, or $1.38 per common share, in the second quarter. These results included $1.6 billion decrease in the allowance for credit losses as credit quality continued to outperform our expectations. Charge-offs continued to decline as the economy continues to improve and our customers continue to have high levels of liquidity. Revenue increased compared with the first quarter. While net interest income was stable, we had sizable gains from equity securities and card and deposit-related fees increased, reflecting increased spending. Expenses declined, reflecting a decline in personnel expense, which is typically highest in the first quarter, and progress on our efficiency initiatives. If you look through the reserve release and outsized gains from equity securities, we are pleased that our results continue to show progress, even though high levels of liquidity, weakness in supply chains, and low interest rates remained as headwinds. Economic growth was robust in the second quarter with real GDP estimated to have increased at an 8% annual rate with especially strong gains in consumer spending. We continued to see supply chain shortages impacting both supply and prices across many sectors. Home prices are estimated to have increased at a 24% annual rate as scarcity of properties for sale persisted and half of unit sales exceeded asking price. Used car prices continued to increase due to ongoing supply constraints, with the second quarter Mannheim Index increasing 17% from first quarter 21 and 45% from a year ago. However, prices may have peaked in May after four consecutive months of record highs, with June's Mannheim Index finishing 1.3% lower than May. For Wells Fargo consumer customers, nearly $50 billion of federal stimulus payments from rounds two and three have been deposited into our customers' accounts, and we estimate roughly 25% remained in their accounts as of July 2nd. For our customers who received stimulus payments, their median deposit balance was up 56% compared to April 2020, which is prior to the first round of federal stimulus payments. And for all of our customers, including customers who did not receive stimulus payments, median balances were up 49% over that same time period. Weekly debit card spend was up every week compared to 2019 during the second quarter, and areas hardest hit by the pandemic have recovered, including travel up 11%, entertainment up 38%, and restaurant spending up 28% during the week ending June 25th compared with 2019. Consumer credit card spending activity continued to increase, up 13% in the second quarter compared to 2019. As of the weekend of June 25th, travel-related spending, which was hardest hit during the pandemic, was up significantly from 2020, but was the only category that has not fully rebounded to 2019 levels. Our commercial banking clients have also continued to have high levels of cash on hand, and accommodative capital markets and supply chain disruptions continued to to a continued decline in commercial banking loans outstanding, albeit at a slower pace than the last few quarters. Now that we're halfway through the year, let me update you on progress we've made in the areas I highlighted at the beginning of the year. I've spoken at every call about our most important initiative, making progress on risk and control. Wells Fargo's top priority continues to be building the right foundation for a company of our size and complexity. When done, this should meet our regulatory requirements and we remain committed to devoting the resources necessary to operate with strong business practices and controls, maintain the highest levels of integrity, and have appropriate control and appropriate culture in place. The amount of customer remediation and control-related issues that existed when I arrived was many multiples of what should exist at our company. I've spoken of what we put in place to address these issues, and by most metrics, we are making significant progress. Regarding our work on consent orders and other regulatory requirements, the work remaining is significant, and as such, this remains a multi-year journey for us. While what's required for each is clear, there are numerous complexities with managing this amount of work concurrently, and it will take time to consistently accomplish all at the level we and our regulators expect. As such, we may have setbacks, and progress will not be a straight line. However, I remain confident in our ability to complete the work. Building a strong management team was another key priority. When I first joined Wells, our objective was to ensure we had the talent necessary to close our risk and control gaps. During the first half of my tenure, around 60% of senior level hires were in these functions, and many more across the company directed their efforts towards these activities. This remains our most important priority today. We will continue to add resources here, but we're also adding significant resources to improve our competitiveness and provide the foundation for higher levels of performance. During the second half of my tenure, while we've continued to hire senior leaders in risk and control areas, we've been increasing our hiring in areas that will grow our business, with over 70% of our senior level hires focused on this objective. This includes significant hires in data platform and analytics, strategy, digital, and our technology groups. We're focused on the cloud, payments, fintech competition, tech companies, and our own data and digital capabilities. Hires include a digital platform leader for all of our consumer businesses, a head of digital for commercial banking and the CIB, head of strategy and innovation for consumer and small business banking, head of our commercial auto group, head of consumer banking national business development, and a new head of payment strategies for the entire company. We're also adding bankers in the CIB and commercial bank where we see growth opportunities. We also just announced last week that we've hired Bei Ling as the new head of human resources. She will be joining us in October. And providing clear business focus and strategic direction has been important as well as we allocate our resources. We will not do anything to jeopardize our control-related work, but we have also begun to execute on plans to build what's necessary to compete effectively in today's dynamic business environment. Our playbook was dated. and it was time to provide direction and be more aggressive about building leading products, capabilities, and innovating. We've been focused on targeting our resources to what's most meaningful today for our customers by selling or closing businesses, and we're leveraging our breadth and scale to compete with banks and non-banks alike by working to build new capabilities and work across the company to deliver all of Wells Fargo to our customer base. We're rebuilding core capabilities but are beginning to instill a mobile-first mindset as part of our broader technology and data-guided efforts. One example is our credit card business, where we've been working on it since I arrived to build a foundation to compete more effectively. Being competitive here is both an opportunity to grow, but more importantly is a strategic imperative as credit and payments are critical to maintain and build customer relationships. We'll do this with both traditional card products and other ways over time. Our playbook is simple. Build an experienced management team, update and relaunch product customers will make top of wallet, improve customer service, and leverage both our branches and strong digital capabilities to serve our customers. In the second quarter, we announced the first new product of several to come, an industry-leading cashback card, which is now just rolling out. We're also enhancing our deposit products. Our no overdraft product clear access banking continued to perform well with over 825,000 accounts open since the launch in the third quarter of last year. We also simplified and improved the benefits of our portfolio by Wells Fargo checking customers in the second quarter of this year. These are just a few examples of how we're moving forward, but we have initiatives across all businesses which we'll cover over time. And lastly, We've continued to take meaningful actions and are progressing towards better returns. As we highlighted at the beginning of the year, we see a path to get to double-digit ROTCE excluding credit loss reserve releases and then moving towards approximately 15%. We said that the path to double-digit ROTCE is dependent on capital optimization and executing on our efficiency initiatives. With CCAR complete and a return to the SCB framework, We're now in a position to return significant capital to shareholders. We expect to increase our third quarter common stock dividend to 20 cents per share, subject to final board approval. Increasing our dividend is a priority, and our plan contemplates continued increases as we grow earnings capacity. Additionally, our capital plan included approximately $18 billion of gross common share repurchases starting in the third quarter and concluding in the second quarter of next year. This may change depending on a variety of factors, including our earnings and economic outlook. Mike will provide more context here. Importantly, we remain on target to accomplish the expense reductions contemplating in achieving the double digit ROTCE level. Assuming no material changes in the economic environment or interest rates, we expect to achieve a sustainable 10% ROTCE, excluding reserve releases and other special items, both positive and negative, on a run rate basis during 2022. Beyond this, we continue to believe we can further improve our returns through a combination of factors. Moderate balance sheet growth once the asset cap is lifted, a modest increase in interest rates, or a further steepening of the curve. Ongoing progress on incremental efficiency initiatives, a small impact from returns on growth-related investments in our businesses, and continued execution on our risk regulatory control framework. The combination of these factors, we believe, would take our ROTCE to approximately 15% over time. And while we're focused on improving our execution of results, we know that supporting our customers and communities will continue to be an important part of our mission. The work we did through the pandemic was meaningful and necessary to help those most in need, especially consumers and small businesses. But there remains much more to do. We offered payment deferrals, waived fees, supported smaller and diverse small businesses, through the Paycheck Protection Program. We committed to donate all gross processing fees from PPP loans funded in 2020, totaling approximately $420 million to help small businesses' recovery efforts and have completed funding of $234 million of our commitment. We expect to fund the rest by the end of the year. We are also voluntarily extending our foreclosure moratorium on mortgage loans we own through the end of this year. and we're pleased that the industry is contemplating similar foreclosure extensions. We issued our first sustainability bond, which will fund projects and programs that support housing affordability, socioeconomic opportunity, and renewable energy. We partnered with diverse firms in the offering of our $1 billion sustainability bond, with approximately 75% of the economics going to these firms, underscoring our commitment to supporting historically marginalized communities. We fulfilled the pledge that we made last year to commit $50 million to Black-owned banks and communities across the country with investments in two additional African American minority deposit institutions during the second quarter. And we announced the Banking Inclusion Initiative, a 10-year commitment to help unbanked individuals gain access to affordable transaction accounts. This is a complex and long-standing issue that will require gathering the best minds, ideas, products, and educational resources from across our communities to bring about change and help remove barriers to financial inclusion. In summary, let me say that the outlook for the economy for the rest of the year is promising, assuming continued success against COVID. The restocking of inventories is expected to be substantial, and the excess personal savings should provide a cushion for consumer spending. However, risks remain, interest rates have been volatile, and the recent rally in rates is putting pressure on net interest incomes. We've made meaningful progress in our important priorities during the first half of the year, but this is just the start of a multi-year process to transform Wells Fargo. I want to thank everyone at Wells for their hard work and focus on supporting our customers. I'll now turn the call over to Mike.