Wells Fargo & Company

Welcome and thank you for joining the Wells Fargo third quarter 2022 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 1. If you would like to withdraw your question, press star 2. 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.

Good morning. Thank you for joining our call today where our CEO, Charlie Sharp, and our CFO, Mike Sanosimo, 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 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, and good morning, everyone. I'll make some brief comments about our third quarter results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start with the third quarter highlights. Our solid business performance this quarter was significantly impacted by $2 billion, or 45 cents per share, in operating losses related to litigation, customer remediation, and regulatory matters, primarily related to a variety of historical matters. As you know, we've been and remain focused on increasing our earnings capacity and see the positive impact of rising interest rates driving strong net interest income growth and our continued focus on improving operating efficiencies resulting in lower expenses excluding operating losses. Credit quality remains strong and we continue to invest in our technology platforms, digital capabilities, and delivering additional products to our customers and clients. While we're closely monitoring trends with economic conditions expected to weaken given inflation, geopolitical instability, energy price volatility, and rising interest rates, our customers continue to be resilient with overall strong credit performance and solid cash flow. When looking at simple averages across the entire consumer portfolio, deposit balances per account decreased from the second quarter, but were still higher than a year ago and remained above pre-pandemic levels. However, we continue to closely monitor activity by segment for signs of potential stress and for certain cohorts of customers. We've seen average balances steadily decline and are now below pre-pandemic levels, and their debit card spend continues to decline. This is a continuation of what I referenced last quarter, but it's important to note that this remains a small percentage of our total customer base. Overall, our consumer deposit customers' health indicators, including cash flow, payroll, and overdraft trends, are still not showing elevated risk concerns. Debit card spending remains significantly above pre-pandemic levels and was up 3% in the third quarter compared to a year ago, consistent with the second quarter increase. Entertainment and fuel spending had the largest increases from a year ago, but the recent decline in fuel prices drove fuel spending to decline compared to the second quarter. Apparel and home improvement spending declined from both a year ago and second quarter. Credit card spend remained strong in the third quarter, up 25% from a year ago, with double-digit increases coming across all spending categories. Spending was up modestly on a linked quarter basis. Remember, the significant portion of this growth is from our new products, which continue to have strong credit profiles. Period and commercial loan balances were stable compared to the second quarter, with continued growth in commercial banking offset by declines across our businesses and corporate investment banking. Credit performance remained strong with net charge-offs and non-accrual loans continuing to decline from exceptionally low levels. Clients do tell us that they continue to be impacted by persistent inflation, rising interest rates, and tight labor market. And while credit quality remains strong, we're actively monitoring inflation-sensitive industries and taking proactive actions where warranted. Now let me update you on the progress we're making on our strategic priorities. We continue to devote significant resources to implementing an appropriate risk and control framework across the company, and this remains our top priority. We continue to make progress and are executing on our plans, but significant work remains. As a reminder, though I'm confident in our ability to complete the work, it remains a significant body of work and the primary focus of the company. We have set high standards for success, and given the longstanding nature of much of our work, We have said that we remain at risk of setbacks until it is complete. Expenses in the quarter reflect these ongoing risks and our efforts to resolve them. As we continue our work to put our historical issues behind us and to address issues that are identified as we advance our risk control infrastructure work, outstanding issues still remain that will likely result in additional expense in the coming quarters, which could be significant. We are working to close these as quickly as possible, and we remain committed to doing right for our customers and working closely with our regulators and others to resolve these matters. We recognize the importance of moving forward, and the expenses in the quarter are representative of these efforts. At the same time, we're implementing changes to better serve our customers and investing in our businesses to help drive growth. As part of the announcement we made earlier this year to limit overdraft-related fees and give customers more options to achieve their financial goals, we implemented extra-day grace period of the third quarter, which provides consumer customers an extra business day to clear negative balances and avoid overdraft fees. We also began to roll out early payday, which provides consumer customers who receive eligible direct deposits the ability to access funds up to two days earlier than scheduled, further reducing the potential to incur overdrafts. Notably, while this enhancement was rolled out in only six states in the third quarter, during the first two weeks of offering this enhancement, we provided customers early access to $2 billion in funds from 1.3 million eligible direct deposits. And we're on track for a fourth quarter rollout of an easy-to-access short-term credit product that will give qualifying customers another option to meet their personal financial needs. These actions build on services that we've introduced over the past several years, including offering an account that does not charge any overdraft fees. We now have over 1.6 million of those clear access banking accounts up 57% from a year ago. And as I mentioned last quarter, we've developed a new integrated banking, lending, and investment offering that is geared toward the more complex financial needs of our affluent clients called Wells Fargo Premier. During the quarter, we introduced Wells Fargo Premier across our entire branch footprint, initiated a branded digital experience, and launched marketing programs to help affluent customers learn more about how we can better serve them. We'll continue to build the Wells Fargo Premier offering in the coming quarters. In the third quarter, we continue to launch new APIs, providing our commercial and corporate clients more flexibility in helping them drive efficiencies. For example, we launched a new real-time payment API, allowing clients to send digital requests to a payer that can be approved to easily send a real-time credit transfer. We also launched a virtual card API, which enables clients to create and configure virtual cards for B2B vendor payments and purchases. In our CIB markets businesses, We're accelerating our investment into our electronic trading capabilities across multiple asset classes to better meet the evolving needs of our clients, which is helping to drive strong gains in trading bonds. And we're selectively adding talent in our investment banking coverage and product areas as we focus on leveraging our strong existing relationships to build our fee-based businesses. We also continue to make progress on the environmental, social, and governance work that is underway at Wells Fargo. In the third quarter, we published our latest ESG report, which highlights the progress we made in 2021 on our ESG efforts. We consider this work a sustained long-term commitment and believe Wells Fargo is well positioned to make a difference. We issued our second sustainability bond in the amount of $2 billion that will finance projects and programs supporting housing affordability, economic opportunity, renewable energy, and clean transportation. During the third quarter, we officially launched a new grant program in Houston, San Diego, and Milwaukee to help improve racial equity in home ownership, and we have more markets coming before the end of this year. This is part of the $60 million commitment we made earlier this year through the Wells Fargo Foundation to wealth opportunities restored through home ownership for work. This effort aims to create 40,000 homeowners of color access 40,000 homeowners of color across eight markets by the end of 2025. We announced a $1 million donation to provide urgent relief to Florida following the aftermath of Hurricane Ian. In addition, customer accommodations and employee support are available to those directly impacted by the storm. In summary, continued high inflation has kept the Federal Reserve aggressive with rate hikes leading the housing market to slow rapidly, and the heightened uncertainty about the economic outlook and geopolitical events caused the financial market to be volatile. However, labor demand remains robust, consumer balance sheets remain healthy, and customers have capacity to borrow. Wells Fargo is positioned well as we will continue to benefit from higher rates and ongoing disciplined expense management. Both consumer and business customers remain in a strong financial condition. And we continue to see historically low delinquencies and high payment rates across our portfolios. We're closely monitoring risks related to continued impact of high inflation and increasing rates, as well as the broader geopolitical risks. And we do expect to see increases in delinquencies and ultimately credit losses, but the timing remains unclear. As we look forward, we remain bullish on our business opportunities, our higher operating margins, and strong capital ratios have prepared us for wide-range macroeconomic scenarios. In the third quarter, we increased our common stock dividend by 20%, and our CE21 ratio was 10.3%, 110 basis points above our current regulatory minimum, including buffers. We will continue to prudently manage our capital levels to be appropriately prepared for slowing economy and market volatility. Finally, I know many of you are interested in our 2023 expectations, and on our next earnings call, we plan to provide our 2023 expense and net interest income outlook, as well as more color on our path to an over-the-cycle 15% ROTCE. I will now turn the call over to Mike.