Wells Fargo & Company

Welcome and thank you for joining the Wells Fargo fourth quarter 2024 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 one. If you would like to withdraw your question, press star two. 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.

Good morning. Thank you for joining our call today where our CEO, Charlie Sharp, and our CFO, Mike D'Animissimo, 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 relief, 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 risk and uncertainty. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filing, including the Form 8K filed today containing our earnings materials. Information about any non-GAAP financial measures reference, 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. Let me start by acknowledging the unbelievable devastation from the Los Angeles wildfires. Our hearts go out to everyone who's been affected, and we're committed to helping rebuild their lives, businesses, and communities. I also want to thank our employees for working hard to support our customers, many of whom who have been impacted themselves. Turning to Wells Fargo's performance, I'll make some brief comments about our results and update you on our priorities. I'll then turn the call over to Mike to review fourth quarter results, as well as our net interest income and expense expectations for 2025 before we take your questions. Let me start with some general comments. Our solid performance this quarter caps a year of significant progress for Wells Fargo across multiple areas. Our earnings profile continues to improve. We are seeing the benefit from investments we're making to increase growth and improve how we serve our customers and communities. We maintained a strong balance sheet. We returned $25 billion of capital to shareholders, and we made significant progress on our risk and control work. We grew net income and our diluted earnings per share was up 11% from a year ago. After I arrived, we reviewed our businesses and sold or scaled back several which reduced revenues in the shorter term and increased investments in others. We also made a conscious effort to diversify revenues and reduce our reliance on net interest income. In 2024, our strong fee-based revenue growth of 15% from a year ago largely offset in net interest income reflecting these upgrades. Our disciplined approach to managing expense levels has been consistent and an important part of our success. We increased investments in areas that are important for our future and generated efficiencies to help fund those opportunities. Overall, expenses declined from a year ago, benefiting from lower FDIC and severance expenses, as well as the impact of our efficiency initiatives which has helped drive headcount reductions every quarter since third quarter of 2020. We maintain our strong credit discipline and credit performance was relatively stable throughout the year and consistent with our expectations. Average loans declined throughout the year as growth in credit card balances was offset by declines in most other asset classes, reflecting weak loan demand, as well as credit tightening actions. Average deposits issued by corporate treasury. We've been actively returning excess capital over the past five years, and that has resulted in average common shares outstanding decreasing by 21% since fourth quarter 2019. This year, we've increased our common stock dividend per share by 15%, and repurchased approximately $20 billion of common stock, up 64% from a year ago. Regarding our strategic priorities, I'm very proud of the progress we've made on our risk and control work, and it remains our top priority, and closing consent orders is an important sign of progress. Early last year, the OCC terminated a consent order it issued in 2016 regarding cell practices. The closure of this order was an important milestone and is a confirmation that we operate much differently today. This was the sixth consent order terminated by our regulators since I joined Wells Fargo in 2019. greatly trained change from when I arrived, and while we are not done, I'm confident that we will successfully complete the work required in our consent orders and embed an operational risk and compliance mindset into our culture. Our results also show our progress on the other strategic priorities that we have. Improving our credit card platform is an important strategic objective, and our progress here is clear. Since 2021, we have rolled out total of 11 new cards, including four new consumer cards and a new small business card in 2024. Our new product offerings continue to be well-received by both existing customers and customers new to Wells Fargo, with over 2.4 million new credit card accounts opened in 2024. We've done this while maintaining our credit standards. The momentum in this business is also demonstrated by strong credit card spend. up over $17 billion from a year ago. In our auto business, we announced a multi-year co-branded agreement where we will be the preferred purchase finance provider for Volkswagen and Audi brands in the United States starting in the first half of this year. We continue to reposition our home lending business as we execute on the strategic direction we announced in early 2023. We've reduced headcount by 47% and the amount of third-party mortgage loan service 28% since the announcement as we continue to streamline this business. The business is more profitable today and opportunities remain to improve. After several years of little to no growth, as we focused on satisfying the requirements of our consent orders, we are starting to generate growth and increase customer engagement in our consumer, small, and business banking segment. We had a more meaningful growth in net checking accounts in 2024 And importantly, most of that growth came in the form of more valuable primary checking accounts. We had over 10 billion debit card transactions last year, up 2% from a year ago, the highest annual volume in our history. We accelerated our efforts to refurbish our branches, completing 730 in 2024. We continued to make enhancements to our mobile app, including making it significantly easier to open accounts, and in the fourth quarter, accounts were opened digitally. We grew mobile active customers by 1.5 million in 2024, up 5% from a year ago. Our customers are also increasingly using Zelle, and we had over 1 billion Zelle transactions in 2024, up 22% from a year ago. We introduced Wells Fargo Premier to better serve our absolute clients, and we're starting to see some early benefits from the enhancements we've made. We increased the number of Premier financial advisors by 5% from a year ago. We focus on increasing the number of bankers and advisors in top locations. We have enhanced our customer relationship management capabilities for our bankers and advisors. This has increased collaboration, driving $23 billion in net asset flows into wealth and investment management premier channel last year. Deposit and investment balances for premier clients grew steadily This remains a significant area of opportunity for us. Turning to our commercial business, in the commercial bank, we're focused on adding relationship managers and business development officers in under-penetrated and growth markets to drive new client acquisition, future revenue growth, and we expect to hire even more in 2025. We created a strategic partnership with Centerbridge Partners and introduced Overland Advisors to better service our commercial bank customers and direct lending product. We have targeted our investment banking capabilities towards our commercial banking clients. We're still early in these efforts, but we're starting to see results, including our investment banking market share with our commercial banking clients increasing by approximately 150 basis points in 2024, which includes helping some clients access capital markets for the first time. Additionally, we've been working closely with our clients to support their M&A activity, driving higher M&A-related revenue. the opportunity remains significant. We continue to make investments in talent and technology to strengthen corporate investment banking. More than 75 new hires joined CID since 2019, with many of these in key coverage and product groups within trading and banking, and our revenue and share in many important areas is increasing, including in our markets business, where we've grown our U.S. market share, including in credit trading, commodities, and our equity cash and derivatives business. We also continue to make steady progress in growing our FX business with strong growth in both our institutional client base and volumes in 2024. We also grew our U.S. market share in investment banking with share gains in debt and equity capital markets and increased revenue in our advisory business in 2024. We enter 2025 with solid pipeline in both capital markets and advisory, although market conditions can always change. I feel great about our progress and continue to believe we're just beginning to see the benefits of our investments. We've also continued to exit or sell businesses that are not in sync with our strategic priorities, and last year we entered into a definitive agreement to sell the non-agency third-party servicing segment of our commercial mortgage servicing business. More broadly, the U.S. economy has performed very well and remains strong, and lower inflation and unemployment position the economy well into 2025. We are predominantly a U.S. bank. We succeed when the country succeeds. So the incoming administration's support of U.S. businesses and consumers gives us optimism as we look forward. Additionally, the incoming administration has signaled a more business-friendly approach to policies and regulation, which should benefit the economy and our clients. Mike will talk more about our expectations for 2025, but as we start the new year, I'm enthusiastic about the opportunities we have to drive higher returns across our businesses by growing revenue and managing expenses. I'm proud of the progress we've made in 2024. I want to conclude by thanking everyone who works at Wells Fargo, their hard work for what they do every single day to support our customers, clients, and communities. I'm excited about the momentum we're building and all that we can accomplish together in 2025. I will now turn the call over to Mike. Thank you, Charlie. Good morning, everyone. We had solid results in the fourth quarter, including net income of $5.1 billion, or $1.43 for diluted common share. Underlying business performance was strong from 30 or a year ago. We grew fee income across most categories, maintained our expense and credit discipline, and grew customer accounts and activity levels as we benefited from the investments that Charlie highlighted. We also grew net interest income from the third quarter. Our fourth quarter results included $863 million, or $0.26 per share, of discrete tax benefits related to resolution of prior period matters. This benefit was largely offset by $647 million, or $0.15 per share, of severance expense, and $448 million, or $0.10 per share, of net losses on the sale of debt securities as we took the opportunity to further refinance The estimated payback period for this repositioning is approximately two and a half years. Turning to slide four. Net interest income grew 146 million, or 1%, from the third quarter, the first wind quarter increase since the fourth quarter of 2022. The increase was driven by higher customer deposit balances, which enabled us to continue to reduce higher cost market funding. Moving to slide five. Average loans were down from both the third quarter and a year ago. Period end balances grew $3 billion from the third quarter, with growth in commercial and industrial loans and credit card loans more than offsetting declines in most other categories. Average deposits increased both from the third quarter and a year ago, with growth in our customer deposits enabling us to reduce higher-cost corporate treasury deposits. Average deposit costs declined 18 basis points from the third quarter as deposit costs stabilized or declined across all of our deposit gathering businesses. In response to the Federal Reserve rate cuts, we have reduced standard pricing for commercial clients as well as pricing for promotional deposit offers and CDs in our consumer businesses. Lower deposit costs also reflected the slowdown of customer migration to higher yielding deposits. Additionally, lower cost consumer deposits have continued to stabilize. Turning to slide six. We had strong growth in non-interest income, up 11% from a year ago, benefiting from the investments we've been making in our businesses, as well as market conditions. This growth was diversified with each of our operating segments generating growth from a year ago. I'll highlight the specific drivers of non-interest income when discussing our operating segment results. Turning to expenses on slide seven. Non-interest expense declined 12% from a year ago, driven by the lower FDIC special assessment. Excluding this assessment, expenses were relatively stable as lower severance expense and the impact of our efficiency initiatives was largely offset by higher revenue-related compensation, predominantly in wealth and investment management, as well as higher technology and equipment expense. Turning to credit quality on slide 8. Credit performance has been relatively stable with our net loan charge-off ratio the same as a year ago and up four basis points from the third quarter. Commercial net loan charge-offs increased 80 million from the third quarter to 30 basis points of average loans driven by the commercial real estate office portfolio. Commercial real estate office fundamentals have not changed and remain weak. We still expect commercial real estate office losses to be lumpy as we continue to actively work with our clients. Consumer net loan charge-offs increased $20 million from the third quarter to 85 basis points of average loans, driven by higher losses in the credit card portfolio, which was consistent with our expectations. Non-performing assets declined 5% from the third quarter, driven by a $390 million decline in commercial real estate office not-a-full loans, which includes paydowns and net loan charge-offs. Moving to slide nine. Our allowance for credit losses from loans was down $103 million from the third quarter, with modest declines across most asset classes, partially offset by an increase in allowance for credit card loans driven by higher loan balances. Our allowance coverage for total loans has been relatively stable over the past five quarters, as credit trends have remained fairly consistent. Our allowance coverage continued to decline and allowance levels were relatively stable. Turning to capital and liquidity on slide 10. Our capital position remained strong and our CET1 ratio of 11.1% continued to be well above our CET1 regulatory minimum plus buffers of 9.8%. We repurchased $4 billion of common stock reducing common shares outstanding by 9% from a year ago. Turning to our operating segments, starting with consumer banking and lending on slide 11. Consumer small and business banking revenue declined 7% from a year ago, driven by lower net interest income, reflecting the impact of customers migrating to higher yielded deposit products. However, the pace of the migration continues to slow. Home lending revenue grew 2% from a year ago, driven by higher mortgage banking fees. Credit card revenue grew 3% from a year ago as loan balances increased and card fees grew from a higher point of sale volume. We continue to be pleased with the performance of new products that we've launched over the last three and a half years, with credit performing as expected and strong growth in new accounts and usage. Auto revenue decreased 21% from a year ago, driven by lower loan balances reflecting previous credit tightening actions and continued loan spread compression. The decline in personal lending revenue from a year ago is also driven by lower loan balances and loan spread compression. Turning to some key business drivers in slide 12, retail mortgage originations increased 31% from a year ago with higher purchase volume, as well as stronger refinance volume early in the quarter when interest rates were lower. Debit card spending was strong in the fourth quarter and increased 4.9 billion, or 4% from a year ago, and credit card spending was up 9% from a year ago, with growth in all categories except fuel. Turning to commercial banking results from slide 13. Middle market banking revenue was down 2% from a year ago, driven by lower net interest income, reflecting higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 12% from a year ago, driven by lower net interest income and lease income, partially offset by improved results from our equity investments. Average loan balances in the fourth quarter were down 1% compared with a year ago, as growth in middle market banking was more than offset by lower balances in asset-based lending. While our commercial clients are generally more optimistic, we did not see a meaningful change in loan demand in the fourth quarter, as many clients remained cautious. Turning to corporate and investment banking in slide 14, Banking revenue was down 4% from a year ago, driven by higher deposit costs and lower loan balances. This decline was partially offset by higher investment banking revenue from increased activity in equity and debt capital markets, as well as higher advisory fees. Commercial real estate revenue decreased 1% from a year ago, reflecting the impact of lower loan balances, partially offset by higher capital markets revenue from higher volumes in commercial mortgage-backed securities, with real estate loan syndications and multifamily capital as market sentiment improved. Markets revenues down 5% from a year ago, driven by low revenues in equities and municipals, partially offset by stronger performance than most other fixed income products. Our fourth quarter results reflected the implementation of a change to incorporate funding valuation adjustments for our derivatives, which resulted in a loss of $85 million. most asset classes. Average loans declined 6% three years ago, driven by continued reductions in our commercial real estate portfolio, driven by office, as well as lower loan balances and banking as clients continue to access capital markets for funding. On slide 15, wealth and investment management revenue increased 8% compared with a year ago due to higher asset base fees to provide increased market valuations. As a reminder, the majority of wind advisory assets are priced at the beginning of the quarter, so first quarter results will reflect market valuations as of January 1st, which were about from both a year ago and from October 1st. Average deposits increased by 16% and average loans grew by 2% from a year ago, which have both benefited from product enhancements and pricing improvements that provide value to our clients. The growth in deposits with balances in those products lower than a year ago. Slide 16 highlights our corporate results. Revenue increased from a year ago, driven by improved results from our venture capital investments. After having impairments on these investments for the past two years, we had net gains every quarter in 2024 with improved performance in the second half of the year. Now turning to our outlook on slide 17. I'll go into more detail on our for net interest income and non-interest expense in the next few slides. But first, I want to highlight the progress we've made on improving our returns. When we first started discussing the outlook for our returns in the fourth quarter of 2020, we had an 8% ROTCE. Over the past four years, we have been successfully executing on our efficiency initiatives, diversifying our sources of revenue by investing in our businesses to better serve our customers and drive growth, and returning excess capital to shareholders. These actions helped to improve our ROTCE to 13.4% in 2024. We still believe we have an achievable path to a sustainable ROTCE of 15% as we continue to make progress on transforming the company, including the priorities I related earlier on the call. On slide 18, we provide our expectations for net interest income for 2025. We had $47.7 billion of net interest income in 2024, which was within the expected range we provided at the start of last year. Net interest income declined sequentially for the first three quarters of the year before growing modestly in the fourth quarter. Our fourth quarter annualized net interest income was $47 billion, or approximately $700 million lower than full year 2024. Our current expectation is that full net interest income will be approximately 1% to 3% higher than full year 2024 or approximately 3% to 5% higher than the annualized fourth quarter of 2024 net interest income. We expect net interest income will be relatively stable in the first half of 2025, which includes the impact from two fewer days in the first quarter, with more growth in the second half of the year. Underpinning our expectations are a series of key assumptions, including using the Recent forward rate curve, which includes between one and two federal reserve rate cuts. Given our modestly asset sensitive position, this would be a slight headwind to net interest income. Average loans are expected to grow modestly from fourth quarter 2024 to fourth quarter 2025, driven by anticipated growth in the corporate investment bank markets group and GIB banking, as well as anticipated growth in our auto and credit card portfolios. Deposits in all Our deposit-gathering businesses are expected to grow modestly, which would allow us to further reduce higher-cost market funding. Reinvestment of lower-yielding securities into higher-yielding assets. Our expectation also reflects the benefits from the actions we took in the second half of 2024 to reposition the investment portfolio. And trading-related net interest income is expected to be higher due to lower interest rates, which would largely be offset by lower trading-related non-interest income. As we've done in prior years, for the purposes of estimating net interest income, we are also assuming the asset cap will remain in place throughout the year. Ultimately, the amount of net interest income we earn in 2025 will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the curve, deposit balances, mix in pricing, and loan demand. Now turning to our 2025 expense expectations on slide 19. Following the waterfall on the slide from left to right, we reported $54.6 billion of non-interest expense in 2024, which includes the $647 million of severance expense in the fourth quarter that was not contemplated in our guidance. Our 2025 expense expectation includes operating losses of approximately $1.1 billion, which is approximately $700 million lower than operating losses in 2024. Looking at the next bar, we expect severance expense to be approximately $500 million lower in 2025, given the expense report we took in the fourth quarter of 2024. We expect wealth and investment management revenue-related expenses to increase by approximately $600 million in 2025. As a reminder, this is a good thing, as these higher expenses are more than offset by higher non-interest income. Actual revenue-related expenses will be a function of market levels, with the biggest driver being the equity markets. Our outlook assumes the S&P 500 will be up modestly from current levels, but clearly the ultimate performance of the markets is uncertain. We expect all other expenses to be up approximately $200 million, with the impact of efficiency initiatives more than offset by higher investments and other expenses. We expect approximately $2.4 billion of gross expense reductions in 2025 due to efficiency initiatives. We've successfully delivered on more than $12 billion of gross expense more efficient across the company. Keep in mind, however, the resources needed to address our risk and control work are separate from our efficiency initiatives. There are three primary areas we're expecting to invest. First, we expect approximately $900 million of incremental technology expense, including investments in infrastructure or business capabilities. Second, we expect approximately $900 million of incremental other investments, including the specific areas we highlight on the next slide. Finally, we expect other expenses to increase by approximately $800 million, including expected merit increases and performance-based discretionary compensation. As a reminder, the first quarter has seasonally higher personal expenses, which are expected to be $650 to $700 million. Putting this all together, we expect 2025 non-interest expense to be approximately $54.2 million. On slide 20, we provide some examples of our areas of focus for the investments, which are critical to better serving our customers and generating growth. Let me highlight a few. Building the right risk and control infrastructure remains our top priority, and we will continue to invest in this important work. We continue to invest in technology and digital platforms to transform how we serve both our consumer and commercial customers. This includes continuing the transition of our applications to the cloud, migrating into new data centers, and investing in data platforms to drive more insights. We are continuing to upgrade our core lending capabilities, including improvements to our fulfillment and servicing systems, enhancing credit decisioning, and strengthening fraud capabilities. To drive customer growth in the consumer businesses, we plan to continue scaling our marketing efforts, modernizing our branch footprint, and increasing the number of premier bankers and financial advisors. We are also focused on onboarding more independent advisors as we continue building out our independent brokerage channel. In addition, we continue to improve our digital capabilities for our customers, specifically our mobile account opening and onboarding, as well as Zelle. We plan to continue hiring in priority sectors to help drive growth in investment banking capital markets. We also plan to continue hiring relationship bankers within commercial banking to build out coverage in under-penetrated markets and key industries. In summary, our results in 2024 demonstrated the continued progress we've been making to improve our financial performance. We generated strong fee-based revenue growth, reduced our expenses, maintained strong credit discipline, increased capital returns to shareholders, and retained our strong capital position. I'm very pleased with the progress we've made so far. I'm excited about the additional opportunities we have to continue to drive improved performance. We will now take your questions.