Wells Fargo & Company is a diversified financial services company that provides a wide range of banking, investment, and financial products and services to individuals, businesses, and institutions . The company operates through four main segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management . These segments offer various financial solutions, including checking and savings accounts, loans, credit and debit cards, investment banking, and wealth management services .
- Consumer Banking and Lending - Offers financial products and services such as checking and savings accounts, credit and debit cards, and various types of loans to consumers and small businesses with annual sales up to $10 million .
- Corporate and Investment Banking - Delivers capital markets, banking, and financial products and services to corporate, commercial real estate, government, and institutional clients globally, including corporate banking, investment banking, and trading services .
- Wealth and Investment Management - Provides personalized wealth management, brokerage, financial planning, and private banking services to affluent clients .
- Commercial Banking - Provides financial solutions to private, family-owned, and certain public companies, including banking and credit products, secured lending, and treasury management .
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What went well
- Wells Fargo is on track to achieve its medium-term Return on Tangible Common Equity (ROTCE) target of 15%, driven by improving profitability in the credit card and home lending businesses. The company has already improved ROTCE to nearly 13.5% in 2024 and expects further enhancements as these businesses mature. ,
- The credit card business is entering a phase of increased profitability as earlier vintages mature. With credit performance behaving as expected and continued growth in new accounts, profitability from the credit card portfolio is anticipated to positively impact earnings over the next year or two.
- Focused on organic growth opportunities across its businesses, Wells Fargo is driving growth in areas such as card services, wealth management, investment banking, and capital markets. The strategic emphasis on executing across these priorities is expected to generate future revenue growth and enhanced profitability.
What went wrong
- Wells Fargo's trading revenues decreased year-over-year, while peers experienced increases of 15%-20%, indicating potential underperformance in their trading business.
- Ongoing regulatory constraints and consent orders continue to limit Wells Fargo's operations and profitability, as they have not yet resolved all outstanding orders that constrain them.
- Reduced sensitivity to interest rate changes may limit net interest income growth if rates rise, as the bank's balance sheet has become less asset-sensitive over the last number of quarters.
Q&A Summary
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ROE Potential Beyond Remediation
Q: What is Wells Fargo's natural return beyond 15% ROE?
A: Management acknowledges the potential for returns beyond the medium-term 15% ROE target but emphasizes the need to achieve that target first. They prefer to proceed step by step and will address future return goals after resolving remaining regulatory constraints. -
Drivers to Achieve 15% ROE Target
Q: What's driving the last mile to 15% ROE?
A: Management believes reaching the 15% ROE can be achieved through multiple paths, including profitability improvements in the credit card and home lending businesses, as well as growth in investment banking, capital markets, and wealth management. They continue to focus on expense management while investing in technology and growth opportunities. -
Expense Management Opportunities
Q: Are there still meaningful cost-cutting opportunities?
A: Management sees significant opportunity to drive efficiency and continues to find areas for expense reduction through better technology and automation. They do not believe they have exhausted the low-hanging fruit and remain focused on ongoing efficiency improvements. -
Loan Growth Expectations
Q: What are your loan growth expectations for 2025?
A: They expect low to mid-single-digit loan growth, with more meaningful increases in the second half of the year. Growth is anticipated in consumer segments like credit cards and auto loans, and in commercial lending through new clients and investments in bankers. -
Impact of Lifting Consent Order
Q: How is lifting the consent order affecting ROE trajectory?
A: With the lifting of the sales practices consent order, the bank has reinstated incentive frameworks in branches, expected to drive better performance in new checking growth and credit card accounts. These actions are anticipated to contribute to improved profitability in 2025 and beyond. -
Capital Allocation and Buybacks
Q: What's your appetite for share buybacks in 2025?
A: Management intends to continue returning capital to shareholders through buybacks, similar to previous years. They believe they do not need to hold more than the current 11.1% CET1 ratio and will balance buybacks with opportunities for organic growth and other risks. -
Credit Card Profitability
Q: Is credit card profitability improving?
A: As newer credit card vintages mature, profitability is beginning to improve. Early vintages from 3.5 years ago are becoming more profitable, and this is expected to contribute more meaningfully to the P&L over the next year or two. -
Acquisition Strategy Post-Regulatory Issues
Q: Will you consider acquisitions after resolving regulatory issues?
A: Management is focused on organic growth opportunities across businesses and executing the existing plan. They do not currently have plans for acquisitions and believe there is tremendous opportunity to build on existing positions organically. -
Key Risks Outside Geopolitics
Q: What are key risks outside geopolitical factors?
A: Cyber risk is identified as the biggest concern, with significant investment and resources dedicated to it. Management emphasizes that the strength of the U.S. economy is crucial, and anything that risks it is a concern. -
Operational and Cultural Constraints
Q: Are there constraints hindering growth post asset cap removal?
A: Management focuses on disciplined and controlled business expansion, ensuring appropriate controls are in place. They believe significant changes have been made and will proceed in a controlled way, without seeing constraints as hindrances to growth. -
Rate Sensitivity of NII
Q: How sensitive is NII to rate changes?
A: The bank remains marginally asset-sensitive, but the balance sheet has become less sensitive over recent quarters. A decline in rates poses a slight headwind to net interest income, while rates holding higher than forecasts would be a slight positive. -
Trading Revenues and Risk Appetite
Q: Why was trading revenue down compared to peers?
A: The decline is attributed to a strong prior-year quarter rather than weakness in the current quarter. Management notes their trading business is smaller and less complex than peers, with a disciplined risk appetite focused on balance sheet-friendly areas like FX. -
Credit Card Leadership Changes
Q: What's behind the credit card leadership changes?
A: Ray Fisher is retiring after leading the credit card business, and a new leader has been recruited. The strategy remains the same, and management is excited about continuing to execute existing plans. -
Investment Securities Repositioning
Q: How do you decide on securities portfolio adjustments?
A: Management has acted twice to reposition the investment securities portfolio, being disciplined about payback periods, aiming for roughly a 2 to 2.5-year payback. They will continue to evaluate opportunities based on market conditions. -
Auto Lending Growth
Q: Why increase appetite for auto lending growth?
A: Opportunities for profitable growth are seen in auto lending, with better spreads and improved capabilities. Though growth is small, originations are increasing slightly after previous tightening actions and spread compression. -
NII Guidance Excluding Markets
Q: Can you provide NII guidance excluding markets?
A: Management does not disaggregate NII guidance to exclude markets, citing the sensitivity of trading-related NII to short rates and the size of their markets business.
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Given that the asset cap has constrained your ability to grow in areas like wholesale deposits and market financing, how will its removal specifically impact your growth strategy, and what steps are you taking now to prepare for this transition?
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With the recent OCC consent order related to anti-money laundering and KYC compliance disclosed in your 10-Q, how do you plan to address these issues without significantly increasing expenses, and what measures are you implementing to prevent future compliance lapses?
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Your trading gains have exceeded $1 billion per quarter, but given the inherent volatility in market conditions, what strategies are you employing to ensure the sustainability of these revenues, and what key risks could impact future performance in this area?
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The securities repositioning had minimal impact on net interest income in the third quarter but is expected to contribute more in the fourth quarter; can you quantify the anticipated benefit to net interest income from this action, and how does this align with your broader interest rate risk management strategy?
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You've repurchased $15.5 billion in shares year-to-date and remain well above regulatory capital minimums; how are you balancing capital returns with potential economic uncertainties, and should we expect the current pace of buybacks to continue in the coming quarters?
Q3 2024 Earnings Call (Guidance for FY 2024)
- Net Interest Income: Expect Q4 2024 net interest income to be roughly in line with Q3 2024, implying an approximately 9% decline in full year 2024 net interest income compared with 2023 .
- Noninterest Expense: Expect full year 2024 noninterest expense to be approximately $54 billion .
Q2 2024 Earnings Call (Guidance for FY 2024)
- Net Interest Income (NII): Expect full year 2024 net interest income to be in the upper half of the range provided in January, approximately 9% lower than 2023 .
- Noninterest Expense: Expect full year 2024 noninterest expense to be approximately $54 billion .
- Common Stock Dividend: Expect to increase the common stock dividend in Q3 by 14%, subject to Board approval .
- Capital Return: Capacity to continue repurchasing common stock, though the pace will slow .
- Credit Card Charge-off Rate: Expect the rate to decline in Q3 .
- Equity Markets Assumption: Assumes equity markets will remain at current elevated levels .
Q1 2024 Earnings Call (Guidance for FY 2024)
- Net Interest Income (NII): Expect full year 2024 net interest income to be approximately 7% to 9% lower than 2023 .
- Noninterest Expense: Excluding FDIC special assessment, expect full year 2024 noninterest expense to be approximately $52.6 billion .
- Loan Growth: Expect loans to decline in the first half, with slight growth in the second half .
- Deposit Growth: Expect flat commercial deposits and slight decline in consumer deposits .
- Capital Return: Expect to repurchase more common stock in 2024 than in 2023 .
- Credit Quality: Anticipate additional losses in commercial real estate office portfolio .
- Allowance for Credit Losses: Down modestly, with declines in commercial real estate and auto loans, offset by higher credit card loans .
- Interest Rate Environment: Expect around three rate cuts in 2024 .
Q4 2023 Earnings Call (Guidance for FY 2024)
- Net Interest Income (NII): Expect full year 2024 net interest income to be approximately 7% to 9% lower than 2023 .
- Noninterest Expense: Expect 2024 noninterest expense to be approximately $52.6 billion .
- Capital Returns: Plan to repurchase more common stock in 2024 than the $12 billion repurchased in 2023 .
- Deposits: Expect stable deposits in wealth and commercial segments, with declines on the consumer side .
- Return on Tangible Common Equity (ROTCE): Aim for a sustainable 15% ROTCE over the medium term .
Summary of Issued and Guided Periods
- Q3 2024: Guidance for FY 2024 .
- Q2 2024: Guidance for FY 2024 .
- Q1 2024: Guidance for FY 2024 .
- Q4 2023: Guidance for FY 2024 .
Competitors mentioned in the company's latest 10K filing.
- Banks - Compete with financial services providers such as banks.
- Savings and Loan Associations - Compete with financial services providers such as savings and loan associations.
- Credit Unions - Compete with financial services providers such as credit unions.
- Finance Companies - Compete with financial services providers such as finance companies.
- Mortgage Banking Companies - Compete with financial services providers such as mortgage banking companies.
- Insurance Companies - Compete with financial services providers such as insurance companies.
- Investment Banks - Compete with financial services providers such as investment banks.
- Mutual Fund Companies - Compete with financial services providers such as mutual fund companies.
- Brokerage Houses - Face increased competition from nonbank institutions such as brokerage houses.
- Private Equity Firms - Face increased competition from nonbank institutions such as private equity firms.
- Online Lending Companies - Face increased competition from nonbank institutions such as online lending companies.
- Financial Services Subsidiaries of Commercial and Manufacturing Companies - Face increased competition from financial services subsidiaries of commercial and manufacturing companies.