WELLS FARGO & COMPANY/MN Q3 FY2024 earnings call

Management Statement and Operational Highlights:

• Third Quarter Highlights: Net income was $5.1 billion, diluted earnings per share $1.42, ROE 11.7%, and ROTCE 13.9%, all up from the second quarter. Fee-based revenue grew 16% in the first nine months. Headcount declined 20% since Q3 2020. Expenses in Q3 were down from Q2 and year-ago. Average loans declined with credit card portfolio growth. Deposits slightly declined but customer-facing businesses continued to grow. Wholesale credit performance improved, while consumer charge-offs declined. Capital position strong with CET1 ratio 11.3%. Repurchased $3.5 billion in common stock and increased dividend by 14%.
• Strategic Priorities: Risk and control work remains top priority. Continued building credit card business with new co-branded cards. Investments in consumer, small, and business banking with growing net checking counts and refurbished branches. Hired leaders in corporate investment bank. Focus on core businesses and shrinking/selling non-core ones, including selling non-agency third party servicing segment of commercial mortgage servicing.
• Securities Repositioning: Took $447 million net losses on sale of debt securities, reinvested proceeds into higher-yielding securities with an estimated earn-back period of over two years. Without this impact, EPS would have been $1.52.

Segment Performance:

• Consumer Banking and Lending: Consumer Small and Business Banking revenue declined 5% year-over-year due to lower deposit balances and customer migration to higher-yielding products. Home Lending revenue slightly increased year-over-year driven by higher mortgage banking fees. Credit Card revenue decreased 2% year-over-year as lower fee revenue offset higher net interest income. Auto revenue fell 24% year-over-year from lower loan balances and loan spread compression. Personal lending revenue declined due to lower loan balances and spread compression.
• Commercial Banking: Middle Market Banking revenue was down 1% year-over-year due to lower net interest income offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 4% year-over-year from lower net interest income and lease income.
• Corporate Investment Banking: Banking revenue was down 5% year-over-year due to higher deposit costs and lower loan balances. Commercial real estate revenue decreased 1% year-over-year, while markets revenue increased 6% year-over-year.
• Wealth and Investment Management: Revenue increased 5% year-over-year due to higher asset-based fees from increased market valuations and higher brokerage transaction activity, partially offset by lower net interest income from sweep deposits.

Guidance:

• Expect fourth quarter 2024 net interest income to be roughly in-line with third quarter 2024, implying ~9% decline in full-year 2024 net interest income vs 2023.
• Full-year 2024 non-interest expense expected to be approximately $54 billion, unchanged from prior guidance.
• Acknowledged close to NII trough, with key drivers including deposit mix, deposit pricing, loan demand, and day count adjustments.

Risks:

• Commercial real estate office market remains weak with expected additional charge-offs and continued stress.
• Regulatory risks related to ongoing work under the formal agreement with the Office of the Comptroller of the Currency.
• Economic uncertainty impacting loan demand and commercial lending activity.
• Volatility in market conditions affecting trading gains and other income streams.

Q: Scott Siefers asked about NII trough and what drives it, with Mike Santomassimo responding about deposit mix, pricing, loan demand, and day count adjustments.

A: Mike Santomassimo said NII trough proximity is due to deposit mix, pricing, loan demand, and day count factors. Deposits and their mix, deposit pricing, loan demand, and day count adjustments are key drivers.

Q: Ebrahim Poonawala inquired about NII despite 50 basis point cut and asset cap removal, with Mike Santomassimo and Charlie Scharf responding about deposit mix, pricing, and asset cap work stream mechanics.

A: Mike Santomassimo noted NII was flat due to deposit mix and pricing actions, and Charlie Scharf explained asset cap work stream involves plan development, regulator feedback, and execution.

Q: Erika Najarian asked about asset cap work stream next steps and buyback pace, with Charlie Scharf and Mike Santomassimo responding.

A: Charlie Scharf explained asset cap work stream involves plan submission and regulator review, and Mike Santomassimo said buyback pace is based on capital position and ongoing review.

Q: Betsy Graseck asked about asset cap removal impact and expense pullback post-consent order, with Charlie Scharf responding.

A: Charlie Scharf said asset cap removal would impact wholesale deposits and markets business, and expense pullback isn't a focus yet as control work continues.

Q: Matt O'Connor asked about anti-money laundering KYC disclosure and industry focus, with Charlie Scharf responding.

A: Charlie Scharf said they take control work seriously, spend as needed, and focus on their own efforts.

Q: David Long asked about securities repositioning impact on NII and trading gains volatility, with Mike Santomassimo responding.

A: Mike Santomassimo said securities repositioning had little Q3 impact and trading gains are volatile due to market conditions and seasonality.

Q: John Pancari asked about securities repositioning benefit to NII and fee income trajectory, with Mike Santomassimo and Charlie Scharf responding.

A: Mike Santomassimo said repositioning benefit is in run rate for Q4, and Charlie Scharf discussed fee income drivers including market levels and business investments.

Q: Gerard Cassidy asked about commercial real estate office portfolio and deposit/loan behavior, with Charlie Scharf and Mike Santomassimo responding.

A: Charlie Scharf said commercial real estate office portfolio is worsening with more properties impacted, and Mike Santomassimo noted deposit and loan behavior trends within expectations.