Wells Fargo's Director of Investor Relations, John Campbell, welcomed everyone to the Second Quarter 2023 Earnings Conference Call and reminded them that the call was being recorded. CEO Charlie Scharf and CFO Mike Santomassimo discussed the second quarter results and answered questions. Wells Fargo reported solid results in the quarter with higher revenue, pre-tax pre-provision profit, diluted earnings per share, and ROTCE than the previous year.

This paragraph discusses the bank's revenue growth and efficiency improvements. It also mentions that net charge-offs have increased from historical lows, but overall credit quality remains strong. The bank increased its allowance for credit losses due to its office portfolio and credit card portfolio growth. Average loans were up from a year ago, but down from the first quarter due to economic slow down and credit tightening. Credit card spending growth has slowed, but debit card spending was flat from a year ago. Average deposits were down from the first quarter, driven by lower consumer deposits.

Wells Fargo has made progress on their strategic priorities, specifically focusing on risk and control. They have implemented substantial portions of the work, but more implementation is needed to reduce the risk of regulatory actions. In addition, they have increased their use of mobile app, added over 1 million mobile active customers, and launched Fargo, an AI-powered virtual assistant. They have also made important hires to help serve customers and drive growth, including a Co-Head of Global Mergers and Acquisitions, Co-Head of Financial Institutions, and new heads of financial sponsors, equity capital markets, healthcare and technology, media and telecom.

Wells Fargo is committed to serving its communities and has taken several initiatives to do so. These include a 10-year strategic partnership with T.D. Jakes Group, a $7.5 million donation to Habitat for Humanity, a grant to the Hello Alice fund to improve access to credit and capital for small business owners, and the opening of HOPE Inside centers in Wells Fargo branches. The company has also published a 2023 diversity, equity and inclusion report highlighting the progress it has made in its DE&I strategy and initiatives. Despite economic slowing and uncertainty, the Federal Reserve stress test affirmed that Wells Fargo is in a strong capital position.

Wells Fargo announced that they expect to increase their third quarter comp stock dividend by 17% to $0.35 per share, and have repurchased $8 billion of common stock during the first half of this year. They anticipate that Basel III Endgame proposal will include higher capital requirements and that their capital requirements will increase. They are considering the potential impacts of this in their future repurchases, and remain focused on increasing their earnings capacity and their risk and control build-out to support customers throughout economic cycles.

In the second quarter, the CET1 ratio was 10.7%, 1.5 percentage points above the regulatory minimum plus buffers, and 1.8 percentage points above the expected new regulatory minimum plus buffers. The liquidity coverage ratio was approximately 23 percentage points above the regulatory minimum. Credit quality remained strong, but net loan charge-offs increased from historically low levels to 32 basis points of average loans, with commercial net loan charge-offs increasing $137 million from the first quarter to 15 basis points of average loans and consumer net loan charge-offs increasing $23 million from the first quarter to 58 basis points of average loans.

In the second quarter, consumer credit performance remained solid, but net loan charge-offs are expected to increase. Non-performing assets increased 14%, largely due to higher commercial non-accrual loans, mainly in the commercial real estate portfolio. The allowance for credit losses increased, particularly for commercial real estate office loans and credit card balances. The office portfolio was primarily in corporate investment banking, with the most non-accrual loans and the highest allowance for credit losses coverage ratio.

This quarter, the allowance for credit losses for the total CRE office portfolio was 6.6%, an increase from the first quarter. The portfolio is monitored on a loan-by-loan basis, and each situation is different. In some cases, the borrower may need to inject equity or refinance, while in others the asset may be sold or worked out. Average loans were up 2% from the previous year, while average deposits declined 7%. Loan yields increased due to the higher interest rate environment.

In the first quarter, average commercial deposits were down from a year ago, but stable, while average deposits grew in corporate and investment banking. Deposit costs rose 30 basis points to 113 basis points, and the mix of non-interest bearing deposits declined from 32% to 30%. Net interest income was up 29% from a year ago, but decreased $173 million from the first quarter due to lower deposit balances. Non-interest expense increased $125 million from a year ago, and is expected to be $50.2 billion for the full year of 2023.

Bank of America's 2023 non-interest expenses are expected to be around $51 billion, which includes higher severance expenses due to slower-than-expected attrition. Consumer banking and lending revenue increased 19%, while home lending revenue declined 13%. Credit card revenue increased 1%, while auto and personal lending revenue declined 13% and 17%, respectively. Bank of America has reduced headcount and branch staffing by 4% and 10% respectively from a year ago, and credit card new account growth was up 17% from a year ago.

Mortgage originations decreased 77% from a year ago but increased 18% from the first quarter. Auto portfolio balances decreased 7% year-over-year and origination volume was down 11%. Debit card spending was flat from a year ago, but credit card spending was up 13%. Middle Market Banking revenue increased 51% due to higher interest rates and loan balances, while Asset-based lending and leasing revenue increased 13%. Corporate Investment Banking revenue increased 37%, driven by higher interest rates and lending revenue. Average loan balances grew for 8 consecutive quarters, with loan growth in asset-based lending and leasing driven by higher inventory levels and middle market banking loans were flat.

Investment banking fees increased from a year ago, driven by write-downs taken in the second quarter of 2022. Commercial real estate revenue grew 26% due to higher interest rates and higher loan balances. Markets revenue increased 29% from a year ago due to higher trading results. Wealth and Investment Management revenue was down 2% due to lower market valuations. Corporate revenue increased $751 million from a year ago due to higher interest rates and lower impairments of equity securities. Average loans were down 3% from a year ago due to a decline in securities-based lending.

In the second quarter, the company saw revenue growth and pre-tax provision profit growth, while net charge-offs continue to slowly increase from historical lows and the allowance for credit losses increased. Capital levels remain strong and the company is repurchasing common stock. Mike Santomassimo answered a question about NII, noting that loan growth is not a big driver of the increase, but that modest loan growth is part of the assumption.

Mike Santomassimo explains that outflows, particularly in the consumer space, will continue and deposits will migrate from non-interest bearing to interest bearing. He also notes that this trend has been consistent for the last couple of quarters and that factors such as excess deposits and people spending from their primary checking accounts will influence when the trend starts to slow down and stabilize.

Mike Santomassimo responded to Ebrahim Poonawala's question about the CRE book and the bank's reserve. He discussed how the portfolio, including multifamily, is performing well with slowing growth rates but not declines in rents and good occupancy rates. However, office is seeing weakness and the allowance was set up with specific borrower loan level estimates to deal with potential scenarios.

Charlie Scharf and Mike Santomassimo of Wells Fargo explain that the company's balance sheet is currently below the asset cap of $1.952 trillion, and that it is not standing in the way of serving customers. They also note that the asset cap is a reminder that there is still more work to do, and that their growth opportunities lie in hiring the right people to go after the fee opportunity, rather than extending more balance sheet.

Mike Santomassimo discussed the loan growth in terms of card, asset-based lending, leasing, middle market, and consumer items. He noted that the guidance does not require every assumption to go in their favor, and the bigger drivers of uncertainty around NII for the rest of the year are deposits and deposit pricing. He also mentioned that headcount reductions and higher severance costs are driving some upward pressure on expenses this year.

Mike Santomassimo and Charlie Scharf both emphasize that the company is going to remain disciplined with their expenses and that their focus on expenses has not changed. They will evaluate the budget for the upcoming year and make decisions on how much to spend on subjective expenses such as business development and product enhancements. They will also look at their performance and decide how much they want to spend on these expenses.

Mike Santomassimo stated that they have substantial excess capital above the regulatory requirements and buffers and that it is likely that capital requirements are going up. It is expected that more clarity will be given later this month or early next month on the proposal, which will help inform how much room they have for buybacks.

Mike Santomassimo discussed the possibility of continuing the buyback program in a prudent way and still building required capital. He also mentioned that there are a lot of moving pieces and that it is difficult to put numbers on it until proposals are seen. He then discussed the implications of the forward curve on NII, noting that commercial betas are high when rates go up and down, and that consumer rates have not changed much. He also noted that there is likely some lag when rates peak, and that deposits have been performing consistently over the last couple of quarters.

Charlie Scharf clarified that the bank is not giving guidance for 2024 yet, but they are out-earning in NII and are on track to reach their 15% ROTCE targets in a more normalized environment. The bank also expects to increase their fees and remain focused on expenses. Additionally, the CECL requirement means that the bank needs to be forward-looking in their reserving, and this is impacting their EPS for the fifth consecutive quarter.

Charlie Scharf and Mike Santomassimo discussed that the reserve build in commercial real estate is not isolated to California, and that it depends on the building, borrower, and other factors. They also emphasized that it is a mistake to assume that losses are based solely on the location of the property, as there are examples of loans in struggling cities with strong structures and high lease rates.

The reserve build for commercial real estate loans is taking into account all the risks, including refinance risk, based on current rate environments and cap rate expectations. Charlie Scharf and the team are being holistic in their review, though they acknowledge it is possible they may have to add more in the future as more is learned. There is a range of opinion in the room, with some believing it is hard to see losing a certain amount of money based on their underlying assumptions.

Mike Santomassimo explains that the balance sheet has not changed substantially, and that the bank has been able to get additional payments or equity investments from commercial real estate borrowers in order to address potential problems.

Mike Santomassimo and Gerard Cassidy answered a question about workout solutions for commercial real estate, detailing how they work with borrowers to make structural enhancements and partial paydowns to help them work through difficult circumstances. They also discussed the OCC and Fed joint statement from June 29, which is similar to the guidance issued in 2009 and does not change the way they interact with borrowers.

Mike Santomassimo answered a question from Erika Najarian about the average loan size in the CIB, saying that it is too varied to give an average, and that what really matters is all the variables Charlie talked about earlier. He then answered a question about the $800 million increase in the outlook for the year, saying that the largest part of it was severance and other exit costs for properties.

Charlie Scharf explains that there is still a lot of work to be done in order to meet the regulatory requirements, and that it is a multi-year process. He emphasizes that it is not enough to simply do the work, but that it must be done to the satisfaction of the regulators. Matt O'Connor then asks how far along they are in terms of the work they can control, but Scharf reiterates that it is ultimately up to the regulators to sign off on the work.

Mike Santomassimo answered questions regarding the maturity schedule and average life of office CRE and multifamily loans. He noted that while they have been refinancing existing facilities during that time period, they have not been originating much in the last few years. Charles Peabody then asked a follow-up question about the consent order issues.

Mike Santomassimo and Charlie Scharf of the company discussed the progress they have been making in relation to the nine public consent orders. They have been actively engaging with their regulators all the time and talking to them about everything, with particular emphasis on the work being done to satisfy the consent orders. At the end of the process, the regulators will review the work that has been done.

Charlie Scharf explains that when submitting a consent order to regulatory organizations, their determination is based on a holistic review that they do internally. He reiterates that he does not want to draw any conclusions from their view on their work or any interim comments they might get from them. He then ends the call by thanking everyone for their participation.

This summary was generated with AI and may contain some inaccuracies.