The operator welcomes participants to the Wells Fargo Second Quarter 2024 Earnings Conference Call and introduces the CEO and CFO. The Director of Investor Relations reminds listeners that the call is being recorded and directs them to the company's website for materials related to the call. The CEO discusses the company's second quarter results and priorities, and the CFO provides more detailed information.

In the second quarter, the company saw strong fee-based revenue growth in most categories due to investments and favorable market conditions. Credit performance was consistent with expectations, with improvements in the consumer auto portfolio and net recoveries in the home lending portfolio. However, losses in the credit card portfolio increased as expected. The company continues to focus on efficiency and has seen a decline in headcount for 16 consecutive quarters. Commercial and consumer loans were down from the first quarter, and deposit growth was modest.

The CEO provides an update on the company's strategic priorities, focusing on their risk and control build-out. They have made progress and are working to embed this mindset into their culture. However, they are still at risk of further regulatory actions. The company is also making progress in diversifying revenue sources and improving their credit card platform. They have launched new credit cards and are close to completing their initial product build-out.

The company's credit card business is showing strong momentum with high spend and new account growth. They are investing in this business despite initial low profitability. The corporate investment bank is also a priority for growth, with a multi-year investment plan in place and talented individuals being added to the team. The company expects to see results in the short and medium term. In their Wealth and Investment Management business, they have improved advisor retention and are focusing on serving independent advisors and consumer banking clients to drive growth.

The commercial bank is focused on growing its treasury management business and expanding its investment banking and markets capabilities. They also see opportunities for growth in their consumer and small business banking franchise. The bank is investing in its branch network, refurbishing branches and improving technology, including a new digital account opening experience. They have seen strong growth in mobile users and have had success with their AI-powered virtual assistant. However, the economy is slowing and there are challenges from inflation and interest rates.

The managers of a large financial institution prioritize risk management and building a strong operational and compliance framework. They see both risks and opportunities in the current economic environment and have a diversified business model. They have maintained strong financial risk disciplines and a strong balance sheet, allowing them to serve their customers' needs and return excess capital to shareholders. The company plans to increase its third quarter dividend and continue repurchasing stock. The manager is proud of the company's progress and optimistic about future opportunities.

In the second quarter, the company's net income was $4.9 billion, or $1.33 per diluted common share, which was an increase from both the first quarter and the previous year. This was due to the strong performance of the fee-based businesses and the company's focus on efficiency. The effective tax rate was slightly higher due to the adoption of a new accounting standard, but it did not significantly impact net income. Non-interest income decreased by 9% from the previous year, primarily due to higher funding costs and lower loan balances. However, there was growth in average deposit balances and a slower pace of customer migration to higher-yielding alternatives, resulting in a smaller increase in deposit costs compared to the first quarter.

The Fed's potential rate cuts later this year could lead to a decline in deposit pricing, with the most immediate impact on promotional rates for consumer business and standard pricing for commercial deposits. Average loans were down from the previous quarter and year, while credit card loans grew and other categories declined. Average deposits remained stable, with growth in commercial deposits offsetting declines in consumer deposits. The bank has successfully attracted operational deposits and slowed outflows by using promotion and retention strategies. This has allowed them to reduce higher-cost market funding. Non-interest income increased 19% from a year ago, driven by investments in the business and favorable market conditions.

In the second quarter, the company experienced overall revenue growth, which offset the expected decline in net interest income. This growth was driven by various factors, including increased operating losses and higher expenses related to revenue and technology. However, the company also implemented efficiency initiatives to offset some of these expenses. Additionally, the company saw an increase in net loan charge-offs, particularly in the commercial real estate office portfolio, but this was in line with expectations. The company is actively working to reduce its office exposure and loan balances. Consumer net loan charge-offs also increased slightly from the first quarter.

The company's auto losses have decreased due to credit-tightening measures implemented in late 2021. Credit card losses have increased as older vintages are no longer benefiting from pandemic stimulus, but newer vintages are performing as expected. Non-performing assets have increased, driven by commercial real estate office non-accruals. The company's allowance for credit losses has decreased slightly, but remains stable overall. Their capital position is strong and they have the capacity to continue repurchasing common stock. The company expects to increase their common stock dividend in the third quarter. In the Consumer Banking and Lending segment, the company has seen stable credit trends.

The paragraph discusses the decline in revenue for consumer, small and business banking, home lending, credit cards, auto, and personal lending. Retail mortgage originations decreased due to the company's focus on simplifying the home lending business and the decline in the mortgage market. The auto portfolio and average loan balances also decreased, while debit and credit card spend increased. In Commercial Banking, revenue for Middle Market Banking decreased due to higher deposit costs, while loan demand remained low. The Corporate and Investment Banking division is discussed on Slide 14.

In the third quarter, banking revenue increased by 3%, primarily due to higher investment banking activity. However, commercial real estate revenue decreased by 4% due to lower loan balances. Markets revenue saw a 16% growth, driven by strong performance in equities, structured products, and credit products. Wealth and Investment Management revenue increased by 6%, mainly due to higher asset-based fees. Corporate revenue also grew, thanks to improved results from venture capital investments. Looking ahead to 2024, the company expects net interest income to be 7-9% lower than 2023, which aligns with the first half of this year where net interest income was down 9% from the same period last year.

The current outlook for the year reflects a decrease in rate cuts and an increase in deposit balances, leading to reduced market funding. However, there has been a slower increase in deposit costs and a decrease in loan balances, resulting in a decline in net interest income. The company expects net interest income to be in the upper half of the previously provided range, with a trough towards the end of the year. Non-interest expenses are also expected to be higher than originally anticipated.

There are three main reasons for the increase in expenses: higher equity market performance, higher operating losses and customer remediation expenses, and unexpected expenses for the FDIC special assessment. Despite these challenges, the company has made progress in transforming and improving its financial performance. The strong growth in fee-based businesses offset the decline in net interest income, and the company's capital position remains strong. The speaker then addresses a question about changes in deposit costs, mentioning a 12 basis point increase in interest-bearing costs and the inclusion of sweep pricing.

The speaker explains that sweep pricing will be included in future reports and that there has not been much pressure on overall deposit pricing. The migration from checking to savings or CDs is slowing, but still occurring. On the wholesale side, competitive pricing has put pressure on NII, but deposits are valuable in the long run. Overall, deposits have grown in every line of business and the trading business is performing well. It is difficult to compare the trading business to the rest of the Group.

Mike Santomassimo and Charlie Scharf discuss their market-share gains and the sustainability of their trading performance. Santomassimo mentions that their investments in various asset classes have been paying off, but their growth is still limited by the asset cap. Scharf adds that their investments are focused on customer flows and improving product capabilities, while also prioritizing overall returns.

The speaker discusses the progress of the company and their expectations for share growth in all categories. They acknowledge the volatility in the market but remain confident in sustained growth. They also express confidence in the bottoming of NII towards the end of the year, citing factors such as deposit stability and expected rate decreases. They also mention a slower pace of capital buybacks in the future.

The speaker, Charlie Scharf, discusses the moderation in capital return and how it is affected by uncertainties surrounding SEB and Basel III. He mentions the need to be conservative and pragmatic in the short term until more information is available. Another speaker, Mike, adds that they are still generating a significant amount of capital and a reasonably sized dividend, but they want to wait and see where Basel III ultimately winds up before being more specific about capital return. A question is then asked about the 11% CET1 ratio and whether it is the current target, to which the speakers do not give a direct answer but mention the significant buffer above the minimum requirement of 9.6%.

In this paragraph, Charlie Scharf discusses the current state of the company's buyback plans and expenses. He mentions that the SEB was higher than expected, which is affecting their decision to slow down buybacks. He also reassures that the company still has the capacity to buy back, but they want to be prudent. In terms of expenses, Scharf mentions that their goal to become more efficient has not changed, but they have increased their expense estimates for the year due to higher revenues and customer remediations.

The company's customer remediations are not new items and are related to historical matters. The expense base of the company is playing out as expected and the statements made in the past are still true. The company assumes fees will remain elevated in the second half of the year. The stock is down 7.5% and if consensus adjusts to the higher end of NII range, it would imply a 3.5% adjustment. Expenses increased by $1.4 billion, with the FDIC special assessment being quantified as one of the reasons.

During a conference call, an analyst asks for more detail on the increase in remediation expenses and operating losses at the bank. The CFO explains that the operating losses are up $500 million year-to-date compared to the previous year, and the remaining increase in expenses is due to wealth management revenue-related expenses. The CEO adds that the increase in expenses is due to remediations, FDIC expenses, and variable expenses, while credit quality is improving and reserves are being released.

Charlie Scharf, CEO of the company, explains the changes in the company's reserves. He mentions that the consumer business has seen a decrease in exposures and losses due to underwriting changes. However, the credit card side has seen an increase in reserves due to higher balances. In the wholesale side, the losses in the commercial real estate portfolio are in line with expectations, but there is still uncertainty so they are maintaining coverage. The company has also increased deposit costs for a specific product in the wealth business, but this does not affect other products.

In this paragraph, Mike Santomassimo and Matt O'Connor discuss the impact of deposit balances on the company's second half of the year. They also touch on the growth of the credit card business and how the company is monitoring and maintaining credit quality. Charlie Scharf emphasizes that they look at each individual product and compare results to pre-pandemic levels to ensure they are not compromising credit quality.

The speaker explains that the company has tightened up its credit standards, but the performance of their credit card portfolio is still in line with their expectations. They clarify that the new credit card mentioned in a Wall Street Journal article is a small part of their overall strategy. The company is not originating any accounts with a FICO score below 660 and the credit quality of new originations is higher than the existing portfolio. The company closely monitors their credit risk and makes adjustments as needed. The company has experience with similar products and is confident in their ability to manage risk.

The speaker emphasizes the company's awareness of potential risks and mentions that card losses are expected to decrease in the third quarter. They also mention that expenses will increase due to better revenues from wealth management, which is expected to see a slight increase in the third quarter. The speaker also notes that the company is not guiding for an increase in revenues, but there is potential for growth in the markets business, despite the asset cap constraint.

The speaker discusses the balance sheet and how they are careful about managing it. They mention the need for a cushion and how they have to be prepared for customer demand and unexpected events. They also mention the demand for trading assets and how they are trying to optimize the balance sheet. The next question is from another speaker.

During an interview, the CEO of Wells Fargo discussed the company's use of AI in various areas of the business. They have already implemented traditional AI in marketing, credit decision-making, and customer information. They are now focusing on GenAI, which can create new opportunities based on public or internal data. The company is primarily using AI to improve efficiency and enhance the customer experience, such as in call centers where they can answer questions before customers speak to a representative. They also track and analyze root causes of calls to improve overall operations.

The speaker discusses the use of GenAI to automate processes and identify root causes in order to improve efficiency and reduce manual effort. They also mention improvements in adviser retention and fluctuations in revenues in the Wealth and Investment Management segment, which are not necessarily related to specific factors.

In this paragraph, Mike Santomassimo, the CFO of Morgan Stanley, is responding to a question about the recent changes in deposit pricing in the company's Wealth business. He clarifies that the decision to adjust pricing was not a reaction to cash sorting pressures or competitive forces, but rather a strategic move to address a specific product in advisory accounts. He also mentions that this change is not expected to have a significant impact on expenses.

The speaker discusses the fee momentum and investment in the CIB and Wealth segments, noting high incremental margins in CIB and potential for margin expansion in Wealth through productivity and growth in advisory assets and increased penetration in banking and lending products. They also mention ongoing investments in the I-banking business over the past few years.

The company is adding good people and making sure they are in the right positions, resulting in a moderate increase in senior headcount. The investment in new employees is paying off with increased revenue, but also resulting in higher expenses. This pace of margin expansion is expected to moderate over time as the new employees become more productive.

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