Breaking down the Q3 Earnings
https://news.alphastreet.com/wells-fargo-co-wfc-q3-2020-earnings-call-transcript/
1) What is happening?
“To be clear, our focus starts with running the company more effectively and efficiently. This includes reducing bureaucracy, simplifying our products, reducing redundancy in manual work, and migrating customers and employees to digital solutions. All of this will also improve our control environment. Lower expenses will be a by-product of doing these things”
2) How?
“We’ve established dedicated teams in each of our lines of businesses and functions. We’re reviewing near-term, medium-term, and long-term actions.”
3) When (near term)?
“We are already working on the near-term actions, including streamlining management ranks through spans and layers and other business improvements. Again, these are driven and making it easier for us to serve our customers and each other. These actions were the primary driver of the $718 million restructuring charge we took this quarter.”
4) When (medium and long term)?
“We also identified many medium and longer-term actions that will take some time to fully implement. These include, simplifying products in many of our businesses, optimizing operational and client service delivery, and continuing to downsize our corporate real estate portfolio. I understand that many of you would like more specifics on our plans. We should be in a position to provide more specificity regarding 2021 expense expectations on our call next quarter”
5) How big (near term) ?
“We had a $718 million restructuring charge, predominantly driven by severance expense. These actions should reduce gross run rate expenses by over $1 billion annually”
6) How big (medium and long term) ?
Not much disclosed on today’s call. Basically investors were told to wait until the next earnings call once the new CFO takes charge.
“…it is too early to be definitive about what the net numbers look like at this point. But as I said last quarter, we want to show progress and progress is a combination of taking actions on the growth side, but also showing you something on the net side. But I think the right thing at this point is to give you a much clear guidance on next quarter’s call after we finish our budget work, and after Mike gets to review the work himself.”
“During the third quarter, we notified our customers of our exit from the student loan business as part of our ongoing process of pruning certain businesses as we assess our strategic priorities. We’re exiting them because they aren’t core to serving our core customer base on the consumer and large corporate side. We’re not exiting them because of the asset cap”
7) Are investors really buying this?
“….a lot of investors are looking for kind of this big roll out of the strategy that put some numbers and more meat behind kind of what you just said”
8) How about the financial health of the bank?
“Our capital and liquidity continue to be strong with our CET1 level $28.3 billion above the regulatory minimum, and our LCR, 34 percentage points above our regulatory minimum. At the end of the third quarter, our primary unencumbered sources of liquidity totaled approximately $494 billion”
9) OK. Healthy now but the real question is for how long?
“In summary, while our results in the third quarter improved from the second quarter, they were still down significantly from a year ago, reflecting the impact of the economic downturn”
“Even though we can’t predict the path to a full economic recovery, we’re focused on improving business performance by reducing our expenses, while meeting our regulatory commitments and appropriately investing in our business.”
• “Net interest income declined $512 million or 5% from the second quarter, primarily due to the low interest rate environment”
• “Both average and period-end loans declined from the second quarter.”
• “C&I loans declined $29.2 billion or 8% from the second quarter”
• “Commercial real estate loans decreased $1.2 billion from the second quarter, reflecting weaker demand in commercial real estate mortgage,”
• “Auto loans declined $358 million in the second quarter, and originations declined 5%”
• “Credit card loans were relatively stable from the second quarter”
10) Reserve for loan losses – can it get worse?
“Our allowance of $20.5 billion was stable from the second quarter, reflecting an improving economic environment and solid credit performance in the third quarter, but with continued uncertainty due to COVID-19. In determining our allowance, we considered current economic conditions which improved compared with prior expectations as unemployment levels decreased during the third quarter. We also considered that recent credit performance reflected the support of fiscal stimulus, lender accommodations, and borrower’s ability to excess liquidity. These factors drove lower loss expectations in our quantitative models. However, there is increased uncertainty in economic forecasts that vary widely and future credit performance may deteriorate as stimulus effect that benefited recent credit performance come to an end”
“We increased our qualitative reserves, reflecting a variety of factors, including our exposure to significantly impacted industries, the limited transaction activity and wide variability in market valuations for property types in our commercial real estate portfolio, and the elevated default risk for borrowers as payment deferral programs end.”