Wells Fargo & Company (WFC)

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Wells Fargo & Company (WFC)

Q3 2012 Earnings Call

October 12, 2012 10:00 am ET

Executives

Jim Rowe – Director-Investor Relations

John G. Stumpf – Chairman, President and Chief Executive Officer

Timothy J. Sloan – Senior Executive Vice President and Chief Financial Officer

Analysts

Leanne Erika Penala – Bank of America/Merrill Lynch

Moshe Orenbuch – Credit Suisse

Joseph Morford – RBC Capital Markets

Scott Siefers – Sandler O’Neill & Partners L.P.

Edward R. Najarian – ISI Group Inc.

Andrew Marquardt – Evercore Partners

Matthew O’Connor – Deutsche Bank Securities

Kenneth M. Usdin – Jefferies & Company, Inc.

Paul J. Miller – FBR Capital Markets & Co.

Michael Mayo – Credit Agricole Securities

Gregory W. Ketron – UBS Investment Bank

Betsy L. Graseck – Morgan Stanley

Christopher M. Mutascio – Stifel, Nicolaus & Co., Inc.

Marty Mosby – Guggenheim Securities, LLC

Chris Kotowski – Oppenheimer & Co.

Presentation

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Third Quarter Earnings Conference Call. (Operator Instructions) After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Jim Rowe, Director of Investor Relations. Mr. Rowe, you may begin your conference.

Jim Rowe

Thank you, Regina, and good morning, everyone. Thank you for joining our call today during which our Chairman and CEO, John Stumpf; and our CFO, Tim Sloan, will review third quarter results and answer your questions.

Before we get started, I would like to remind you that our third quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I’d also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings; including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures can also be found in our SEC filings, in the earnings release, and in the quarterly supplement available on our website.

I will now turn the call over to our Chairman and CEO, John Stumpf.

John G. Stumpf

Thank you, Jim. Good morning, everyone, and thanks for joining us today. Our results in the third quarter demonstrated the underlying strength of our diversified business model and our ability to earn more of our customers’ business, driving outstanding performance throughout our franchise.

Let me quickly review some of the highlights of the quarter. We achieved record net income up 22% from a year ago and EPS was also up 22%. Revenue grew 8% and pre-tax pre-provision profit increased 14% from a year ago. Our core loan portfolio grew 6% and core deposits were also up 6% from a year ago.

We had positive operating leverage and our efficiency ratio improved by 240 basis points from year ago. We had continued strong underlying credit performance. Our profitability ratios reflected these strong results with a return on assets growing to 1.45%, up 19 basis points from year-ago, the highest it’s been in five years. Our return on equity increased to 13.38%, up 152 basis points from a year-ago.

Our estimated Tier 1 common equity ratio under Basel III reached 8.02% as we continue to have strong capital growth while remaining focus on returning more capital to our shareholders. This strong performance during a period of slow and uneven economic growth was driven by momentum across Wells Fargo’s diversified businesses.

We have a broad set of products that enables us to meet all of our customers’ financial needs, which is reflected by our record retail banking cross-sell this quarter of 6.04 products per household. In the current low rate environment, our mortgage business continued to benefit from the strong refi and purchase volume. And credit quality reflected an improving housing market.

Our credit card business is successfully generating new account growth, up 46% from a year-ago, and we are focused on increasing customer card usage, which is generating strong balance and fee growth. We’ve grown managed account assets in our retail brokerage business over 25% in the past 12 months driven by strong net flows and market performance.

Our wholesale banking business continues to meet the financial needs of our commercial customers generating nine consecutive quarters of loan growth from our middle market customers. We are also meeting the lending needs of our small business customers with $11.4 billion of new loan commitments so far this year, up approximately 30% from a year ago. These are just a few examples of the momentum we have throughout our businesses as we remain focused on better serving our customers, while we continue to be diligent in managing our costs and risks.

Our ability to meet a broadly diversified set of customer needs throughout a variety of economic cycles is a clear Wells Fargo advantage, and contributed to another strong quarter for our company.

Tim Sloan, our Chief Financial Officer, will now provide more details on our financial results. Tim?

Timothy J. Sloan

Thanks, John, and good morning, everyone. My remarks will follow the presentation included in the first half of our quarterly supplement starting on Page 2, and then John and I will take your questions.

As John highlighted, we had a very strong quarter, with record earnings of $4.9 billion, up 7% from the second quarter. Earnings per share were a record $0.88, up 7% from last quarter, our 11th consecutive quarter of EPS growth and the 6th consecutive quarter of record EPS.

Our ability to consistently generate earnings growth reflects the benefit of our diversified business model. We are balanced between fee and spread income, and our sources of fee generation are also very diversified.

As John highlighted, we had many businesses serving our commercial and consumer customers that had strong growth this quarter, and I’ll provide more examples throughout my comments today.

I’m going to highlight some of the key drivers of our results this quarter starting on Page 4, and then I’ll discuss them in more detail later in my remarks.

We had strong balance sheet growth in the quarter. We grew both our total and core loan portfolios with growth in commercial and consumer portfolios. We once again had strong deposit growth with balances up $23 billion.

Turning to credit, we continue to have strong underlying credit performance this quarter. However, our reported results were affected by regulatory guidance issued to the industry by the OCC. The guidance covers consumer loans that are current or less than 60 days delinquent, where the borrower has declared bankruptcy.

The implementation of this guidance resulted in a $1.4 billion reclassification of performing consumer loans to non-accrual and a $567 million in net charge-offs, which was fully covered by our loan loss reserves. Absent this change, credit performance continued to improve, which I’ll also highlight later on the call.

Turning to the income statement, net interest income was down as our net interest margin declined as expected from the second quarter. We had strong non-interest income growth across a number of our businesses this quarter, and we remain focused on reducing expenses, and we generated positive operating leverage.

Let me now cover our business drivers in more detail. As shown on page six, period-end loans were up $7.4 billion in the second quarter, with growth across a number of commercial and consumer portfolios. The liquidating portfolio declined by $4.5 billion, and our core loan portfolio grew by $11.9 billion. We’ve now grown our core portfolio for eight consecutive quarters.

Read the rest of this transcript for free on seekingalpha.com