Wells Fargo & Company (WFC) Q4 2017 Earnings Report, Transcript and Summary

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 Fourth Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Question-and-Answer Session. [Operator Instructions]. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Regina. Good morning. Thank you for joining our call today where our CEO and President, Tim Sloan; and our CFO, John Shrewsberry, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth 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 our call over to CEO and President, Tim Sloan.

Thank you, John. Good morning everyone, and thank you for joining us today. 2017 was a transformational year for Wells Fargo as we made significant progress on our efforts to build a better bank. Our vision of satisfying our customers' financial needs remains unchanged, but how we execute this vision has evolved. This evolution includes develop new ways to more efficiently serve our customers and create a better customer experience, which includes investments in innovation, streamlining and centralizing processes in organization structures, strengthening the foundations of the way we manage risk and building a robust and more modern data and technology infrastructure. Pages we supplement highlight the few of the actions we taken at Wells Fargo better for our customers, our team members, our shareholder and our communities. Some with our customers in order to help those impacted by hurricanes last year we provide a payment relief and proactively way -- to approximately 100,000 customers. We've also made a number of customer friendly changes to help all of our customers to better manage their accounts. For example, in March we introduced Automatic zero balance alerts and we now send over 18 million real time alerts a month, enabling our customers to make a deposit or a transfer so they don't overdraw their account. In November, we introduced Overdraft Rewind, which has already helped over 350,000 customers avoid overdraft charges. We believe that using data and technology to help our customers better manage their finances will enable us to grow and build more long-term relationships. In 2017, we accelerated the pace of innovation and launched value added technologies, including card-free ATM access, which our customers have used more than 5 million times since March. And since June, our customers have sent more than $10 billion through Zelle for P2P payments. As our customers have increased their use of online and mobile channels, we've made it easier for them to interact with us digitally. For example, digital credit card account openings were up 47% from a year ago. In November, we launched Intuitive Investor, our digital brokerage advisory offering, and later this quarter we will fully rollout our digital mortgage application, which combines the power of Wells Fargo Data with a You Know Me customer experience. In 2018, we expect additional innovations including instant issuance of debit cards to customers in mobile wallets and control tower, a central hub for customers to view and manage the places where their Wells Fargo cards and account information is stored. In addition to these innovations, we rely on our team members to help drive an exceptional customer experience and in 2017 we took a number of steps to enhance team member benefits, including adding four additional paid holidays, announcing plans to grant restricted stock rights to approximately 250,000 team members, and increasing the minimum base pay for all U.S. based team members. We increased the minimum hourly rate, to $13.50 in 2017 which impacted 31,000 team members. After the passage of the tax cuts and Job Act, we announced another increase to $15 an hour starting in March 2018 and we are also reviewing team members, who were already making $15 an hour or slightly above to ensure that they are paid appropriately based on their role. We estimate that approximately 70,000 team members will receive a pay increase related to these changes. Our goal is to deliver long-term value for our shareholders through a balanced business model, strong risk discipline, efficient execution and a world-class team. In 2017, we generated $22.2 billion of net income, with an 11.35% return on equity. From that, we've returned $14.5 billion to our shareholders through common stock dividends and net share repurchases. This is up 16% from 2016. Returning more capital to our shareholders remains a top priority. Another goal is to make positive contributions to the communities we serve. And in 2017, we donated $286 million including more than $4 million to areas that were impacted by Hurricanes, California wildfires and other natural disasters. We also announced that we are targeting $400 million in donations to non-profits and community organizations in 2018, an increase of approximately 40% from last year. And beginning in 2019, we are targeting 2% of our after-tax net profits for corporate philanthropy. Our results in the fourth quarter were strong and they included a net benefit from the tax cuts and Job Act. While it's too early to determine the full impact, it appears that tax reform will benefit our customers and help grow the U.S. economy and surveys indicate business confidence has increased. Other items that impacted our results in the fourth quarter included, the gain on the sale of Wells Fargo Insurance Services, and higher litigation accruals. Our efforts to transform Wells Fargo were evident in our results in 2017, including record deposit balances, improved retail banking household retention, increased brand satisfaction with most recent visit scores, which are now back to the levels we had prior to the sales practice settlements, growth in debit card and credit card purchase volume, both up 6% in the fourth quarter from a year ago, record levels of client assets in wealth and investment management, historically low credit losses, exceptionally strong capital and liquidity levels. And while our expenses increased driven by higher litigation accruals and investments in our businesses and capabilities, we are on track with our expense initiatives and we remain committed to our target of $4 billion in expense reductions. John will provide more details on this later in the call. In summary, Wells Fargo is a much better company today than we were a year ago. And notwithstanding our challenges, I am confident that the hard work, dedication and resiliency of our team members demonstrated throughout 2017 will make Wells Fargo even better in 2018 as we continue our transformation. John will now discuss our financial results in more detail.

Thanks, Tim. And good morning, everyone. We are earned $6.2 billion or $1.16 per share in the fourth quarter. And as Tim mentioned our results included three noteworthy items I will describe in a minute. First, I want to quickly highlight the impact from our election to early adopt the new hedge accounting standard which was mentioned on the call last quarter and was discussed in our third quarter 10-Q filing. It’s described in a note on slides that highlights, slide 4. As a result of this early adoption, our previously reported EPS for prior quarters in 2017 was revised resulting in a net $0.03 per share increase in EPS for the first nine months of the year. We have more information on this accounting standard in the appendix. On page 5, we summarize the noteworthy items which included a $3.35 billion after-tax benefit or $0.67 per share from the Tax Cuts and Jobs Act. I will be providing more details about this on the next page. Our results also include an $848 million gain on the sale of Wells Fargo Insurance Services which benefited EPS by $0.11, and we had a $3.25 billion litigation accrual in the quarter for a variety of matters including mortgage related regulatory investigations, sales practices and other consumer related matters. The majority of this expense was not tax deductible and it reduced EPS by $0.59. On page 6, we provide more details on the impacts of the Tax Act. The estimated tax benefit from the reduction to net deferred income taxes was $3.89 billion, was somewhat unique in that the tax effective, our temporary difference results in a net deferred tax liability which is primarily driven by differences between the book and tax treatment of our leasing and mortgage servicing businesses and mark-to-market timing differences. In addition, we’ve not had big historic net operating losses which are now less valuable under the Tax Act and we earn substantially all of our income in the US, so we have lower amounts of foreign cash subject to deemed repatriation. This benefit was partially offset by a $370 million after-tax loss from valuation adjustments related to leverage leases, low income housing and tax advantage renewable energy investments. In addition, there was a $173 million tax expense from the estimated deemed repatriation of undistributed foreign earnings. We currently expect our full year 2018 effective income tax rate to be approximately 19%. And we’ll highlight much of what’s on page 7 later on the call. So, let me just point out on the asset side, we purchased $20.9 billion of securities in the fourth quarter which were largely offset by one-off and sales. On the liability side, our long-term debt balances declined $14.2 billion primarily driven by lower federal home loan bank debt. I'll be highlighting our income statement drivers on page 8 later on the call. So, turning to page9. Average loans declined $521 million from the third quarter with commercial loans down $692 million partially offset by a $171 million of higher average consumer loans. However, we did have some positive momentum in our loan growth during the quarter with period end loans up $4.9 billion from the third quarter. Let me highlight the drivers starting on page 10. Commercial loans increased $3.2 billion from the third quarter, with C&I loans up $5.2 billion. C&I growth was broad based and included seasonal growth in financial institutions and commercial distribution finance as well as growth in asset backed finance and corporate banking. Commercial real estate loans declined $2.1 billion from the third quarter, reflecting our continued credit discipline in a very competitive market. Consumer loans grew $1.7 billion from the third quarter, similar the trends we've highlighted throughout the year. We had growth in first mortgage loans and credit card balances and declines in junior lean mortgages auto and other revolving and installment loans. As a reminder, growth in the first quarter will be impacted by seasonally lower mortgage origination and credit card balances. Auto originations were relatively flat linked quarter and were down 33% from a year ago. We've reduced volumes while strengthening the credit profile of this portfolio and our origination volume with the FICO score above 640 grew to 85% of total originations in the fourth quarter, up from 76% a year ago. We expect balances will continue to decline throughout 2018 given the transformational changes we're making in the business. Our deposits reached a record high in the fourth quarter and our average deposits increased 2% from the year ago. Our average deposit cost increased 2 basis points from the third quarter and was up 16 basis points from a year ago. The market hasn't made changes to the rates paid on consumer and small business banking deposits and neither have we. As Fed funds and LIBOR have increased we've had incremental deposit repricing for commercial and wealth and management customers. If the tax act drives stronger, industry loan growth this year, deposit betas could be impacted somewhat as market demand for deposits increases to fund this growth. Our full year 2017 net interest income increased 4% consisting with the expectation we provided at Investor Day. Net interest income in the fourth quarter declined to $136 million from the third quarter, primarily driven by the $183 million reduction to net interest income from adjustments related to leverage leases due to the tax act, which reduced loan yields in the quarter. Similarly, our NIM was down 2 basis points to 284 as the negative impacts from the adjustment related to leverage leases and growth in average deposits was partially offset by lower average long-term debt and a modest benefit from all other growth repricing and variable terms. Investors often ask us about our loan swaps. So, let me provide some additional details on our position. As we previously disclosed between 2014 and 2016, we entered into received fixed rate swaps to hedge some of our LIBOR based commercial loans when the expectation was the interest rates to be lower for longer. We converted lower yielding floating rate loans into higher yielding fixed rate loans. At the peak, we had $86 million worth of loan swaps. We actively manage these positions as starting in the third quarter, we began to unwind some of them. At year-end, we had $51 million of notional outstanding, and we've unwound more early this year leaving us with that current notional value of closer to $30 million. The reduction in swaps will reduce interest income from these loans in 2018, but it's increased our interest rate sensitivity from the low end, back to near the midpoint of our range of 5 to 15 basis points for a 100 basis point parallel shift in the yield curve. Being modestly more asset sensitive at this point in the rate cycle should be beneficial. However, it's important to note, that during the extended period of loan interest rates since these swaps we're entered into they generated incremental revenue of approximately $3 billion for Wells Fargo. The cost of unwinding the swaps which is approximately $700 million will be amortized over the remaining life of the original derivative which averages approximately 3 years. Our net interest income for full year 2018 will be dependent on a variety of factors including the level and of slope of the yield curve as well as deposit betas and earning asset growth trends. Non-interest income grew $337 million from the third quarter. This increase included the benefit of the $848 million gain on the sale of Wells Fargo Insurance Services, which was partially offset by a $414 million reduction from impairments on low income housing and renewable energy investments resulting from the tax act. Deposit service charges declined $30 million from the third quarter, driven by customer friendly changes including the launch of Overdraft Rewind in November which Tim highlighted at the start of the call. Trust and investment fees increased $78 million on higher asset base fees and retail brokerage transaction activity. Mortgage banking non-interest income declined $118 million from the third quarter, largely due to a $71 million decline in residential mortgage origination revenue, driven by a 10% reduction in origination volumes primarily from seasonality in the purchase market. The gain on sale margin in the fourth quarter was 125 basis points relatively flat from the third quarter, and based on current pricing trends and channel mix in our held-for-sale pipeline we expect the margin to decline in the first quarter. Servicing income declined $47 million, primarily from lower net hedge results due to the impact of changes in MSR valuation assumptions, including the impact of increasingly competitive industry pricing, lower carry on our MSR hedge in the flatter yield curve environment and increased customer payment deferrals in areas impacted by recent hurricanes. On page 15, we provide details on our trading related revenue, which declined $49 million from the third quarter, primarily driven by declines in customer trading activity from lower volatility and compressed spreads. Turning to expenses on page 16. Expenses increased $2.4 billion from the third quarter largely driven by the $2.2 billion higher operating losses. On page 17, I'll highlight the other drivers of the increase. The $142 million increase from the third quarter in compensation and benefits expense reflected higher stock award expense, primarily from stock price and performance impacts on prior period awards. Higher salaries expense was largely driven by higher costs from the additional paid holidays we granted our team members in 2017. Increases in running the business discretionary and infrastructure cost were driven by typically higher advertising and equipment spending in the quarter. On page 18, we showed the drivers of the year-over-year increase in expenses, which was also primarily driven by higher operating losses. Compensation and benefits expense increased $475 million, primarily due to annual salary adjustments and higher benefit costs which were partially offset by lower FTE. Our FTE were down 2% from the year ago reflecting the sale of our insurance services business as well as declines in consumer lending and community banking. Higher compensation and benefits expense also reflected $115 million of higher deferred comp expense which is P&L neutral. On page 19, we highlight the progress we made in 2017 on our expense initiatives which was primarily driven by the efforts we’ve made through centralization and optimization. We centralized enterprise functions that were previously distributed across our organization. In addition, we realigned businesses to eliminate redundancy and leverage customer synergies and we’ve continued to make transformational changes for our operating models including in-contact centers, technology and operations. We also saved money through continued improvement in vendor leverage in contract pricing. We have done this by using our centralized contract team to negotiate rates based on the aggregated volume of the entire company. We reduced travel and entertainment expense by 2% by enhancing our travel policy standards and leveraging technology. We also exceeded our target of 200 branch closures in 2017 and to date, the closures have had minimal impact on household retention and growth. Based on customer channel usage, we currently expect to close 250 branches or more in 2018. Branches play an important part in serving our customers and we will have as many branches as our customers want for as long as they want them. Based on our current assumptions regarding consumer channel behavior and our own technology advances as well as other factors, we can see our total branch network declining to approximately 5,000 by the end of 2020. We are also reducing properties and other businesses including standalone mortgage locations which stand [ph] by over 10% in 2017. We are also transitioning operational activities in our auto business from 57 regional banking centers into three larger regional sites. We expect to complete the consolidation in the first half of 2018 helping us further standardize process in the business. As we pursue these reductions, we will continue to support team members by helping them find other positions while we also consider the banking needs of the communities we serve. We are on track to achieve our targeted $4 billion of expense reductions which have been identified and assigned to the business leaders who have specific responsibility for achieving them. As a reminder the first $2 billion of targeted expense saves by year end 2018 supports our ongoing investment in the businesses which includes a number of key areas such as enhancing our compliance and risk management capability, building a better bank and strengthening our core infrastructure. We expect the additional $2 billion targeted annual expense reductions by the end of 2019 to go to the bottom line and be fully recognized in 2020. These expected savings do not include the completion of core deposit intangible amortization expense at the end of this year which will amount to $769 million in full year 2018 and also it doesn’t include the completion of the FDIC special assessment which we expect should happen by the end of 2018. Finally, it doesn’t include expense savings due to business divestitures which we highlight on page 22. As part of our efforts to be more transparent in response to investor request, we are providing more detail on our expense expectations for 2018 on page 21. We currently expect that full year 2018 total expenses to be in the range of $53.5 billion to $54.5 billion. This expectation includes approximately $600 million of typical operating losses this year and excludes any outside litigation and remediation accruals or penalties. As I mentioned on the call last quarter we expect to achieve a quarterly efficiency ratio with a 59 handle by the end of 2018, not including any outside litigation accruals. 2018 revenue which will impact the efficiency ratio will be influenced by a number of factors including the absolute level of rates, the shape of the yield curve, loan growth, deposit betas, credit spreads, cash redeployment and the absolute level of the equity markets. And just as a point of reference, we estimate our efficiency ratio sensitivity to be plus or minus 60 basis points for every 1% increase or decrease in revenue from the $88.4 billion we earned in 2017. We will provide guidance on the expenses for 2019 in our Investor Day in May. For the past couple of years, we’ve been taking a hard look at all of our businesses and their contributions and as a result we’ve had multiple divestitures, we thought it will be helpful to share the revenue and direct expense associated with the businesses we sold over the past two years, which we provide on page 22. As you can see there was a revenue impact from selling these businesses but they were sold for sound economic reasons and generated nice returns for our shareholders. As a reminder, Wells Fargo Insurance Services was sold at the end of November and the share owner services is expected to close later in the first quarter. Turning to our segment starting on slide 23. The majority of the impacts from the tax act as well as the litigation accruals in the quarter were included in our community banking results. On page 24, we highlight the customers continue to actively used their accounts, we have strong growth and digital secure sessions up 8% from a year ago and we continue to have declines in branch and ATM interactions reflecting the increased use of digital channels by our customers. On page 25, we highlight balance and activity growth which included an increase of 6% in both credit and debit card purchase volume from a year ago. As Tim mentioned, branch satisfaction with most recent visit scores are now back to the levels we had prior to the sales practice settlements. I believe the transformational changes we’re making to better meet our customers financial needs including providing bankers with innovative tools to enable more meaningful financial conversations with our customers not only improves customer service, but will also drive growth. Turning to page 26. Wholesale banking results in the fourth quarter included the gain on the sale of our insurance services business. Total wealth and investment management client assets reached a record high of $1.9 trillion, and average closed referral investment assets were up 12% from a year ago. Turning to page 28. Our credit quality remained exceptionally strong, our loss rate for the full year was among the lowest in our history and in the fourth quarter our loss rate was 31 basis points of average loans. All of our commercial and consumer real estate loan portfolios were in a net recovery position in the quarter including our home equity portfolio. Non-performing assets have declined for seven consecutive quarters and were less than 1% of total loans for the second consecutive quarter. Continued improvement in the oil and gas portfolio have benefited this trend. During the oil and gas cycle over the last three years, we established a peak oil and gas reserve of $1.7 billion in the first quarter of 2016 and incurred through the cycle losses of $1.2 billion. We believe we’ve largely put this issue behind us and we’ll no longer provide credit updates on this portfolio in future quarters unless factors change, but we will continue to include the size of the portfolio in our 10-Q, filings. We had a $100 million reserve release in the quarter reflecting continued strong credit performance. Turning to page 29, our estimated common equity Tier 1 ratio fully phased in increased to 11.9% in the fourth quarter remaining well above our internal target level of 10%. We remain focused on returning more capital to shareholders and we turn to record $14.5 billion through common stock dividends and net share repurchases in 2017, up 16% from 2016. We had net share repurchases of $6.8 billion in 2017, up 42% from 2016, and period end common shares outstanding declined 2% to 4.9 billion shares. In summary, we began 2018 with an exceptionally strong asset quality, liquidity and capital. We're on track to achieve our expense targets and the transformational changes we're making throughout Wells Fargo will help us achieve our six goals and drive our long-term success. We'll now take your questions.

[Operator Instructions] Our first question comes from the line of Erika Najarian with Bank of America. Please go ahead.

So, I expect you to differ me to Investor Day, but I'm going to try anyway. I'm sure that your investors are going to refine your 2019 and 2020 outlook for the company following your results. And if you think about your new guidance for dollar expenses in 2018 and again fully acknowledging that you will get more color in May, is it fair to take that $53.5 billion to $54.5 billion range, assume a growth rate, and this is for 2020, assuming normal growth rate over the next two years and then take out the $2 billion in cost savings, the $769 million in CDI expense and the $573 million in sold business expense, isn't included?

Yeah. Erika, I think that's a fair description of what could happen. I think one of the big impacts to that could be what revenues look like in 2020, but I think that's fair.

The one thing I'd add that will be, we've been talking about, we'll talk about more at Investor Day as you mentioned, is the arc of the ongoing reinvestment or investment in the various programs that we have to transform Wells Fargo. Some of them are regulatory in nature, some of them are [probation] in nature, but there are variety of them, each of them has their own arc. They're in place today and so how they come off the total is going to be the missing link for what happens in 2019 and maybe even in 2020 for some of them.

Got it. And my follow up question is on the consumer loan side, it was up $1.7 billion on a linked quarter basis. Two of your peers are more relatively upbeat in terms of the consumer outlook for 2018 especially relative to tax reform. And the question for you is, has the attrition in the consumer book bottomed in 2017? And on the mortgage side as you think about non-conforming loan growth and loan originations, is there still a gap between what your underwriting standards are today and what you think they could go down to if we had better guidance or reformed guidance from the agencies on mortgage?

So, Erika good question. I think let me respond in a couple of ways. First, I think it's absolutely fair and the feedback that we've been getting from our customers is that we should all be cautiously optimistic on the impact of the tax reform act on consumers. There have been millions of employed folks across the country that have gotten pay races and bonuses and the like, and I think that’s a net positive for economic growth. As it relates to cyclically to our consumer loan growth, we believe that we will grow mortgage loans this year. We believe that we will grow credit cards this year. But we believe that it’s likely that the home equity book will continue to decline, not -- if you look at the home equity book and you divide it in the kind of the post crisis and pre-crisis book, pre-crisis book just continues to decline as we’ve been talking about for years. But we expect the post crisis book to grow. But I don’t think that growth will offset the decline in the home equity book for 2018. And then likewise as John mentioned at it relates to auto, we believe that with all the changes that are going on in the auto portfolio, notwithstanding the underlying credit improvement and new originations, that we will see a continued decline in that portfolio throughout 2018 and in our current estimates this maybe, the lines will start to cross the fourth quarter this year may be first quarter 2019, it’s -- we will find out. But I would think about our consumer portfolio, we are optimistic about -- again about the impact of the tax act on consumers.

Follow-up on the underwriting side.

Yes, we don’t anticipate making any changes to our underwriting. Our underwriting, as it relates to mortgage, that we look at those every day and we are going to be competitive from a market standpoint. We are also going to take the long-term view and not get too aggressive at any one point in time.

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Congratulations Matt. You were right. We needed to provide $1 expense guidance. We listened to you. Can you mark that down in your calendar?

I do think it’s a good first step given [Multiple Speakers] 2019 and 2020 trajectory, I think of great importance. So, appreciate that’s coming in a few minds. The only thing I ‘m really been focused on and obviously the market as well is just the legacy issues and at this point a year and a quarter after taking over CEO and obviously being in very senior roles for many years before, do you feel like you’ve identified Tim, all of the legacy issues and they have been all disclosed. And now you are at the point where you’re just finishing out working through them internally and hoping to reach settlements this year where applicable?

Well Matt it’s a very fair question, particularly with the accrual that we took this quarter. And my answer continues to be very consistent and that is I think we’ve made a lot of progress in terms of looking at the operations of the company. But I can’t provide you with a guarantee or absolute assurance that we won’t be making additional changes in the future to anything that we might find. But again, we’ve made a lot of progress.

And I guess I wonder why you can’t. Because I feel like -- you’ve been there a long time, John has been there a long time. I appreciate it’s a big company and any company can have issues that arise. So, I am not trying to kind of get the all clear on everything for forever. But it does seem like there’s a number of issues that are probably legacy in nature that you’ve identified and I would assume you’ve reviewed and re-reviewed in triple shake [ph] banks or are doing that now and I do still think it’s great importance to be able to turn the page whether it’s for the investors, the employees, I would think it’s relevant too, so that’s why just continued to push on this as well.

Look this is very reasonable question and I love to live in a world where I can give you an absolute guarantee and certainty, but it’s just not the world we live in. I mean we’ve been working very hard and looking at operations across the company. We have invested a significant amount of money in doing that, we’ve been very transparent when we have issues for all of you. I know that sometimes it’s disappointing, but that was the promise that we made and when we find that we’ve made any sort of mistakes we fix them and if there is a customer on the other end that’s been harmed, we will remediate them. But I just can’t provide you with that absolute guarantee at this moment in time, maybe someday I will, but I think it’s going to be something we look at the rare view mirror over a longer period of time as opposed to having some inflection point today or tomorrow or the week after that.

And just last thing on this, are there certain businesses or regions or customer segments that you are still reviewing, maybe they’re not as close customers to you like those third-party relationships that can be a little trickier like are there still segments that you’re reviewing that you are just not a 100% sure is not issues or?

Yeah. again, it’s a fair question. I would say that we’re continuing to look across the entire company as opposed to in any specific area. Again, we’ve made a lot of progress, but as I reflect on my first year and a quarter in this role, I think it’s fair to say that one of the mistakes that we’ve made at this company was that we didn’t have a thorough enough review of the businesses on an ongoing basis. So, our review will be continuing, we’re never going to declare victory, we’re going to always make sure that we’ve got the right checks and balances from a corporate risk standpoint and an audit standpoint and we’re making even more investments in the infrastructure and collecting data in a different way. So, we want to continue to make improvements. So, again the punch line matters that we’ve made a lot of progress and we’ve been very disclosive, but I can’t provide you with absolute certainty.

Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Hi, good morning Tim. How are you guys doing. Questions on the fee side of the business. Maybe to start with, nice to see that trust side are actually moving the right way. I’m just wondering how much of that is any improvement in transaction side. How much of it is the higher markets and what’s your just basic outlook for how that business can do going ahead?

Well we’re optimistic and we’ve seen growth in that business for the last few years, we’ve had a nice transition [Multiple Speakers] that’s a good point John, we’ve had a nice transition in the senior leadership from David Carol who did a terrific job to John Wise. I think John mentioned in the fourth quarter that he thought we'd see 4% to 5% type revenue growth this year. And so, we continue to be optimistic. A large part of the increase in the fourth quarter to your point was related to higher underlying values, but again that tends to drive revenues in future too. But we continue to be optimistic about that business and to reinforce John's point about the improvement in referrals from community banking to wealth and investment management.

Okay. And I guess I'm just wondering the markets are up a lot and your referrals are up a lot, but obviously the revenues are up but not as much. So that whole underlying shift to seize and decompression, is that start to stabilize or is it just an ongoing burden you always just have to overcome on with volume?

Well, your point is fair. Because there have been some changes in the business that attracted the entire market because of the DOL rule and implementation last year. And it's a competitive business, but again, I think John was clear that he, John Jon Weiss clear that he thought that he would see 4%, 5% not even say 6% growth on the top-line. So, we're comfortable with that.

I also think this secular shift this intentional shift to emphasize recurring asset management relationships over transactional revenue. Means you've got the means, the outcome that you're describing but less volatility around it because you're less reliant on people trading stocks and more aligned with the managed solution which is a more stable form of revenue.

Got it, okay. And then just to keep on in another big area, fees. Just on the mortgage business, you got your platform rolling out and there is obviously it's major potential transition happening just with rates, and tax and housing markets. So, what's your expectation for just your size of the mortgage market and what do you think share can be? And within that, you've got a big, big mix sale of correspondent versus retail as a percentage. And can your new platform start to change that mix?

Yeah. So, I think the NBA is calling for the overall mortgage market size to be down a little bit. They can't factor in what might happen with more economic expansion as a result of the tax act. But call the size of the market unchanged to down, it's probably going to continue to be a little bit more of a purchase market from a reify market or trending more in that direction, which is a more competitive market for us to operate in. As a big servicer, we have an advantage in the reify market. As a result, our retail share may end up being a little bit lower, but we do a lot of correspondent lending and servicing. And so, our volumes represent the aggregate of what we originate directly and what we fund and service for correspondents. So that's part of why margin is down because that mix from retail to correspondent means our costs are less but our revenue opportunities is less too. So, I think it's our expectation that the market is flat to down a little bit. Again, unless tax reform does something remarkable which will be great. I think it's our expectations that gets, it stays competitive. I mentioned in my comments. We think the first quarter is going to be a lower margin quarter than the fourth quarter based on what we can see. Some of that is specific behavior and a part of the agencies, because of programs that they run in the fourth quarter to get things done. And as it relates to our competitiveness, whether it's our feet on the street or our technological innovation that's rolling out right now, we anticipate being as competitive as we can possibly be in every market and maintaining our leading share. And so, it's a big point of emphasis for Michael DeVito and the folks who manage that team, but we don't want to cede that position.

Your next question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.

Great, thanks. Hey, good morning. Quick question on the loan growth, it looks like CRE was loan growth again this quarter and you did mention that you saw focusing on continued credit discipline. But can you maybe breakdown kind of what you are seeing in that market currently, how much farther do you have to kind of wind down this book, I mean how much lower can it go?

We don’t want to wind down this book. I mean we are the largest commercial real estate lender by far in not only in total but in almost every product type and we have the most diverse and broadest commercial real estate platform in the market. We are committed to this business long-term. But to be committed to the real estate business long-term you need to also make important and disciplined decisions when you see that you are at a period in the cycle that doesn’t last forever but a period in a cycle where, things that that -- underwriting standard or pricing might be a little bit out of balance. That’s how you get to stay in this business through cycles because you made good decisions. So, we want to grow this book but we want to grow it in a way that makes the right decisions for our shareholders. So, what we have seen this year is an increase in competition, slightly lower in credit spread -- standards excuse me, and a little bit more aggressive pricing and that's meant that our book has declined a little bit. But again, we’ve got a balanced business here and so our real estate capital markets business has absolutely been on fire and you can see that other parts of revenue in the company. So, I wouldn’t look at this as we’re purposely rolling down this book because we don’t like the business, we love the business. We want to grow it so that we are ready for next year and the next cycle.

And then maybe a separate question on the retail bank metrics, like the primary consumer checking account growth, just the other positive year-over-year, if you look at it where it was last December, you’re up 3% year-on-year. May be if you could break down what you are seeing with regards to new customer acquisition versus the attrition? Because I thought you said the attrition had slowed, did you see the acceleration in the fourth quarter? Thanks.

I don’t think we saw acceleration. I think that Mary Mack and team are doing a terrific job in terms of fundamentally changing that platform. It takes time to make changes in a business that has 5,800 branches and call centers and tens of thousands of team members who are working very hard. We made changes in terms of incentive plan. We made changes in terms of the management team to streamline that. We’ve improved training and we’ve also delegated responsibility so that our folks in branches can address customer opportunities and needs more quickly, that takes time. But I am pleased with the progress and our expectation for 2018 as we are going to see checking account growth, I would also say -- primary checking account growth, I would also say an improvement over what you saw in the fourth quarter but I would also say that underlying value of those accounts has increased, and we’ve talked about that at Investor Day last year. And we are continuing to see that trend.

One thing I would add is that the 2015, ‘16 primary checking account growth numbers were also benefited by a major attempt to convert people who were primary. They were customers of Wells Fargo but they were at that point primary into primary customers. And so, we had a backlog of relationships to convert to primary that we’ve, I’d say we basically worked through and now it’s really about net new customers to the bank and making them primary customers. And so just to comp owner.

Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

Back to the loan growth front. Thanks for the color on the areas you’ve commented on already. I know you’re seeing some of the interest in still and auto and declines in home equity and you’re being selective in CRE. So, given that as you look at 2018, can we see growth in 2018 in average loans versus full year 2017? And as a commercial that can really drive that growth despite the headwinds?

Yeah. Hope so, our plan is to do that, John. I think the wild card is just the pace of underlying economic growth, and we’re the largest lender in this country and so we’re dependent not only on the hard work and effort of the great team of relationship managers, but it’s also a function of economic growth. So, if we see an increase in economic growth that should be a net positive. Just anecdotally I would tell you that I’ve spent a lot of money in the last week and a half with our commercial and corporate customers and there is a lot of optimism out there.

The C&I loans, credit card and first mortgage is likely where our net loan growth is going to come from in 2018 and similar to the quarter.

Got it, got it. Thanks John. And then just secondly on capital, I know we’ve seen that article recently in the journal in the camel ratings and everything. And assuming -- I know you haven’t commented on it, but want to say if you have anything to say about the ratings. And then secondly if that is true and everything is there an implication in terms of capital deployment. And if you could just talk about how you’re thinking about deployment as you look at 2018?

So, fair question given the media coverage. We can’t comment on confidential supervisory information from our regulators and so we won’t. But as it relates to capital return, I think that I said it early in the call and John repeated it that we’re pleased to have increased the amount of capital returned to our shareholders by 16% year-over-year and our expectation is that we will continue to increase capital return because we have excess capital at the company to fund our growth. And so, our goal is to reduce our 11.9% Tier 1 common equity number over the next few years to something closer to 10%. I don’t know exactly what that means in terms of what our submission for C-CAR is this year or next year for that matter. But, we’re certainly going in that direction. John, I don’t know if you have any other comment.

No, that’s right the I guess I was interpreting the question also mean deployment for growth and loan portfolio and that would be the first call on our capital share and make loans for our customers. There is no M&A in our future that would be a use of capital that we can possibly imagine at this point. And thus, the high starting point in the ongoing relatively high level of capital generation should lead to attempting to return more of that to shareholders.

Your next question comes from the line of John McDonald with Bernstein. Please go ahead.

Hi. Hey, good morning. Just want to clarify the outlook on expenses the range for 2018, that would include the community contribution stuff that you list on page 3, the $400 million on donations and the other things there?

Yes, it does. And the higher base pay for the roughly $70,000 fee numbers.

Okay. And then, John, you also mentioned hoping to get to 59 handles on the efficiency ratio by late 2018? I guess you had to kind of make some assumptions about kind of the economy and rate hikes there. Could you just give us some sense of what it would take to kind of get there?

Yeah, I mean. I think we are imagining 3 rate hikes built into our baseline scenario. We don't have a lot of economic impact from tax reform built into our current forecast for 2017 to the extent that it achieves its desired goals to see some upside there. I think those would be the big drivers. And one of the key estimations we have to make as what's going to happen with deposit pricing throughout the course of the year. I think we're anticipating normalizing betas over the course of the year that feeds into that range.

Okay. And how do you evaluate further reduction in the swaps, what's kind of the calculus that you go through? And has that remain fairly way you've got.

Sure. The calculus is what is our outlook for rates over the next couple of years versus what the forward curve implies because that's where swap pricing comes from. And if we think that if there is a chance that we're going to be earning more over the next couple of years, then it might make sense to get out of today's fixed rate to get back into a floating rate scenario. Then we do the math to figure out what the swap mark is and the amortization cost is and what the benefit of increased asset sensitivity is. And we've been doing that and it's made sense to us to reduce that position.

Okay. And then just on the expense outlook and efficiencies. I know you don't want to get into 2019, 2020 too much, but just maybe broader thoughts. I'm not sure if this came up before, I think it might have, but with all the tailwinds that you have in '19 and '20 is, is there any reason that directionally the 2019 expenses wouldn't be down absent a material pickup in business operations. And then maybe John, you can address that. And Tim, are you holding or Tim, is there any reason you wouldn't be holding a team to getting back that efficiency ratio middle of that range, the 55 to 59 by 2019 and further deeper into the range in 2020. Is that broadly a goal that you're going to hold folks too?

I'll pick that. That's a goal that I hold myself too as well as the senior management team. So, you're spot on there John.

And there is no reason, for the reasons that we've laid out, the expectation is that those incremental cost would be coming off in '19 and '20 and expenses would continue to trend lower. The caveat I guess I would give is if there was some -- several years ago we went through a period like this where we gave specific expense guidance and then there was a wild mortgage reify here with a revenue opportunity was used and expenses, direct expenses grew to reflect to take advantage of it. So, absence something like that, which we'd all be happy about if occurred, then as you say, there is no reason to believe the expenses shouldn't keep coming down based on these structural items that we're talking about that will fall off.

Okay. And again, just to clarify Tim. How would you phrase the efficiency ratio goal over the next 2 to 3 years?

As we said, our expectation is to get -- by the end of this year to get down to 59 handle and then continue to make progress year after year after year. We should be within the 55% to 59%, that’s a goal to get in there. And then once we are in that range, we are going to continue to make progress. We’ve got to improve the efficiency of this company.

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Hi, good morning. A couple of follow-ups. One, the 53.5 to 54.5 expense target that you’ve put out for this next year, what is the relative number that we are assessing that against in 2017? I know there’s a lot of one-timers here. And I just wanted to get what your view on 2017 like-for-like is?

We’re not -- we don’t really normalize our 2017 expenses and I think many people would obviously look to take out their larger operating losses that we experienced. But beyond that I wouldn’t view much of a normalization for you just because it’s a slippery slope.

Okay. And then second question is just on liquidity. I noticed there was a couple of questions already on that. But I think if I heard you correctly, it accelerates beyond what we’re generating today. Your expectation is that you might need to reset deposit rates, did I hear you right on that?

Actually, my reference there is more to the market. I don’t think people appreciate how much the industry is holding the line of retail and small business deposit prices. It might be as a result of the fact that there’s been a lackluster on demand. And if the economy heats up because of tax reform and everybody has got higher loan growth, then somebody is going to -- may very well begin to defend their deposit franchise in order to fund it, or to attract deposits in order to fund it. So that’s more of an industry comment than a Wells Fargo comment specifically.

Okay. If you mind giving us your view on your situation just grace the question because your LDR looks like it’s around 73 or 74 so, seems like there …

I would say that we don’t think that we have to do too much, although again if there’s a big cyclical change that causes betas to catch up to where people might have previously imagined they should be, looking at prior cycles of rate increases, then if we’re looking for a catalyst or imagining one that could cause that, one of the things that could cause it is a big pick up in loan demand, it hasn’t been there. And we’ve been studying deposit response as an industry without that loan demand, if you were to add loan demand, it could change things, that’s my point. Your point is right, our loan-to-deposit ratio is very modest. We’ve got a lot of liquidity where we are not in a position where we think we need to attract a lot of incremental deposits to fund the next $10 billion of loans. But the industry overall has -- should be thinking about whether an increase in loan demand overall changes the calculus for deposit pricing.

And Betsy just on deposit pricing for a minute, I would just also make an observation separate from John’s point which I completely agree with on loan demand and the potential impact is that when I think about the interaction and the relationship that we have with consumers, it’s not just about deposit pricing, it’s about how much firms are expanding from a marketing standpoint which doesn’t go into deposit pricing line and I think there’s been a lot of discussion about that this year, that’s maybe ramped up for some firms more than others. It’s also about the massive investment that we’ve been making in technology to improve innovation so that we’re not at the margin just competing on price, we’re competing upon the value of the relationship and the convenience in the service that we can provide. And we look at the pace of innovation particularly for us, I think that’s been one of the drivers and some of the reasons why we’ve been able to continue to attract deposits. We’re providing real value to all of our customers because of the massive increase in innovation and we’re going to continue to do that. So, we’re not just competing on price.

Your next question comes from the line of Scott Siefers with Sandler O'Neill. Please go ahead.

Good morning. Thank you very much for those comments on CNBC this morning, my mother thinks -- you’re now her favorite analyst.

At least I am somebody's favorite analyst. Thank you, please pass along my gratitude. Tim, I guess actually John I have got a question for you. On the NII outlook for 2018, I appreciate the comments earlier on the rate outlook that’s actually there. Are you still thinking kind of a low single-digit number for NII growth year-on-year is good for 2018?

Yeah. I think it’s a little earlier to fully forecast it. There is a lot going on. And we’re just talking about deposit pricing and what that means that could be a huge driver of this year. It wasn’t really as much of a topic last year. We’re shaving some NII of the top for the -- on the tax equivalency front for our tax-exempt investments that’s probably worth $400 million and some change in 2018 versus 2017. And then the loan growth and cash deployment are going to matter too. So, it is a stated goal that we’re trying to grow net interest income period-over-period, year-over-year and so that’s what we’re vectoring towards. But, at this point may be at Investor Day it will be easier to think about the year as a whole because we will have a quarter and some change behind us. But, I wouldn’t pencil in last year’s growth rate this year until we get a little bit further into and we know what tax reform means and a couple of other things.

Okay. All right. Perfect. And I think you hit my next SCE question on there as well. So, appreciate it. And then actually just on the effective tax rate guidance. When you look at sort of gap between your effective tax rate and the FTE tax rate, any noticeable change that we should expect now that tax reform is down in there?

No, no I don’t think so. And we’ll probably continue to give – well we’ll certainly give call out changes in our guidance on the effective tax rate overall if conditions change throughout the course of the year, it will be impacted by a couple of things. Most notably how much money we’re making. But that’s the number for now.

Your next question comes from the line of Saul Martinez with UBS. Please go ahead.

Good morning. Thanks for taking my question. On the fees, on the overdraft to wide product and forgive me if I missed, but did you quantify how much that adversely impacted deposit fees in 4Q. And how much more it could linger on into the 1Q 2018 results?

So, it was $19 million in the quarter although it came in during the quarter. And so, it will be -- it will probably be more in the first quarter. And we’ll see how customers adapt to that capability overtime. And just for anybody, who isn't familiar with the product, essentially if you overdraft payments tonight and your direct deposit hits in the morning, we don't charge you for the overdraft, it happened the night before, that's where the Rewind comes from. So, we'll see a full quarter of it in Q1, we'll call it out at the end of the quarter and make it transparent so the people can model it in. But we think it's a very useful capability to help folks who are generally speaking right at the end of the pay cycle when they have an overdraft situation and then rectify it the next day.

Okay, that's helpful. And secondly on John, on your comments on deposit betas and the possibility of sort of maybe a non-linear type of increase in deposit betas if you start to get loan growth. Is there any way to -- I know you're probably going to say it's difficult to put numbers around it, but I'll ask anyway? If you were to see loan growth pickup and let's just say loan growth picks up to mid-single digits. Is there any way to think through the parameters about how much deposit betas can move up maybe based on history or some assumptions of consumer behavior? But is there any way to think about sort of the parameters around which you might see deposit competition and deposit betas move up in that type of scenario.

I don't have a silver bullet for you. But I can tell you that you could stress or model some sort of a catch up to historically normal levels, call it the 40% level. And then ask yourself, by bank who might go first and why? And as Tim mentioned, there are a lot of non-economic reasons for customers who want to maintain relationships maintain balances etcetera call it the very full service with the less full service. All of those things matter. But everybody's deposit franchise is going to look a little bit different. So, people have more core primary types of transactional account relationships and some people are funded with how their money they are seeking the highest yield at any point in time. And that's going to, it's different banks that are going to behave differently. My general guess is that within the relevant range for likely loan growth for Wells Fargo, that if we achieve the higher end of that range, and the impact on our deposit price isn't really going to be because we think that we need to go out and raise more money and jack up our deposit cost, but rather that it's happening to others and they're doing it and we respond -- and if we feel we need to we will be responding to what's happening in the market.

Our next question will come from the line of Nancy Bush with NAB Research. Please go ahead.

Hi, gentlemen. I have a couple of questions for you. And this probably falls into the last question as well. For many years, you were the lowest rate payer in the nation and you are able to maintain that through the location of branches et cetera et cetera. From a competitive standpoint and given the issues over the last couple of years, do you need to kind of get into the middle of the pack or the top? I mean how do you feel competitively, where you need to be positioned with deposit pricing in a rising rate environment.

Yeah, Nancy it's a very fair question. I don't think our view particularly as it relates to retail consumer customers has really changed. And what you have seen in our deposit pricing so far, this year is that we're one of the lowest if not the lowest in the industry. And our expectation is that we will continue to be able to do that because of the franchise that we have, not only the physical franchise but also the digital franchise that we’ve continued to invest in, based upon the innovation and the convenience that we are providing to our customers. I think when you move from traditional retail deposit customers to wealth customers, it’s more competitive and you’ve seen the higher weighted there and we’re kind of in the middle, and that’s fine with us. I think we’re comfortable there. And then as you move to larger corporate customers or financial institutions and the like, it’s very competitive, where your deposit days are close to 100 percentage you can get. And I think that’s been pretty consistent through cycles for us as well as the rest of the industry. So that’s how I would break it down.

On the last point I would add, we’ve been a little bit more active with some of the financial institution customers to get their deposits because we don’t have a leverage ratio problem so we can afford to have a slightly better balance sheet. We can use the liquidity from time-to-time. So, if we weren’t doing that, because that is the highest cost deposit number, we probably weighted average basis like a lower deposit cost payer. But it’s really some purpose to do more business of various types with those customers by having that deposit relationship.

Okay. And also, the follow-on I have is about branch closures. And I am sure you guys have seen the articles over the past couple of months, there was a series I think in the Wall Street Journal a few weeks ago, about how rural America is being impacted by branch closures that there are many small towns now that basically have no bank branches. And I am wondering if this is the coming of bigger regulatory issue or it’s coming more on to the regulatory radar screen and do you guys anticipate that you may in the future have to not close branches that you would have closed otherwise because of their locations?

Well Nancy again it’s a fair question. I think that when we look at our branch network, we included a number of factors beyond just a P&L for the branch as a likely expectation for growth or quality of customers. There is also CRA type requirements and other reasons that we want to keep branches open in certain markets. But to your specific question about regulatory interaction, we haven’t had any increase in regulatory interaction related to a significant increase of -- regulatory interaction related to rural branches as of this point.

I would say there is big investment in digital capability that allows people to bank from anywhere including opening accounts, including applying for and having credit trenches [ph] including deposit taking, eases the burden doesn’t completely remove it, but it makes it easier for people who live far from branches even if there is a branch there, may be 30 miles away, still be in the county. We are making it easier for people to do that from home. So, it’s a better situation than it was 20 years ago or 40 years ago and that same calculus is being weighed.

Our final question will come from the line of Gerard Cassidy with RBC. Please go ahead.

Good morning. Can you guys share with us -- you talked about bringing this efficiency ratio down with 59 handle on by the end of the year and then further improvement in following periods. What percentage of the improvement comes from revenue versus expenses or vice versa. How much is going to come from expenses versus revenues?

Well, you can see the range that we’re talking about for expenses for the year and while that’s an annual number and other quarterly number. We showed some sensitivity around our 2017 on our revenue items. So, right now we’re very focused on specific actions that are being taken on the expense side. And we have to make some assumptions about what’s happening in the revenues estimate, what the handle range will be on efficiency later in the year. And very importantly, I’d remind everybody that Q1 is a very -- is high for seasonal expense I think you know that, it is your business. But that’s something to account for. So, John asked the question earlier about what’s going to happen -- or I forgot who asked the question about NII in 2018, there is a range of estimates depending on the drivers that I mentioned similarly on the noninterest income front. We’ve got a lot of things that are core and easy -- easier to forecast but there’ll be other just as well. So, we’re trying to grow revenue. We have control over expense and it’s the expense that we’re through specifically pointing to in terms of what’s driving the outcome.

Okay. And then in your community banking metrics in slide 24, you obviously give us good data on the digital customer’s and such. And you guys have alluded to on the call about opening up new accounts and selling products through these lines and that seems to be where the industry is going and you’re going. Can you share with us what kind of penetration you have whether it’s credit cards or other types of consumer loan products that you’re actually opening up through the online channel versus people having to come into a branch?

So, right now I’d say credit card is probably the easiest one to point to. I think 43% of card originations in 2017 were digital. Now, to be fair we -- it’s not so important to us what that percentage is, we want more of our customers to have our card in their wallet and if they get it digitally or they get it in-person either will work. But, 43% are trending towards half of our card openings were digitally transacted in 2017. That’s an interesting metric and that’s up from a very small percentage in prior years. Mortgage will be -- this will be the year to see to see what the trend is there as we fully roll out the digital mortgage applications, people who aren’t -- including people who aren’t already customers in Wells Fargo. And while we have the digital account opening process for two of the investor which is something that we’ll be measuring all year and figure out how much benefit our customers and prospects drive from interacting with us in that way.

And just on the mortgage, when do you guys go live with that again? I knew it was this year, but is it first quarter or second quarter?

Well, it’s live now for a people who are already customers of Wells Fargo. You can enter through -- I know you all are customers at Wells Fargo, you can log on to our online banking or digital banking platform you can see it there. But it will be available for all comers in the first quarter.

Okay. And then just my final question in your wholesale banking side you talk about investment banking market share dropped to 3.6% versus 4.4%, the narrow scope focus. Can you give us some background or color on what you mean by what you did to the market share came down?

Yeah. And let me give in order that’s going to reflect some large deal volume could be some leverage finance volume, it could be cross boarder activity, some of which are probably higher beta for us depending on whether we get it or not. I think on an annual basis, we probably assume that we're still going to trend towards the 5% 6% plus market share range, which is where we've been recently. But I'm going to think terribly different.

As you said to reinforce John's point. I think what we saw in fourth quarter was more leverage buyout type transactions and kind of this because of our underlying credit discipline. We tend to have a lower percent market share in those types of deals. And so that would at the margin probably have driven most of that decline.

Again, thank you all for joining us this morning. I know it's always a busy morning the first day of earnings for the industry. I want to reiterate the fact that 2017 was a very transformational year for Wells Fargo. And I also want to emphasize the hard work, dedication and resiliency of our team members, who made the company a better bank today than it was a year ago. And again, notwithstanding the challenges that we have ahead, I'm optimistic that Wells Fargo will be a better bank a year from now. So again, thank you for your support.

Ladies and gentlemen, that concludes today's conference. Thank you all for participating. You may now disconnect.