Wells Fargo CFO Mike Santomassimo Talks Earnings, Interest Rates

SPEAKER_1 (0:02)

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Scarlet Fu (0:07)

Persistent concerns about inflation helping to drive bond yields higher, which raises borrowing costs for consumers and companies. That's been the story the last few weeks. So let's talk about the business of lending and dive into Wells Fargo's latest earnings report and bring in Mike Santomassimo. He is the CFO of the bank. Mike, it's great to speak with you.

Along with JP Morgan and Citi, Wells set a fresh record last quarter for how much you earn from the core business of lending. So this is a sign that customers continue to borrow even as rates have risen. From your point of view, were customers rushing to borrow more than usual in order to lock in rates before they go even higher? I wonder how durable this pace of borrowing is.

Mike Santomassimo (0:48)

Well, thanks. Thanks for having me. No, that's not what we saw sort of happen in the business over the last number of months. I think when you take a step back, we have seen really good activity across a number of different parts of the business, including the lending side. On the consumer half of the business, what you're seeing in lending is really consistent growth in our card portfolio, in our auto portfolio, and then pretty stable balances in sort of home lending. And really, where you're seeing more of the growth is on the commercial side, and that's across a whole bunch of different parts of the business, including our commercial bank and our corporate investment bank.

And really, that's just clients growing their business, making investments they need to. Now, having said all that, they're not getting over levered.

If you look at utilization of their revolvers on the commercial side, it's still relatively low on a historic basis. It may be moved up slightly over the last few months, but it's still quite low. So all of this is really leading to a really good picture from a credit perspective, where people aren't over levered, they're coming into this environment in really good shape, and we're seeing that flow through in the credit performance across the portfolios as well.

Scarlet Fu (2:01)

Yeah, you told reporters that there's no indication of systemic stress that would lead to broader credit concerns overall. Having said that, where are there starting to be emerging signs of stress on either the consumer or on the commercial side? Is there a typical profile of a struggling borrower?

Mike Santomassimo (2:19)

We're just not seeing that flow through our portfolio in any significant way. On the consumer side, unemployment's still quite low.

So most people that want a job have jobs. You've seen wages keep up with inflation on a cumulative basis over the last number of years. And the debt to income ratios are still quite good, and are down slightly over the last couple of years, not increasing. So on the consumer side, people are in pretty good shape. So as long as the employment picture stays strong, I think you'll see that continue.

On the commercial side, most businesses came into this environment in a really good shape. They had a lot of liquidity, they weren't over-levering themselves, they were being cautious about making investment. AI, CathEx cycle aside, most businesses are being still pretty prudent there. And so I think they come into this in really good shape overall. And it's a big portfolio. So on the commercial side, there may be idiosyncratic issues with a particular company, but we're just not seeing that systemic risk come through. Now, higher interest rates will have some impact in places like commercial real estate over a longer period of time, but you're just not seeing that come through the portfolio yet.

SPEAKER_4 (3:32)

Mike, I'd like to ask about gross unrealized losses on held to maturity securities.

JP Morgan decided to sell a chunk of those bonds, crystallizing those losses, and then potentially reinvesting some of them into higher yielding securities. Would you do the same? Your unrealized losses were 32.5 billion in the second quarter. How are you thinking about a similar action?

Mike Santomassimo (3:55)

Well, people aren't selling their held to maturity securities. Those are something that you don't sell. What other people may be doing is some small repositionings of their available-for-sale portfolio. And over the last couple of years, we've done a little bit of that over time, and so if it makes sense in the future, we'll consider that. But I think we've also used derivatives to help swap some of that fixed-rate exposure into floating rates, so we're getting the benefit of higher rates in parts of that portfolio already.

And as we've grown our portfolio over the last couple of years, a lot of that goes into floating rate papers, so you're also getting the benefit in some of the newer investments we're making as rates rise.