富國銀行 (WFC) 2004 Q1 法說會逐字稿

Welcome to the Wells Fargo first-quarter earnings recorded call.

At this time I would like to turn the call over to Bob Strickland, Director of Investor Relations.

Thank you for calling into the Wells Fargo first-quarter 2004 earnings review prerecorded call.

Before we talk about our first-quarter results we need to make the standard securities law disclosure.

In today's call we will make forward-looking statements about specific income statement and balance sheet items and other measures of future results of operations and financial conditions including statements about future gains on our private and public equity securities portfolio; second-quarter 2004 mortgage originations and average mortgage loans held for sale; the expected benefits from investments in our business; various statements about future credit losses and credit quality; and California and other regional economic trends.

Forward-looking statements give our expectations about the future; they are not guarantees and results may differ from expectations.

Forward-looking statements speak only as of the date they are made and we do not undertake any obligation to update them to reflect changes that occur after that date.

For a discussion of some of the factors that may cause actual results to differ from expectations refer to our SEC filings including the 8-K filed today which includes the press release announcing our first-quarter results to our most recent annual and quarterly reports and to information incorporated into those documents.

Now I will turn the review over to our Chief Financial Officer, Howard Atkins.

Thanks, Bob.

I am pleased to report that Wells Fargo earned a record $1.8 billion or $1.03 per share in the first-quarter of 2004.

Earnings per share grew 17 percent from the 88 cents per share earned a year ago.

The first quarter was the 11th consecutive quarter of record profits and earnings per share.

We also now achieved double-digit earnings per share growth in 10 consecutive quarters with a compound annual growth rate of 17.5 percent over this time period.

The quarter was characterized not only by higher double-digit earnings growth but also by improved operating leverage, stronger credit quality, higher returns and an ever stronger balance sheet.

Operating leverage improved year-over-year with revenue growing at 7 percent and expenses at only 2 percent resulting in an efficiency ratio of 56.4 percent, an improvement from the 60.5 percent last quarter and 59.2 percent a year ago.

Credit quality remained among the best in the industry with charge offs declining to $404 million from $415 million a year ago and nonperforming assets declining 9 percent from a year ago.

Given the growth in our loan portfolios and lower charge offs loss ratios have declined to .63 percent of average total loans, the lowest loss rate since prior to the 1998 Norwest/Wells Fargo merger.

Our return on assets was 1.84 percent and return on equity was 20.31 percent; the highest returns we've realized since the Norwest/Wells Fargo merger, and reflecting our solid growth, wider risk adjusted margin and capital management efficiency.

Even with the 10 percent annualized growth in our total assets since December 31, 2003, and even after repurchasing 13 million Wells Fargo shares during the quarter, our capital position strengthened with tangible leverage ratio increasing to 7.1 percent at March 31, 2004, up from 6.9 percent at year-end 2003.

We are beginning to see clearer signs in our business flows of an improving economy across our products across our regions.

UCLA's latest economic forecast for California concludes that the worst is over and that the California economy is improving.

State's residential market continues to grow with rising prices and new construction permits at their highest level in more than a decade.

Unlike recent quarters which were led primarily by mortgage and consumer lending, our first-quarter 2004 results were broader-based; in part because of the improving economy and, more importantly, because of our successful cross sell efforts.

Apart from home mortgage, which I will discuss in a moment, combined revenue growth from all our other businesses accelerated to 15 percent in the first quarter from a year ago.

Let me mention a few key business producing this growth.

Average commercial and commercial real estate loans increased $1.4 billion or 6 percent annualized from the fourth-quarter of 2003.

Approximately $550 million of that increase was due to the first full quarter of the Pacific Northwest Bank acquisition completed late last year.

Most of the same-store loan growth came from new customers as we increased our share of business relationships.

While credit demand from our existing wholesale customer base has been more modest, generally speaking our customers seem to have more confidence on the economy.

Commercial real estate loans, equipment leasing and construction loans were all up again in the quarter.

We are encouraged by the loan growth in our small-business group, Business Direct, which serves businesses with revenue under $2 million.

Total loans outstanding were up 17 percent during the first-quarter compared to the first-quarter of 2003.

The dollar volume of new loan commitments made by the Business Direct were up 48 percent during the same period reflecting better economic activity as well as our renewed focus on cross sell in the small-business segment.

Merchant card transaction volume picked up sharply in the quarter.

Business debit card volume was up 69 percent and credit card volume was up 34 percent year-over-year, although both on a relatively small base.

Trust and investment management fees increased 16 percent to $535 million from $460 million a year ago and fee income accelerated on a linked quarter basis.

In part this reflected the recent strength of the stock market and in part it reflected the success we've had in integrating the several small acquisitions we've made in the past few years like Montgomery Asset Management last year.

More fundamentally though, growth entrusted investment management fees reflected the more recent success we've had in building and managing our private client service business.

Overall in private client services revenue was up 20 percent from a year ago.

Private client deposits were up 53 percent and private client loans up 18 percent.

Insurance revenues of $317 million in the first-quarter were up 19 percent from a year ago reflecting a continuation of expanding cross sell of insurance products by Accordia agents through to our commercial customers as well as increased demand for crop and other loan based insurance products, yet another potential indicator of a stronger economy in our regions.

Trade finance and foreign exchange services expanded in the quarter due to greater export/import activity, growth in new relationships using our foreign exchange services, and greater usage of our online product set.

In fact, over 90 percent of our import/export customers now use online services products, up from 75 percent last year.

Indeed online banking continued to help all of our businesses grow.

At quarter end we had 5.2 million active online customers, up 33 percent from a year ago, and 1.8 million bill pay customers, up 34 percent.

We had 450,000 active online small-business customers, up 44 percent from last year.

These customers bought more online with consumer product sales up 78 percent, small-business product sales up 40 percent, and revenue from wholesale products up 37 percent in the first-quarter, all compared to the first-quarter of last year.

Our consumer businesses remained very strong.

Core product sales increased 23 percent in the first-quarter to 3.24 million products.

In part this sales growth was the result of increasing our retail bankers by 10 percent or an additional 1,000 bankers from a year ago while at the same time our banker productivity measured by sales per banker per day increased 10 percent to 4.88 core product sales per day.

We continue to have strong growth in the number of net new consumer checking accounts, a foundational product in building customer relationships which were up 5 percent from a year ago.

We are selling more deposit products and saw increased average deposit balances.

Excluding mortgage escrow balances, which were down due to lower origination volumes, community banking grew average core deposits 11 percent from the first-quarter of 2003 and 8 percent annualized from the fourth-quarter of 2003.

Average consumer checking account balances grew 12 percent both from first-quarter 2003 and on a linked quarter basis annualized.

Despite the increase in stock prices we have not yet seen signs of this intermediation.

In fact, deposit inflows in the month of March were a record for that month and were the fifth highest monthly amount ever.

We also had strong growth in both our consumer debit and consumer credit card businesses. 87 percent of our checking account customers now have a debit card and they increased their purchases made on their debit cards by 24 percent during the first-quarter compared to the first-quarter of 2003. 28 percent of our consumer households have a Wells Fargo credit card up from 25 percent a year ago.

Credit card purchases increased 14 percent over this time period.

Consumer loan growth remained strong in the first quarter.

In addition to credit cards, home equity, home mortgage, revolving credit and installed load products all grew in the quarter.

On a combined basis these consumer loan products increased $57 billion or 52 percent from the first-quarter of 2003.

While we have had substantial growth in consumer loans, consumer credit quality remains strong with all categories having performed better than expected.

If interest rates continue to increase we would expect less turnover and therefore more normal seasoning of our loss rates and our high-growth home equity and consumer finance portfolios as these loans remain outstanding for longer periods instead of being refinanced as they have in the last two years.

We're also seeing lower credit and residual losses on auto leases as used car prices have firmed and as our underwriting standards have tightened.

Current and future growth should benefit from investments we have made in our businesses.

For example, during the past three years we have increased total salespeople by 8,700, mostly in community banking.

We have completed about 25 percent of the net new 100 stores planned for 2004 and we are on plan to finish most of this effort in the third-quarter this year.

These stores will primarily be in Southern California, Texas and other high-growth markets.

We also have plans to remodel over 260 of our existing banking stores this year.

During the first-quarter we spent an additional $27 million in software expenses to improve the functionality and customer service at the phone bank and to reduce ongoing administrative costs throughout the company.

We continued to focus on training, retraining, and incenting our tellers so they can better identify the financial needs of the customers they serve.

Currently one-third of our core sales to our consumer banking customers are the result of teller referrals.

Let me now turn to mortgage banking.

After record mortgage originations in the second-quarter of 2003, mortgage applications slowed late last year as higher interest rates reduced refi activity and this slowdown in volume continued into the early part of the first-quarter of 2004.

As a result the average mortgage warehouse declined $33 billion from a year ago and mortgage origination fees declined to $178 million in the first-quarter from $276 million a year ago.

Given our extensive experience in managing the mortgage business over many cycles, we were very prepared for these expected declines and had already taken steps in the latter part of 2003 to maintain profitability by reducing staff and expenses.

As mortgage rates dropped again by the end of the first-quarter our mortgage servicing right valuation policy led us to increase temporary provision for servicing impairment by $400 million.

As a result the combination of servicing income and net gains on mortgage origination and sales was $86 million in the first-quarter of 2004 compared with $326 million in the fourth-quarter of 2003 and $194 million a year ago.

As a result of the $400 million temporary impairment as well as a $169 million permanent impairment MSR write-down we took in the quarter, the MSR valuation allowance stood at $2.2 billion at March 31st.

The ratio of mortgage servicing rights to related mortgage loans serviced for others was reduced to 1 percent down from 1.15 percent at year and the weighted average note rate on our owned servicing portfolio was at a record low of 5.84 percent.

The decline in mortgage rates during March also led to yet another round of refi activity.

Our mortgage company took $60 billion in applications during March, the fifth highest month ever.

With an unclosed mortgage pipeline of $72 billion at quarter end, the third highest quarter and pipeline in our history, mortgage originations and average mortgage loans held for sale in the second-quarter should be higher than in the first-quarter.

Our MSR and pipeline hedging programs continued to work very effectively throughout the quarter despite the volatile interest rate environment and strong refi activity.

Home mortgage expenses continued to decline in the first-quarter, down $115 million from a year ago and down $250 million on a linked quarter basis.

And despite higher application volume, temporary staff was indeed reduced by 800 people from year end.

As interest rates have risen since the end of the quarter, I would like to remind investors that for the last two years we have substantially reduced the size and the duration of our investment portfolio.

In addition, we took steps to lengthen our funding at the low point in rates last year and additional steps to lengthen our funding in the first-quarter of 2004.

Debt to capital market demand for our long-term debt instruments remains very strong.

During the first-quarter we completed a $6 billion global debt offering which was the first true global offering issued by Wells Fargo and the largest financing ever done by a financial institution.

Non-U.S. participation in this offering was almost 25 percent, double the normal rate, indicating that Wells Fargo is earning an international reputation for quality and growth.

In addition, earlier this monthly we issued $500 million of retail preferred securities at 5.625 percent, one of the lowest rates ever issued for such securities.

During the quarter we realized $95 million of pretax gains on our equity investments; approximately half of these gains were from our private equity portfolio and half from our public equity portfolio.

Given the strength of the equity markets and the significant actions we have taken in the last two years to write down both our private and public equities, we are encouraged by the quality of the portfolio and would expect additional gains going forward although not necessarily the same amount each quarter as we realized in the first-quarter.

Our private equity portfolio had a cost basis of $1.7 billion and the $577 million public equity portfolio had an unrealized gain of $163 million at quarter end.

In conclusion we are very pleased with another quarter of extremely solid results.

The emerging strength from the economy and our continued focus on satisfying all of our customers' financial needs while helping them succeed financially has once again resulted in double-digit earnings per share and profit growth.

Our growth record was recently recognized by Forbes magazine when it ranked Wells Fargo 25th among the world's leading companies based on revenue, profits, assets and market value.

Thank you for listening and if you have any questions please call Bob Strickland, Director of Investor Relations, at 415-396-0523.