富國銀行 (WFC) 2005 Q4 法說會逐字稿

(Call in progress) -- to the Wells Fargo fourth-quarter earnings recorded call.

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

Hello, this is Bob Strickland.

Thank you for calling into the Wells Fargo fourth-quarter 2005 earnings review prerecorded call.

Before we talk about our fourth quarter, 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 the expected impact of charge-offs of conforming Wells Fargo Financial's charge-off practices to FFIEC standards, the expected impact of expensing stock options on our 2006 earnings per share, expected trends in credit quality and the adequacy of our allowance for credit losses.

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 2005 results and to our most recent annual and quarterly reports filed with the SEC and to the information incorporated into those documents.

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

Thanks, Bob.

Once again, Wells Fargo achieved its long-term goal of double-digit revenue growth and double-digit earnings per share growth for the year with record EPS of $4.50 and record revenue of $33 billion.

In the fourth quarter, EPS was up 10% from the prior year, even after we incurred $171 million in incremental charge-offs related to the October 17, 2005 change in bankruptcy law.

We had positive operating leverage for the year and quarter while we continued to invest in our businesses.

And while the yield curve continued to flatten throughout the year, our net interest margin has been relatively stable and remained in the highest margin among large bank holding companies.

The strength of our results reflects the diversity of our business model.

While mortgage earnings declined from the fourth quarter of 2004, most of our other businesses experienced double-digit earnings growth, including regional banking, commercial banking, corporate banking, private client services, corporate trust, our home equity and personal credit businesses, asset management, asset-based lending, student lending, commercial real estate and international trade services.

I will highlight the growth drivers behind many of these businesses during the call.

Our results were driven by continued strength in both our consumer and commercial businesses.

Let's start with the consumer.

Community Banking's exceptional results were driven by Regional Banking, our retail store network, which had a phenomenal year and closed the year on continued strength.

Core product sales in Regional Banking increased 15% from a year ago to a record 16 million products in 2005.

Our average retail bank household now has a cross-sell ratio of 4.8 products per customer, up from 4.6 a year ago.

We continued to be successful in selling Wells Fargo packages, which include a checking account and at least three other products, which is a debit card, credit card, savings account or home equity loan.

Package sales were up 37% in 2005 with package penetration of our new checking account base reaching 46%.

Another reason for our success in Regional Banking is that our team members are more engaged.

Engaged team members are loyal, productive and committed to helping their customers succeed financially.

One way to measure engagement is by comparing the number of engaged to actively disengaged team members.

We now have an engaged to actively disengaged ratio of 5.8 to 1; up from 4.1 to 1 in 2004.

Having more engaged team members results in better customer service, lower attrition and improved loyalty.

Household attrition improved 7% from 2003 and attrition of our high-value households improved 17% in 2003.

Our improved customer service is also reflected in stronger customer loyalty.

Wells Fargo Regional Banking surveys indicate that the percentage of customers who are loyal increased 12% from December 2003 to December 2005.

Loyal customers are those who express strong agreement with the likelihood to recommend Wells Fargo to a friend, to continue to do business with Wells Fargo and who have a high overall level of satisfaction with Wells Fargo.

One of the key consequences of higher team member engagement and higher customer loyalty is that our customers buy more products from us and we retain more of their business.

We continue to successfully sell debit and credit cards to our customers.

At year end, 33% of our retail bank consumer households had a Wells Fargo credit card; up from 31% at year end 2004.

Purchase volume on these cards was up 19% from a year ago and average balances were up 12%. 91% of our consumer checking account customers had a debit card; up from 88% at year end 2004 and purchase volume increased by 20% from a year ago.

This increased penetration of our customer base moves us closer to our stated goal of having a Wells Fargo card in every Wells Fargo wallet.

Important because cards have surpassed checks and cash for in-store purchases and because using a Wells Fargo credit or debit card increases our share of mind among our customers.

We are increasing usage in part by introducing reward programs for both our credit and debit card customers.

Growth in sales and usage by our Retail Banking households contributed to total card fees increasing by 23% from the fourth quarter of 2004.

All of this was organic growth.

Private client services, or PCS, grew both revenue and earnings at double-digit rates in the fourth quarter compared with the fourth quarter of 2004.

PCS added approximately 150 net new bankers during 2005 for a total of more than 720 private bankers, a 20% increase in producers in the affluent and wealth market.

By partnering with other business groups within Wells Fargo, PCS grew average core deposits by 27% in the fourth quarter of 2004 and average loans by 5% and if you exclude real estate one to four family first mortgages, the loan category impacted by our ARM sales throughout the year, average loans grew by 12%.

Brokerage assets under administration also improved in the face of a relatively flat equity market and assets up 15% from the fourth quarter of 2004.

For our mass market segment, the licensed banker program increased the number of licensed bankers by 35% during the year.

Without doing an acquisition, we now have 1350 licensed bankers offering investments and traditional banking products.

Our licensed bankers are also more productive.

At the beginning of the year, licensed bankers sold only 9% of all new accounts on their own as opposed to referring the customer to a financial consultant.

At year end, licensed bankers were selling 49% of new accounts themselves.

The progress PCS made during the year was recognized by outside experts.

PCS was ranked number one in security and privacy rankings in 2005 by Watchfire GomezPro, number two among full-service brokerage online providers in 2005 by Watchfire GomezPro and number 11 among top wealth managers in 2005 by Barron's.

During the fourth quarter, Wells Fargo was recognized as the nation's leading lender to small businesses for the third consecutive year, funding $13.6 billion in loans under $100,000. 15% of all loans under $100,000 loaned to small-business owners nationwide in 2004 are from Wells Fargo according to reports compiled under the Community Reinvestment Act.

We ranked number one in small business loans in 19 of our 23 banking states; up from 16 states in 2003.

Small business loans originated through our business direct platform grew 20% compared with the fourth quarter of last year.

Quarterly sales for small businesses for our retail stores increased 29% from a year ago and same store small business sales were up 24%.

Average consumer loans increased 6% from the fourth quarter of 2004.

Excluding real estate one to four family mortgages, again the loan category impacted by ARM sales during the year, consumer loans continue to grow at a healthy pace; up 22% year-over-year.

Average consumer loans grew 15% annualized on a linked quarter basis.

First mortgage, home equity, credit card and other revolving credit and installment loans grew at double-digit annualized rates on a linked quarter basis.

Average core deposits grew 10% from a year ago and 10% annualized from the third quarter.

Average mortgage escrow deposits were up 3.2 billion from the fourth quarter of 2004 and down 1.3 billion from the third quarter of 2005.

Excluding mortgage escrow balances, total average core deposits grew 9% from the fourth quarter of 2004 and 13% annualized on a linked quarter basis.

Retail core deposits, which also exclude escrow balances, were up 11% from a year ago and 11% annualized from the third quarter.

Average consumer checking account balances grew $5.7 billion or 11% from the fourth quarter of 2004 and consumer checking accounts were up a net 4.3% from a year ago.

We were able to achieve these strong deposit growth rates while maintaining our historical deposit pricing discipline.

The industry in general lagged deposit rate increases in response to the Fed funds increases to a greater degree in the fourth quarter than in the prior two quarters.

As a consequence, we saw somewhat less pricing pressure from our competition from a competitive standpoint.

Our most competitive markets during the quarter were the Midwest and Texas.

Our deposit growth and share increase reflect the attractiveness of our markets, the convenience, service and security we provide to our deposit customers and our long-standing ability to attract and retain consumer and business customers.

Mortgage originations grew 23% in 2005 and we ended the year with an unclosed application pipeline of $50 billion; down from the peak of $73 billion in the second quarter of 2005, but still a solid level.

Our owned servicing portfolio ended the year at a record $989 billion.

In other words, almost $1 trillion in servicing; up 23% from the start of 2005.

During the quarter as interest rates continued to rise, we increased the level of our servicing hedge coverage in response to market conditions and our overall hedging strategy.

This increase in hedge coverage somewhat limited our reversal of servicing asset impairment to $55 million during the quarter compared with $356 million last quarter and $234 million in the fourth quarter of 2004.

While the mortgage company historically had hedged its servicing assets with highly liquid derivative contracts, in the fourth quarter, it began using on balance sheet securities to expand the tools available for its hedging.

Of the $124 million in total bond losses recorded by the consolidated company in the fourth quarter, $58 million were attributable to the mortgage servicing hedge program.

Mortgage activity decelerated in the fourth quarter, but we’re still at a solid level reflecting our strength in a purchase mortgage market and our continued industry leadership in retail mortgage originations.

Applications were $89 billion in the fourth quarter compared with $116 billion in the third quarter and $80 billion a year ago.

Total originations in the fourth quarter were $113 billion versus $103 billion in the third quarter and $69 billion a year ago.

Third party originations increased this quarter as a result of growing marketshare and focusing resources this past year to better penetrate the co-issuance correspondent market, which we believe is a good channel for economically increasing our servicing asset and customer base.

The decline in mortgage applications in the fourth quarter was anticipated and consequently, its impact on mortgage profitability was mitigated by reducing expenses, which were down 13% annualized linked quarter.

As we have said in the past, our diverse business model allows us to grow consolidated earnings in different economic and interest rate environments.

And even with the decline in mortgage activity and profitability in the fourth quarter, we were still able to generate 10% consolidated EPS and revenue growth with our other businesses picked up any slack.

We now shift to our commercial businesses.

In our wholesale and commercial businesses, we once again saw solid commercial loan growth.

Our C&I loans have now grown nine consecutive quarters with double-digit growth in each of the last five quarters.

Average commercial and commercial real estate loans grew $12 billion or 13% from the fourth quarter of 2004 and $2.5 billion or 10% annualized on a linked quarter basis.

At quarter end, C&I loans accounted for 35% of total loans.

Now our wholesale banking group, which serves middle market and large corporate customers, average commercial loans grew 15% year-over-year and 9% annualized linked quarter.

Wholesale had double-digit loan growth year-over-year in asset-based lending, international, real estate and specialized financial services.

We measure the profitability of our commercial customers on a relationship basis, which gives us an advantage when pricing loans.

As a result of this focus on cross selling, we were able to both grow commercial loans at a double-digit pace in a highly competitive market as well as grow revenue in the wholesale banking group 11% in 2005.

Our wholesale customers like our relationship banking model and broad product line and have rewarded us with more of their business.

Our wholesale customers now have an average of 5.7 products with us and our middle market customers have close to 7 products.

An independent survey indicates that we now have the leading marketshare among middle market customers in the western United States.

With the addition of seven commercial banking offices this year primarily outside of our banking footprint, we now can serve our commercial customers coast-to-coast.

Our international group within wholesale banking had particularly strong fourth-quarter results with double-digit growth in revenue and profits compared to the fourth quarter of 2004.

Foreign exchange revenues were up as a result of the expansion of our international teller initiative within Community Banking, which included opening 73 new international teller sites in our banking stores this year.

Revenue from international treasury management, which provides services in over 40 countries, was up as we continued to capture customers requiring cross-border solutions to their cash management needs.

Trade-related loan balances grew 16% in the fourth quarter compared with the fourth quarter of 2004.

Also we continued to have success with the targeted initiative to gather deposits from foreign central banks, these deposits growing 48% on a linked quarter basis.

This growth was directly attributable to our focused sales effort to call on new corporate and institutional customers that began after Wells Fargo was upgraded to AAA by Moody's, the only bank in the United States with the highest possible credit rating.

Our commercial real estate group had double-digit revenue, loan and earnings growth in 2005.

They booked record new loan commitments during the year, up 27%.

The real estate group's growth was primarily driven by the continued geographic expansion on the East Coast and in the Midwest.

Over the past five years, they have opened an average of two offices a year in these new markets and they are beginning to see good growth as these offices mature.

In addition, the real estate group continues to substantially increase middle market penetration across all markets.

Internet banking continues to grow.

At year end, we had over 7 million active online customers serving 56% of consumer checking accounts.

We had 3 million Bill Pay customers, up 41% from a year ago and active online small business customers increased 25% from a year ago.

We also increased Internet sales with consumer product sales up 22%, student loans up 52%, checking accounts up 21% and credit card sales up 17% in 2005.

We also continued to be recognized as having the best Internet banking site.

Watchfire GomezPro ranked Wells Fargo full-service brokerage the number two online offering nationwide.

Wells Fargo received the gold medal in Bill Pay, self-service and online applications for the 2005 Bank Monitor Awards and Keynote Web Excellence ranked Wells Fargo home mortgage number two nationwide on the fourth-quarter mortgage scorecard.

Let me now discuss credit quality.

With the exception of the surge in consumer bankruptcy filings related to the change in bankruptcy law in mid-October 2005, fourth-quarter credit quality results were in line with expectations.

Fourth-quarter personal bankruptcy filings increased $171 million above normalized levels.

These losses were primarily from Wells Fargo Financial and credit card but it also included losses in business direct and unsecured consumer loans.

By year end, bankruptcies were well below normal levels.

Without this unprecedented personal bankruptcy impact, fourth-quarter losses would have been consistent with prior periods.

During the quarter, we continued to gather information on our customers who were affected by Hurricane Katrina.

Virtually all impacted customers were under payment moratorium programs until year end 2005 and residential real estate payment moratoriums have been extended an additional 90 days.

Since we do not have post Katrina repayment histories on these customers, we took no additional Hurricane Katrina related provision in the fourth quarter.

In 2005, Wells Fargo Financial adopted the credit guidelines established by the FFIEC in order to conform its credit practices to those of our other consumer credit businesses in Wells Fargo Bank, an important step toward developing an efficient, common platform across our consumer credit businesses.

Among other things, the FFIEC guidelines require earlier loss recognition.

The initial implementation charge for this change in policy in the first quarter of 2005 was $163 million.

As a result of the early recognition of loss, Wells Fargo Financial continued to experience somewhat higher than normal charge-offs and will continue to do so through 2006 before the initial increases in charge-offs, above what they would have been under the old policy, are diminished by greater recoveries.

Looking out to 2006, we're likely to see credit losses increase in line with loan growth and seasoning at levels in line with pricing expectations.

We have also been very disciplined in our credit practices, not offering negative amortizing mortgages, not doing nonprime interest only or no doc mortgages, requiring higher down payments and tightening credit standards in some markets that have experienced unusually high real estate appreciation.

We have never been a large player in the syndicated loan market and our commercial real estate group has limited exposure in higher risk real estate markets, like condo conversions, and is focused on diversifying outside of California.

With the allowance for credit losses at nearly two times annualized credit losses and three times nonperforming assets, we consider our allowance adequate to cover losses inherent in our loan portfolio at year end.

Residential real estate secured loans represented 44% of our loans outstanding; down from 49% a year ago.

I want to update you on some key metrics that I have shared with you in the past with respect to these loans.

At year end, approximately 20% of our $72 billion national home equity group portfolio was in the first lien position and approximately 50% of the portfolio in the second lien position was behind a Wells Fargo first mortgage.

The average FICO was 727 and the average combined loan-to-value was 55% based on outstanding balances; down from 59% a year ago and 66%, including unused commitments, down from 70% a year ago. 20% of the portfolio was fixed rate and of the 80% of the portfolio that was adjustable, over 65% have the option to convert to a fixed rate.

Our fastest-growing real estate secured portfolio was Wells Fargo Financial's $19 billion in receivables; up 39% from a year ago.

The average FICO score on this portfolio was 642; up from 637 a year ago.

The average loan-to-value was 74%; down from 77% a year ago. 97% of Wells Fargo Financial's real estate secured portfolio was in the first lien position and the average loan size was $118,000.

Approximately 25% of the portfolio was fixed rate and funded with fixed-rate debt and 75% are three-year ARMs.

Wells Fargo Financial does not offer interest only or no doc loans.

At quarter end, we had $78 billion in one to four family first mortgages on our balance sheet.

Approximately 20% of this was originated at Wells Fargo Financial and 20% were home equity loans that were in the first lien position.

Of the remaining portfolio, the vast majority were prime loans, which had an average FICO of 737.

The average loan-to-value at time of origination was about 72% and on all loans with an LTV greater than 80% had mortgage insurance.

Virtually this entire portfolio was five-, seven- or ten-year ARMs.

Wells Fargo does not offer negative amortizing loans, including options ARMs.

We now shift to expenses.

We had positive operating leverage in the fourth quarter and for the year as revenue growth exceeded expense growth; 10% revenue growth versus 8% expense growth.

As we have stated in the past, in order to consistently grow over the long term, successful companies must invest in their core businesses and maintain a strong balance sheet.

During 2005, we opened 92 banking stores and remodeled approximately 485 banking stores.

We also opened seven commercial banking stores, 47 mortgage stores and 20 consumer finance stores.

We also increased our distribution network by adding approximately 230 ATMS for a total of more than 6500 Web-enabled ATMs, the largest Web-enabled ATM network in the country, which provides our customers with a consistent, high-quality experience across our 23 state network.

We also added 8,000 team members this year to better serve our growing customer base.

And while this was not a big year for acquisitions, we did incur $56 million in integration expense during the year primarily related to Strong Financial and Regulus, including $13 million of integration costs in the fourth quarter.

We also took many actions to maintain a strong balance sheet.

In the first quarter of 2005, we recorded a $117 million expense to shorten the estimated lives of certain depreciable assets.

During the year, we sold $48 billion of our lowest yielding ARMs at a loss, which helped us maintain our industry-leading margin and in the fourth quarter, we sold $11 billion in debt securities at a loss of $124 million, actions which helped improve our long-term asset yield, our margin and our future earnings given the 13 Fed rate hikes that have already occurred.

At year end, we had $590 million in unrealized gains on debt securities available for sale.

Our private equity portfolio continued to generate gains and had a cost basis of $1.5 billion.

At quarter end, we had $342 million of unrealized gains in our public equity portfolio.

During the quarter, we bought back 13.6 million shares of Wells Fargo common stock. 35.1 million shares remained available for repurchase on the Board authority at year end.

In 2005, we paid common stock dividends of $2.00 per share; up from $1.86 per share in 2004 and in the third quarter, we declared an increase in the quarterly dividend rate to $0.52 or $2.08 annualized.

Our dividends have grown at a compound annual growth rate of 16% since 1989.

In 2005, we returned 60% of net income after tax to shareholders through dividend and share repurchase net of new shares issued for benefit plans and options.

We have been able to grow loans, buy back shares, increase dividends and maintain strong capital ratios because earnings have been so strong because of the discipline in managing our balance sheet.

As required under FAS 123R, we began expensing stock options on January 1, 2006.

Assuming our February 2006 option grant will vest over a three-year period and the valuation of a number of options equals our February 2005 grant, we anticipate this expense will reduce 2006 earnings per share by approximately $0.06.

Our debt securities continue to trade at the lowest spread of any major bank holding company.

On November 18, Wells Fargo issued a debut sterling denominated senior five-year bond.

As a result of strong demand from investors, the announced size of 300 million sterling grew to 750 million sterling and was priced at levels equivalent to the cost of the U.S. debt issue.

The issue provided investor diversification without any cost concession to Wells Fargo.

This was the first unlisted global benchmark ever to be priced in the sterling market and follows two other extremely successful foreign currency bond offerings, Canadian dollars and Australian dollars, done by Wells Fargo in the second half of 2005.

In conclusion, we once again realized double-digit, top-line and double-digit bottom-line growth, which was broad based and of high quality during the quarter.

However, we have achieved double-digit increases in revenue and earnings per share not just over the past year, but over the past 5, 10, 15 and 20 years.

Over the past 20 years, our compound annual growth in revenue has been 12%.

Our compound annual growth in diluted earnings per share has been 14%.

Our compound annual total stockholder return has been 21% compared with 12% for the S&P 500.

We have been able to achieve these results with a strong culture and a consistent vision that has been in place for 20 years.

We do it by investing in our businesses, investing in our people, distribution networks and technology.

We do it with a conservative, disciplined operating philosophy built on prudent risk reward metrics.

We look forward to the following same vision to achieve growth in 2006.

Thank you for listening.

If you have any questions, please call Bob Strickland, Director of Investor Relations, at 415-396-0523.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for your participation.