Last week, Wells Fargo (NYSE:WFC) hosted a conference call to discuss its results for the third quarter. Here are the five most important things the bank's executives wanted investors to know.

1. Operating from a position of strength
Because Wells Fargo was able to sidestep many of the pitfalls that hobbled its competitors during and after the financial crisis, it's now in a position to grow and expand while other lenders -- namely, Bank of America (NYSE:BAC) and Citigroup (NYSE:C) -- have been forced to retreat and retrench.

The fact that Wells Fargo is operating from a position of strength was particularly apparent in the third quarter. While JPMorgan Chase (NYSE:JPM), Bank of America, and Citigroup all reported lower net revenues on a year-over-year basis, Wells Fargo's actually grew, thanks to a substantial increase in interest-earning assets.


3Q15 (millions)

3Q14 (millions)

Year-Over-Year Change

JPMorgan Chase




Bank of America








Wells Fargo




Source: Quarterly earnings releases from JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.

Operating from a position of strength has also empowered Wells Fargo to make "quality acquisitions that help [it] serve more markets and meet more of [its] customers' financial needs," noted CFO John Shrewsberry. In addition to broad-based loan growth last quarter, its 17th consecutive quarter of year-over-year growth, Wells Fargo has recently announced a series of portfolio acquisitions from General Electric's (NYSE:GE) GE Capital, the latest of which includes $32 billion worth of commercial lending assets.

2. Interest rates: lower for longer
Interest rates are the single most important variable right now when it comes to bank earnings. This is why it's such a tough revenue environment for the industry, as a substantial share of loans on bank balance sheets are indexed to short-term rates. Low rates thus translate into low revenue.

But while analysts and commentators have been forecasting an imminent increase in rates for the past year, Wells Fargo now believes that rates are likely to stay low for longer than previously expected. This is particularly bad news for the likes of Bank of America, which is waiting with bated breadth for an uptick in rates to meet its profitability target of generating a 1% return on assets.

Wells Fargo, on the other hand has begun to prepare for the worst-case scenario. "[O]ur view on interest rates has evolved over the past year to be more of a lower-for-longer expectation for both short-term and long-term rates," explained Shrewsberry. "As a result, we've been adding duration to our balance sheet." To this end, Wells Fargo has increased its holdings of fixed-income securities, and swapped out floating-rate loans with fixed-rate loans.

3. Credit risk is at a generational low
Generally speaking, the last thing bank investors need to be worried about right now is credit risk -- the risk that a bank's loans will default en masse. "We're at a generational low in terms of charge-offs, which means that credit performance can't really improve meaningfully from where we are today; it's already that good," explained Shrewsberry. It necessarily follows that credit metrics can only get worse from here.

This is nothing for investors to be concerned about; it's an expected consequence of the way that banks manage credit risk. Wells Fargo and other banks set aside tens of billions of dollars' worth of loan loss reserves in the wake of the financial crisis. They've since used these reserves to absorb loan losses. With these reserves now largely depleted, however, Wells Fargo will need to start setting aside more money each quarter to account for loans it originates going forward.

4. Broad-based growth
If you look at Wells Fargo's performance last quarter, there's very little to criticize, as the nation's fourth-biggest bank by assets notched improvements across all of its "core building blocks of long-term shareholder value creation." As Shrewsberry and CEO John Stumpf pointed out on the call:

  • Wells Fargo's core loan portfolio grew by $73.4 billion or 9% from a year ago and was up $17.1 billion from second quarter. Its total loans are now at a record $903 billion, finally exceeding the size of its loan portfolio at the time of its 2008 acquisition of Wachovia.
  • It generated $21.9 billion of revenue, up 3% year over year, with growth in both net interest income and noninterest income.
  • Total deposits reached a record $1.2 trillion, up $71.6 billion or 6% from a year ago.
  • The number of primary consumer checking customers, the most important long-term driver of Wells Fargo's top and bottom lines, increased by 5.8%.

5. Acquisition of lending units from General Electric
Finally, Stumpf and Shrewsberry discussed Wells Fargo's latest acquisition, two commercial lending businesses from General Electric. The first is a commercial distribution finance company, an asset-backed lending business that operates between equipment manufacturers and distributors. The second is a vendor finance business that works with equipment manufacturers to finance customer purchases, much like car dealerships that extend loans to car buyers.

Wells Fargo doesn't expect the deal, which adds $32 billion to its balance sheet, to be accretive to earnings this year or next, as it typically takes three years for transaction costs to yield to the incremental revenue. But it nevertheless represents a strong strategic combination, explained Shrewsberry:

This agreement provides us with a unique opportunity to add relationships and earning assets in businesses where GE Capital was an unequivocal market leader and where we either have meaningful experience or, in the case of commercial distribution finance, is a strong complement to our existing capabilities. These businesses have established and deep relationships with their customers, and we're excited about the opportunity to enhance these relationships with the breadth of our product offerings.