Wells Fargo & Company (NYSE:WFC) Q1 2018 Earnings Conference Call Transcript
Apr 13, 2018 • 10:00 am ET
(Operator instructions) Our first question will come from the line of Ken Usdin with Jefferies. Please go ahead.
Thanks a lot. Good morning.
Good morning, Ken.
Good morning, John, Tim. I wanted to ask you guys to talk a little bit more about the outlook for net interest income and specifically, there's a lot of moving parts here with the asset cap impact. You mentioned it's supposed to increase from here, but then there's the benefit to come from the swap roll-off over time and the NII sensitivity improving. So can you help us just to understand like do you have an expectation you can grow NII and what will drive that? Will it be rate more than volume at this point?
I'd say you mentioned the big drivers, the swap roll-off probably will be a negative in 2018 because we're stepping down from the higher fixed rate to what currently is a lower floating rate. The expectation is that if that floating rate moves up through where we're previously capped out on receiving fixed. So that's probably more of a 2019 benefit than a 2018 benefit. With respect to -- the biggest driver, obviously, will be the growth in loans and deposits.
And related to that, what happens with deposit pricing, particularly among retail and small business deposits, will be a big driver. We've been -- we, the industry, have been outperforming previous expectations in this early part of the normalization of short-term rates. And to the extent that there's a meaningful catch-up, which I think people -- because of fair expectation, that will actually probably be a negative adjustment while we go through that until we figure out what the stable beta is for those types of deposits. So I would say those are probably the big drivers.
At the longer end of the curve, we're continually reinvesting what's coming through an amortization and prepayments from a mortgage securities portfolio. And if long range remain in the, call it, sub-280 range, then that won't be much of a driver. If they move up appreciably as the short end comes up, then there's an opportunity to earn more there as well. And one important point that I'd make that I don't think is really well-appreciated, is that a lot of what's been happening on the asset side of our books as we run down some higher-yielding assets on purpose, is that there's an increase in overall credit quality that's coming with a lower spread component.
So even though I mentioned that our loan portfolio has the highest coupon that it's had, with the highest rate that it's had since 2012, that's happening at the same time that the credit quality profile is improving. So it's not quite apples-to-apples when we're thinking about one year's assets versus the next.
And I will just reinforce a couple of themes that John mentioned, that the asset cap really isn't impacting our ability to grow loans. I mean, our folks are out there facing