Wells Fargo & Company

Welcome and thank you for joining the Wells Fargo fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Star 1. If you would like to withdraw your question, press Star 2. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santamisimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement, and presentation deck, are available on our website at wealthmargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K file today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website.

I will now turn the call over to Charlie. Thanks very much, John. Good morning, everyone. I'll make some brief comments about our 2021 results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review fourth quarter results and some of our expectations for 2022 before we take your questions. Let me start with some 2021 highlights. We earned $21.5 billion or $4.95 per common share in 2021. Expenses declined 7% from a year ago, reflecting lower operating losses and progress on our efficiency initiatives. Revenue increased 6% as we benefited from strong gains from equity securities and gain from sales of our student lending, asset management, and corporate trust businesses. We also have broad-based revenue growth across our businesses, including home lending, consumer and small business banking, credit card, auto, commercial real estate, banking, and wealth and investment management. Credit quality improved significantly as the economy improved and our customers had high levels of liquidity. Our loan charge-off ratio declined from 35 basis points in 2020 to 18 basis points in 2021, and our allowance for credit losses declined by $5.7 billion. Deposits increased $78 billion, or 6%, and loans grew 1%, with declines in the first half of the year offset by a 5% increase in the second half. We also returned a significant amount of capital to our shareholders, including increasing our common stock dividend from 10 cents per share to 20 cents per share in the third quarter, and we repurchased $14.5 billion of common stock, predominantly in the second half of the year, after the return to the SCB framework. Our results in the fourth quarter also showed continued broad-based momentum. We earned $5.8 billion, or $1.38 per common share. We grew loans by $32.6 billion, or 4%, and deposits by $12.1 billion, or 1% from the third quarter. Expenses declined 1% from the third quarter and 11% from a year ago, and we generated positive operating leverage over both periods. Most importantly, we continued to prioritize our risk and control work. And the strong economy continues to positively impact our customers and our results. Consumers continue to have more liquidity than prior to the pandemic, Though we do see this declining, as the median balances today are 27% higher than pre-pandemic levels, but are down 10% from the third quarter. Consumer credit card spend also continued to be strong, up 28% from the fourth quarter 2020, and up 27% from the fourth quarter 2019. Holiday sales were strong, with spending up 31%, the three weeks leading up to Thanksgiving, and that momentum continued post-Thanksgiving. All spending categories were up in the fourth quarter compared to a year ago, with the largest increases in travel, fuel, entertainment, and dining. Weekly debit card spend during the fourth quarter was up every week compared to both 2019 and 2020. This increase was driven by higher transactions, but also higher spend per transaction, reflecting inflationary impacts and increased spending in higher cost categories such as travel. We are watching the impact from Omicron on consumer spending. And while there is some softening in restaurant travel and entertainment in recent weeks, overall spending remains strong in the first week of January with credit card up 26% and debit card up 29% versus the same week in 2020. And we saw strong loan growth from the third quarter across our commercial businesses, including commercial real estate, asset-based lending, middle market banking, and our markets and banking businesses. So I've been at the company for a little over two years now, and I thought I'd spend a few minutes giving you my thoughts on our progress. Overall, I feel great about what we've accomplished and continue to feel energized about the opportunities in front of us. I think about this along several dimensions, talent, leadership, and culture, risk regulatory and control, financial and strategic progress, and our work on ESG and broader reputational issues. I've spoken of the substantial talent changes we've made, but just to remind you, 11 of 18 members are new to the operating committee and two are new to their job since I arrived. Additionally, well over half of the senior-most people at our company, meaning those who are one level below the operating committee, are new to their roles, and a significant proportion of them were hired from outside the company. This is a dramatic change, in our leadership, and with it, we've changed how we run the company, how we prioritize our work, and how we view our responsibility broadly. We began a process two years ago to change the culture and priorities of the company, and the most significant part of this prioritization was the building and implementation of an effective risk and control framework across the company. Our approach and our progress are entirely different than they were when I arrived. We are laser focused on meeting our own expectations and those of our regulators. We have clear plans in place and clear owners for every regulatory deliverable we have. We have detailed reporting on how we're progressing on those plans. We review this reporting every single week at the operating committee level. The detailed involvement of the operating committee members is very different from what was happening before I arrived. Our ability to identify issues has also improved from two years ago. I continue to believe that we're making significant progress, and this is based on what we see in our internal reporting. It doesn't mean that we're perfect. The fact that we have multiple consent orders makes it complex. It takes time to build all of our capabilities, and it's certainly in the regulator's purview to look at issues that have been outstanding for a long time, like the OCC did in the third quarter. But I would point you to the comment made by the OCC in their recent consent order. that highlights that we have taken steps to comply with their 2018 order and we're committed to addressing remaining requirements. I remain confident in our ability to continue to close the remaining gaps over the next several years. Having said that, it continues to be the case that we're likely to have setbacks along the way, but that doesn't change the fact that we believe that the quality of the talent we now have and the processes we now have in place will enable us to get the work done. We're making progress increasing the earnings power of the company and have also begun to invest in a more holistic and aggressive way to drive stronger organic growth in all of our businesses. We are just now beginning to bring things to market that are differentiated and the number of significant opportunities are exciting. We're continuing to track to the financial return goals we've discussed. First, achieve a sustainable 10% ROTCE subject to the same assumptions we've discussed in the past and then target 15%. We continue to believe that we will achieve the 10% during one of the quarters in 2022 on an annualized basis. To achieve this, we're aggressively focused on driving efficiencies and we're seeing net expense reductions after significant investments in our control build-out and our businesses. We are aggressively returning excess capital to shareholders now that we've returned to the SCB framework. We continue to manage credit well and we're seeing early benefits from higher interest rates, growing loan balances, and higher fees in certain businesses. We're doing this while devoting significant resources to building our franchise. We have fallen behind in providing competitive digital capabilities for our clients. This is changing. In the fourth quarter, we announced a rebuilt mobile banking experience for consumer and small business customers that is set to begin rolling out this quarter. It has a new, modern look and feel and a simpler user experience that will help our customers more easily accomplish their banking needs. This platform is necessary to drive significantly higher digital adoption from our customers. Even with our existing capabilities, in the fourth quarter, our customers logged in 1.6 billion times using a mobile device, up 7% year over year. Teletransactions remained more than 30% lower than pre-pandemic levels. We also announced that later this year we'll be adding an all-new virtual assistant, Fargo, to the app. Customers will be able to get answers to their everyday banking questions, ask Fargo to complete the task for them, and Fargo will also provide personalized insights and recommendations to help customers better manage their finances. We will also be introducing the first phase of the redesign of our public website early this year. In addition, we're beginning to become more active on the wholesale side. For example, we announced that we're collaborating with HSBC to optimize the settlement of foreign exchange transactions through a blockchain-based solution, which will reduce settlement risks and associated costs. We're also approaching payments and credit cards very differently. We believe credit cards will remain important as both a credit and as a payment vehicle. We were also doing additional work around non-card payments and believe we must succeed here via key financial services provider. Two years ago, our products and capabilities supporting those products were not as competitive as necessary. In 2021, we launched two products, including Active Cash, which we believe is the best cashback product in the marketplace, and Reflect, which rewards customers for on-time payments. We improved the core experience, including investing in advertising, simplifying our digital application, and enhancing our underwriting. These efforts have driven an increase in digital card activation, paperless statements, and enrollment alerts. We are opening approximately twice as many accounts as we were prelaunch of these products, and importantly, we're not competing on credit. In fact, the quality of applications and the accounts we're booking continues to be better than what we were booking historically. Away from CARD, we're beginning to invest in our broader digital payments across the platform, enhancing our capabilities, increasing limits, and broadly reducing the friction in moving money. As evidence, Zelle momentum continued to accelerate with Zelle transactions up 46% from a year ago. We are also taking a very different approach in that we believe that for us to be successful, we must consider a broader set of stakeholders in our decisions and actions. This is not in lieu of shareholders. In fact, we believe it will enhance our returns to shareholders over time. We have taken significant efforts to support small businesses since the beginning of the pandemic and recently fulfilled our roughly $420 million Open for Business Fund commitment to assist small businesses in recovering from the pandemic. by working with not-for-profits to offer capital, technical assistance, and long-term programs. The fund was created by donating the gross processing fees we made from administering the Paycheck Protection Program loans in 2020. Additionally, we made significant climate commitments in 2021. In the fourth quarter, we joined the Net Zero Banking Alliance, an industry-led leadership group designed to foster collaboration and support banks in aligning their financing with the goal of achieving net zero greenhouse gas emissions. Climate change is one of the most urgent environmental and social issues of our time. And last year, we announced our goal to achieve net zero greenhouse gas emissions, including emissions attributable to financing by 2050. We expect to announce our first finance emission targets for the oil and gas and power sectors later this year. We made our first solar plus battery storage tax equity commitment. Once it is operational, it will be one of the largest solar and battery projects in the company. Last year, we surpassed $13.3 billion in cumulative tax equity investments in nearly 600 wind, solar, and fuel cell transactions. These investments have provided 13% of all utility-scale wind and solar capacity in the U.S. over the past 16 years. We continue to be one of the top investors in affordable multifamily housing in the U.S., as well as an active lender for affordable rental housing developments. Additionally, we're committed to expanding affordable homeownership. For example, in the fourth quarter, we committed to invest $5 million through the Neighborhood Lift Program to help more than 300 low- and moderate-income residents in Houston with home down payment assistance. We've also supported our employees, and in December, we announced that as part of our commitment to providing comprehensive benefits and competitive pay, we're increasing U.S. minimum pay hourly pay levels to a range of $18 to $22, effective at the end of this month. Just this week, we announced new efforts that will roll out over the course of 2022 to help our consumer customers avoid overdraft fees and cover short-term cash needs, building on other changes we've made over the last several years. The changes we announced include the elimination of transfer fees for customers enrolled in overdraft protection, the elimination of non-sufficient fund fees, early access to direct deposit by providing customer access to funds up to two days before their scheduled deposit, a 24-hour grace period for customers that overdraw their account to cover the balance before incurring an overdraft fee, and a new short-term credit product for customers to meet personal financial needs. This builds on existing features we already have in place, including clear access banking, our no overdraft checking account that we launched in September 2020, and we now have over 1.1 million outstanding customer accounts. Overdraft Rewind, which was introduced in 2017, which automatically rewinds overdraft fees when a covering direct deposit is received by the next morning, which will be replaced by our expanded 24-hour grace period. Balance Alerts that help customers avoid overdrafts by sending more than 1.3 million alerts every day. Putting all of these changes in perspective, these fees are down significantly since the financial crisis. We have alternatives for both customers that do not want to overdraft and those that do. This is a competitive marketplace. We continue to review our capabilities and pricing with the goal of providing value to our customers. And let me make a few comments now as we look forward. While there is a risk with the continued growth of the Omicron variant, or potentially other variants later this year, I expect to see continued strong economic trends in 2022. Consumer's financial condition remains strong. Modest debt growth, strong asset appreciation, and higher deposit balances have left household balance sheets in excellent condition, which should help drive continued strong consumer spending. Corporate America has demonstrated the ability to adapt to the ever-changing pandemic conditions. Inventories remained unusually lean as businesses adopted a defensive posture and supply chains have been disrupted. This is expected to result in substantial gains in industrial production as they continue to restock. We're beginning to see loan growth and expect this to continue. In a moment, Mike will provide our thoughts on net interest income and expenses for 2022. I commented earlier that we remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we've discussed in the past, on a run rate basis at some point this year, and that once we've achieved this goal, we'll discuss our plan to continue to increase returns. But at a high level, we continue to believe we can further improve our returns through a combination of factors, including a modest increase in interest rates or further steepening of the curve, ongoing progress on incremental efficiency initiatives, a small impact from returns on growth-related investments in our businesses, continued execution on our risk and regulatory control framework, and moderate balance sheet growth once the asset cap is lifted. It's important to note we currently have the ability to grow loans even under the asset cap. The changes we've made to the company and continued strong economic growth prospects make us feel good about how we're positioned entering 2022. We also remain cognizant that we still have a multi-year effort to satisfy our regulatory requirements with setbacks likely to continue along the way, and we continue our work to put exposures related to our historical practices behind us. As we look forward, we will continue to be aggressive in driving progress and improvement in our performance, embrace our responsibility to our customers and communities, and I remain incredibly optimistic about our future. I want to conclude by thanking our employees who continue to serve our customers through another challenging year. I appreciate their hard work and their resiliency while we made progress on making Wells Fargo better. I look forward to all that we accomplish in the year ahead.