Dear Shareholders,
I’m proud to report that Wells Fargo continued to make progress on our priorities in 2022. Our underlying financial performance is improving, we are moving forward on our risk, control and regulatory agenda, we are focusing on businesses where we can generate appropriate risk-adjusted returns, we continue to strengthen the leadership team, and we are executing on our strategic objectives. While we have made progress, our work is not complete and we remain focused on successful and timely execution of our multi-year journey to complete our risk and control work and to move forward with our businesses.
Stronger financial performance
Our financial performance benefitted as we continued to drive improved efficiency, and it was positively impacted by both rising rates and a benign credit environment.
In 2022, Wells Fargo generated $13.2 billion in net income, or $3.17 per common share. Our results were significantly impacted by $7 billion of operating losses, primarily related to putting historical issues behind us, including litigation, regulatory matters, and customer remediations. However, our performance excluding those items was solid and demonstrates the continued progress we are making to improve returns.
Our revenue decreased 6% from the previous year. The higher rate environment and good loan growth drove strong growth in net interest income, which was up 26% from a year ago. However, this growth was more than offset by lower net gains from equity securities, mortgage banking, and investment advisory and other asset-based fees reflecting market conditions, as well as the lost revenue related to businesses we sold in 2021.
Expenses increased 6% from a year ago, reflecting higher operating losses primarily related to putting historical matters behind us, as noted above. Excluding operating losses, noninterest expense declined from a year ago, reflecting continued progress on our efficiency initiatives and the impact from business sales. We achieved these efficiency gains while we made continued investments in our risk and control infrastructure and in strategic initiatives across our businesses, and in the face of continued inflationary pressures.
Credit quality remained strong, but, as expected, losses started to slowly increase in the second half of the year off their historical lows. Our net charge-off rate declined from 18 basis points in 2021 to 17 basis points in 2022, and our allowance for credit losses declined by $75 million in 2022, as our reserve release in the first quarter was slightly larger than the reserve builds we had in the last three quarters of the year.
Loans outstanding increased by 7% from one year ago, with growth in both our consumer and commercial portfolios. Consumer Banking and Lending grew 4%, driven by growth in residential mortgage and credit card, which offset a decline in auto loans. Both Commercial Banking and Corporate and Investment Banking had strong loan growth, with commercial loans up 9% from a year ago, driven by growth across all asset classes. Average deposits in 2022 decreased 1% to $1.42 trillion, as higher market rates spurred customers to look for higher yielding alternatives, and consumers continued to spend savings that built up during the pandemic.
Our capital levels remained well above our required regulatory minimums plus buffers. We increased our quarterly common stock dividend in the first quarter of 2022 from $0.20 per share to $0.25 per share and then to $0.30 in the third quarter of 2022. While we did not repurchase any common stock in the last three quarters of 2022, we have repurchased shares in the first quarter of 2023.
Our return on equity was 7.5% and our return on tangible common equity (ROTCE) was 9.0%. Both of these ratios were impacted by the operating losses I highlighted earlier.
In my shareholder letter over the past two years, I have discussed our path to higher returns. Since 2020, we have executed on a number of important items to improve our returns, including returning $16 billion to shareholders through net common stock repurchases, increasing our common stock dividend from $0.10 per share to $0.30 per share, and delivering approximately $7.5 billion of gross expense saves. Based on these actions and others that are in flight, we believe we have a clear line of sight to a sustainable ROTCE of approximately 15% in the medium term. In order to achieve that, we need to continue to optimize our capital, including returning capital to shareholders and redeploying capital to higher returning businesses; execute on efficiency initiatives; and benefit from the investments we are making in our businesses.
We are actively watching the economy
After a period of strong economic growth and low unemployment, the Federal Reserve has been increasing interest rates aggressively with a goal of combatting high inflation. Increasing interest rates and a slowing economy have caused headwinds for some of our customers, but our customers have largely remained resilient over the past year, with deposit balances, consumer spending and credit quality still stronger than pre-pandemic levels.
Consumer credit card spend continued to be strong in 2022, with spending up 25% compared with 2021, which reflects the benefit of new Wells Fargo product launches. Almost all spending categories had double-digit spend growth year over year. Consumer debit card spend slowed to 3% growth in 2022 compared to 2021. Growth was driven by ticket size since transaction volume was flat year-over-year, and discretionary spend outpaced non-discretionary spend.
At the same time, we are carefully watching the impact of higher rates and we expect to see deposit balances continue to decrease and credit quality to continue to weaken. For certain cohorts of customers, average deposit balances are below pre-pandemic levels, and we are closely monitoring activity for signs of potential stress. For our borrowers, we are working to limit the risk – both to them and to us – of overextension. We have taken selective actions across our consumer lending businesses to mitigate risks associated with inflation and increased debt leverage. In our auto business, we have adjusted policies to address risk associated with collateral value declines and inflationary pressures on consumers’ ability to pay. In home lending, we have tightened loan-to-value policies nationally and even more so in local markets that have elevated home value risk. Additionally, in our card business, we have tightened our lending policy to focus on applicants who may be exhibiting debt-seeking behavior.
Commercial loans grew 9% in 2022, with most of the growth in the first half of the year. Higher inventory levels contributed to increased working capital needs, which drove higher utilization rates. However, utilization rates stabilized in the second half of the year, and current data is not pointing to additional inventory builds, which indicates most businesses are carefully managing inventory levels amid slowing demand.
We continue to closely monitor the most pandemic-impacted sectors and inflation-sensitive industries in our commercial portfolio. This includes updating underwriting guidelines to include interest-rate sensitivity to leveraged loans, analyzing supply chain issues, inflationary pressures, and the impact of a potential recession, and making timely updates to our watchlist.
The Commercial Real Estate office market is showing signs of weakness due to lower demand, driving higher vacancy rates and deteriorating operating performance. Challenging economic and capital market conditions are also buffeting the office market, and while we haven’t seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure. Specifically, we have issued underwriting guidance for navigating current conditions, including limited tolerance for new credit policy exceptions, increasing minimum debt yield thresholds, and stress testing and expansion of the watchlist process, including additional emphasis on the office market.
Looking ahead to the remainder of 2023, we are prepared for a range of scenarios. As a large lender to both consumers and businesses in the United States, we have significant credit exposure across our businesses, and as the Federal Reserve continues to take action to reduce inflation, we will continue to monitor both the markets and our own customer data and will react accordingly. If our view of economic stress deteriorates from our view at the end of 2022, we will likely add to credit loss reserves during 2023.
Moving forward on our risk, control, and regulatory agenda
We continue to move forward with the foundational work of building out a risk and control framework appropriate for our company. This multi-year journey continues to be about setting clear priorities, cultural change, and operational execution. I have been clear and consistently reinforce that this foundational work is our top priority. This should always be the case for a bank such as ours, but this has not always been the case, so reinforcement is necessary. We remain confident in our ability to complete this work and build appropriate risk, control, and operational excellence into our culture.
The Acting Comptroller of the Currency gave an important speech in January addressing the potential difficulties of managing a large bank. Given that the OCC is a key supervisor of ours, we take the speech seriously and are focused on its key messages.
The speech focused on the view that there are limits to an organization’s manageability based on size and, if so, that the most efficient and effective way to fix this is to compel its simplification. I am not in a position to agree or disagree with this premise, but I am in a position to have the strong point of view that Wells Fargo is not too big or complex to manage. Our shortcomings are not structural, but they are the result of historically ineffective management and the lack of proper prioritization of building out an appropriate risk and control environment that will ultimately take multiple years to correct.
We are large but are far less complex than many with whom we compete. In fact, we have more similarities with regional banks than other global systemically important banks (GSIBs), and strong and effective risk management processes should scale to a company of our size. In addition, we have acted and will continue to act on our own to simplify our company and reduce operational complexity and risk, as I detail in the section later in this letter entitled “Executing on Strategic Objectives.”
Operating at a broad scale but with less complexity than peers, we are primarily a US domestic bank and we do not have the many complexities that running large-scale international businesses bring. Our legal entity structure, extent of international regulatory oversight and physical footprint are far simpler than many of our competitors. Approximately 90% of our revenues come from U.S. clients or activities of non-U.S. clients in the U.S. Our businesses outside the U.S. primarily support our U.S. customer base. We are very happy with our existing footprint and are not looking beyond for growth opportunities.
Our products are not complex compared with those offered by other banks and are similar to those offered by smaller institutions. We predominantly provide the same products and services as regional and smaller, more local banks. We take deposits, provide financing, move money, and provide financial advice for our customers. Our trading activities and the size of our market risk are relatively small compared to other large GSIBs.
Scale in each of our businesses should not make us more complex. Our distribution methods are similar to smaller institutions. We manage a branch network, have relationship managers across our markets, market through the internet, traditional advertising, direct mail, and word of mouth, and we rely on our local reputation. The controls necessary to manage a network of 4,000+ branches are similar to those necessary to manage a smaller branch network. The same is true for managing relationship managers, marketing, and protecting our reputation. Senior management should be involved at a detailed level, but all institutions should have and rely on defined control frameworks in place that are effective at risk management, regardless of individuals in a seat. These frameworks can effectively scale to a bank of our size.
Our customers benefit from our size and reach. Wells Fargo has nearly 4,600 retail bank branches, with a presence in 25 of the largest 30 markets in the U.S. A Wells Fargo branch or ATM is within 2 miles of over half of U.S. Census households and small businesses in our footprint. The range of banking services we provide helps us build full relationships with individuals and companies, allowing us to see a full picture of their personal, family, and/or business financial needs, and to meet these needs. We have the ability to invest in technology to make it faster, safer, and more transparent for our customers to handle their banking needs. In addition, our resources allow us to innovate quickly, developing new products, services, and digitized experiences to meet constantly changing consumer and business expectations. These capabilities, along with our size and reach, are of tangible benefit to consumers across the country, whether they live in large cities or more rural areas, and also to the U.S. economy as a whole.
Managing the company with significantly heightened discipline, we agree that there are also traits that management should avoid as they grow. These signs are familiar to us, as we identified them as historical behaviors at Wells Fargo when I arrived. We viewed them then – as we do now – as unacceptable. Our approach today is dramatically different than it was at Wells Fargo in the past and we will continue to work so it becomes part of our culture at all levels in the organization.
Don’t hide behind materiality – As a large institution we know we cannot let our size hide potential issues. We must think about raw numbers, not just percentages which are indexed to a large customer base, asset base, or capital base. We have built functions and processes to review customer complaints, employee allegations, and issues raised from outside the company, and aim to use them to identify issues and themes so we can address them and make changes as required.
Don’t assume incidents are isolated – One of the advantages large institutions have is the amount of data and information we see and have, but we must use it expeditiously. Individual incidents provide data points which can help us learn and react, and we should treat each as such. We strive to make data-driven decisions and to explore whether incidents that can appear isolated can in fact have broader application elsewhere in the company.
Identify weaknesses ourselves and address them quickly – The Acting Comptroller stated that “the business of banking is operationally intensive. Even at banks with strong teams and robust risk management systems and controls, mistakes and problems can arise. Well-managed banks identify such problems early and often, address them quickly, and take steps to prevent their recurrence.” We agree completely. Many of the historical issues we continue to work through were identified by regulators, not by us. We are changing this, emphasizing our responsibility to self-identify more issues and address them with a heightened sense of urgency. As we implement our risk and control framework, we will likely identify more issues and move with haste to implement compensating and ultimately permanent controls. Our risk and control framework is not a project, but an ongoing set of actions, and it will be part of our culture.
Hubris, contempt, and indifference are unacceptable and dangerous traits – We cannot believe that we know better than others and need to react with seriousness and urgency when issues are raised – whether from employees, customers, regulators, or others outside the company. Every issue raised has the opportunity to be a learning moment and we should also proactively look at our competitors to learn as well.
Integration of mergers is more than a short-term technology conversion – While we have not had a merger-related systems integration in my time at Wells Fargo, we agree that “simply stitch[ing]…systems together” can cause a proliferation of issues. It is critical to merge and simplify platforms, whether merger-related or as part of a customer service strategy, as the reduced complexity in the number of platforms should make it easier to properly serve customers. For example, asking customer-service representatives to learn multiple systems to provide the same information creates more operational risk and the possibility of a poor customer experience.
But these platform mergers should be the beginning of integration, not the end. This is true looking both from our perspective and the customer perspective. Customers think of us as one company, not as separate relationships with individual lines of business. They want to see their information seamlessly and be able to transact with us easily across all of their products. Unless we integrate our platforms, we will either not appear as one company to the customer, or we will create workarounds to try and accomplish this, which creates unneeded operational risk. A major competitive advantage of Wells Fargo is serving our customers across a broad range of products, but we can only do so effectively with common platforms.
The same is true of data platforms. Pulling customer data from multiple platforms is operationally complex and expensive. Common data platforms across our company are critical. We rely on this for financial reporting, regulatory reporting, risk reporting, and the ability to assess a customer relationship holistically.
And finally, it is a mistake to lose sight of aged platforms, to not invest in improving them and to not move to new ones. New software and hardware solutions make it easier to reduce complexity and properly serve customers, and when these solutions are part of a program with a clear target state, they should significantly reduce operational complexity.
Recognizing this, Wells Fargo is implementing a modern technology stack that is cloud-native and therefore more elastic and resilient. We are applying this stack for the various product domains that we are modernizing across our businesses. Examples include a more modern digital desktop for our financial advisors in Wealth and Investment Management, our value-at-risk models in Corporate and Investment Banking, and our payment platforms across businesses. These modernization initiatives are guided top-down by a product and platform architecture that sets clear boundaries and expectations for teams. In addition to this, the hosting of our platforms is more and more migrating to a combination of private and public cloud, powered by our partnerships with Google and Microsoft. This also is leading to faster innovation by plugging in innovative services provided by these cloud providers into our platforms.
In parallel to these modernization efforts, we are also enhancing the way we deliver software and the developer experience. We are implementing new cloud-native tool-chains that allow our developers to have the experience that they deserve: on-demand, instant, elastic and with embedded automated controls.
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Read the whole letter here.
