Wells Fargo & Company/Mn Q4 FY2021 Earnings Call

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 Santomassimo, 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 wellsfargo.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 filed 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, and 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 gains 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 significant amounts of capital to our shareholders, including increasing our common stock dividend from $0.10 per share to $0.20 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 continued to have more liquidity than prior to the pandemic, though we do see this decline 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 of 2020 and up 27% from the fourth quarter of 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 remained 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're 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. Teller transactions 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 credit and as a payment vehicle. We were also doing additional work around non-card payments and believe we must succeed here to be a 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 cash-backed 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 for 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 around 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 financed 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 NeighborhoodLIFT 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 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 nonsufficient 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, automatically rewinds overdraft fees when a covering direct deposit is received by the next morning, which has been replaced by our expanded 24-hour grace period. Balance alerts that help customers avoid overdraft 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. Consumers' 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 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 multiyear 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. I will now turn the call over to Mike.

Great. Thanks, Charlie, and good morning, everybody. Charlie summarized how we helped our customers, communities and employees last year on Slides 2 and 3, so I'm going to start with our fourth quarter financial results on Slide 4. Net income for the quarter was $5.8 billion or $1.38 per common share. Our fourth quarter results included a $943 million net gain on the sales of our Corporate Trust Services business and Wells Fargo Asset Management. There could be future gains related to these sales due to post-closing adjustments and earn-out provisions; an $875 million decrease in allowance for credit losses as credit trends continue to be strong; and a $260 million impairment of certain leased railcars due to changes in demand for these cars. We also had $2.5 billion or $1.9 billion after non-controlling interest of equity gains, primarily from our affiliated venture capital and private equity businesses, the third consecutive quarter of strong returns in these businesses. Our effective income tax rate in the fourth quarter was approximately 23%, including the discrete impacts related to business divestitures. Our CET1 ratio declined to 11.4% in the fourth quarter, reflecting share repurchases and an increase in risk-weighted assets primarily from loan growth in the quarter. We repurchased $7 billion of common stock in the fourth quarter, partially offset by $1.4 billion of new issuances, predominantly for the annual matching contribution for our 401(k) plans. As a reminder, the regulatory minimum for our CET1 ratio will be 9.1% in the first quarter of 2022, reflecting a lower G-SIB capital surcharge. Turning to Credit Quality on Slide 6. Our net charge-off ratio was 19 basis points in the fourth quarter. Commercial credit performance continued to be strong with net loan charge-offs declining $10 million from the third quarter to 2 basis points. Despite the challenges created by the pandemic, the commercial real estate portfolio has continued to perform well. Commercial real estate valuations and investment activity has rebounded off their lows across all property types, although there is still some risk in office and select hotel and retail segments. Consumer credit performance also remained strong with higher collateral values for homes and autos and consumer cash reserves remain above pre-pandemic levels. Consumer net charge-offs of $393 million increased $172 million from the third quarter. $152 million of the increase is related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans. Nonperforming assets increased $145 million or 2% from the third quarter, driven by an increase in residential mortgage nonaccruals, primarily resulting from certain customers exiting COVID-related accommodation programs. Loans that were modified in 2021 upon exiting forbearance are reported as nonaccrual until they perform for a period of time. Overall, early performance of loans that have exited forbearance have been aligned with our expectations. After increasing during the first four quarters of the pandemic, commercial nonperforming assets have declined for four consecutive quarters, and we're back to pre-pandemic levels in the fourth quarter. Our allowance level at the end of the fourth quarter reflected continued strong credit performance, the ongoing economic recovery and the uncertainties that still remain. If the economic recovery continues, we would expect to have additional reserve releases. On Slide 7, we highlight loans and deposits. Average loans grew 2% from the third quarter with growth in both our commercial and consumer portfolios. We had strong growth late in the quarter and period-end loans grew $32.6 billion or 4% from the third quarter with broad-based growth across most of our commercial and consumer portfolios. I'll highlight the specific growth geographies when discussing business segment results. Average deposits increased $89.9 billion or 7% from a year ago with growth in our consumer businesses and commercial banking, partially offset by continued declines in corporate, investment banking and in corporate treasury, reflecting targeted actions to manage under the asset cap. Turning to Net Interest Income on Slide 8. A year ago, we provided our expectation for 2021 net interest income to be flat to down 4% from the originally reported annualized fourth quarter 2020 level, and we ended up being down 3% for the full year. Fourth quarter net interest income was down $93 million or 1% from a year ago and grew $353 million or 4% from the third quarter. The increase from the third quarter was driven by higher loan balances, including higher interest income from loans purchased from securitization pools or EPBOs. We also benefited from higher trading assets and a favorable funding mix. In the fourth quarter, we had $318 million of interest income associated with EPBOs, and at year-end, we had a total of $17.3 billion of these loans, down from $34.8 billion highlighted last quarter; we expect these balances to decline substantially by the end of this year. We also had $130 million of interest income in the fourth quarter from Paycheck Protection Program loans or PPP loans, and our outstanding balance declined to $2.4 billion at year-end. We've reflected the headwind from these portfolios running off in our 2022 net interest income waterfall that I will review later on the call. The net interest margin increased 8 basis points from the third quarter, 3 basis points of which was due to higher interest income from EPBOs. Now turning to Expenses on Slide 9. Noninterest expense declined 11% from a year ago. The decrease reflected progress we made on our efficiency initiatives, including reductions in personnel costs, consultant spend and occupancy expense. I will provide specific examples of the progress we made in our efficiency initiatives in 2021 later on the call before updating you on our expense expectations for 2022. We also had lower restructuring charges and operating losses in the fourth quarter compared with a year ago. Fourth quarter expenses included one month or approximately $100 million of operating expenses from our Corporate Trust Services business and Wells Fargo Asset Management prior to their sales on November 1. Now turning to our business segments starting with Consumer Banking and Lending on Slide 10. Consumer and Small Business Banking revenue increased 4% from a year ago, primarily due to higher deposit-related fees as fourth quarter 2020 included some COVID-related fee waivers. Fourth quarter 2021 also reflected an increase in consumer activity, including higher debit card transactions compared with a year ago and the benefit of strong deposit growth was largely offset by lower spreads. Charlie highlighted the enhancements and changes we're making to help our customers avoid overdraft fees. The impact from the fees that will be reduced, including the elimination of nonsufficient fund or NSF fees as well as overdraft protection transfer fees, is estimated to be approximately $700 million annually. Also, we expect that they may be partially offset by other fees due to higher levels of activity as well as the expiration of various fee-related waivers that were in place in 2021. In terms of new features to be rolled out in the latter part of the year, including a 24-hour grace period for overdrafts and a new short-term loan product, we will have to observe how customers respond. Home lending revenue declined 8% from a year ago, primarily due to lower mortgage banking income, driven by lower gain on sale margins and origination volumes. Even before the recent rate back up, we started to see a drop in application volume in December, and we expect originations to decline in 2022, which will put pressure on margins as the industry adapts to the lower volume. Credit card revenue was up 3% from a year ago, driven by higher point-of-sale volume, partially offset by higher rewards costs, including promotional offers on our new Active Cash Card. Auto revenue increased 17% from a year ago and higher loan balances with the average balances up $6.8 billion. Turning to some key business drivers on Slide 11. Our mortgage originations declined 7% from the third quarter. We expect our first quarter originations to continue to decline due to lower refinance activity and the typical seasonal slowdown in the purchase market. We increased our nonconforming originations in the fourth quarter and have grown our nonconforming portfolio for seven consecutive months, reflecting the improvements in our capabilities as well as the reintroduction of cash-out refinancing late in the first quarter of 2021. Turning to Auto. Limited vehicle inventories continued to constrain industry new car sales. However, we had our third consecutive quarter of record originations with volume up 77% from a year ago, with the majority of our originations coming from used cars. Originations also benefited from the enhancements we continue to make in our capabilities. Importantly, we are maintaining our underwriting standards and continue to be cautious about the increase in vehicle prices over the last year or so. Turning to Debit Card. Transactions were relatively stable from the third quarter and up 10% from a year ago with increases across nearly all categories. Credit card point of sale purchase volume continued to be strong, was up 28% from a year ago and 11% from the third quarter. While payment rates remain elevated, balances grew 5% from a year ago due to strong purchase volume and the launch of new products. New credit card accounts more than doubled from a year ago, driven by our new Active Cash Card, and we're pleased by the quality of the accounts we've been attracting. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue increased 2% from a year ago. Results included higher deposit balances and modestly higher investment banking fees, partially offset by the impact of lower interest rates. Asset-based lending and leasing revenue increased 1% from a year ago, driven by higher net gains from equity securities and higher revenue from renewable energy investments, partially offset by lower loan balances. Noninterest expense declined 10% from a year ago, primarily driven by lower personnel and consulting expense due to the efficiency initiatives as well as lower lease expense. Loan balances started to increase late in the third quarter and now have grown for four consecutive months with growth accelerating in December. As with other portfolios, we are adhering to the same credit risk appetite. Increases in the Middle Market Banking were driven by growth from our larger clients, a modest uptick in revolver utilization and strong seasonal borrowing. Growth in asset-based lending and leasing was driven by new client wins as well as increased levels from higher prices and some increases in inventory levels. Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 17% from a year ago. Investment Banking had a strong quarter, with higher debt origination and advisory fees. Banking results also benefited from higher loan balances and capital markets results in stronger commercial real estate financing activity. Revenue grew 8% from a year ago, driven by higher loan balances and capital markets results in stronger commercial real estate financing activity. Loan originations returned to pre-pandemic levels, and we had a healthy pipeline as we started the new year. Markets revenue was relatively stable from a year ago. It was down 14% from the third quarter, primarily due to lower trading activity in spread products and equity derivatives. Average deposits in Corporate and Investment Banking were down $23.7 billion from a year ago, driven by actions taken across all lines of business to manage under the asset cap. Average loans increased from both the third quarter and a year ago across all lines of business. On a period-end basis, loans grew every month since June and growth accelerated in December. Wealth and Investment Management on Slide 14. The revenue grew 6% from a year ago as higher asset-based fees and market valuations more than offset a decline in net interest income due to lower interest rates. The 5% increase in expenses from a year ago was primarily driven by higher revenue-related compensation, which was more than offset by higher revenue. This increase was partially offset by lower salaries expense, reflecting progress on efficiency initiatives. Client assets increased from a year ago, primarily driven by higher market valuations. Average deposits were up 7% from a year ago and average loans increased 5% from a year ago, driven by continued momentum in securities-based lending. Slide 15 highlights our Corporate Results. Revenue increased from a year ago, driven by strong results in our affiliated venture capital and private equity businesses and gains on the sales of our Corporate Trust Services business and Wells Fargo Asset Management. These businesses contributed $1.6 billion of revenue in 2021, excluding net gains on sale and $1.5 billion of noninterest expense. We expect approximately $200 million of these expenses associated with them to remain in 2022, with offsetting revenue so it's P&L neutral. We also expect approximately $300 million of corporate overhead expenses related to these businesses to remain in 2022, which we expect to manage down over time. Turning now to our expectations for 2022, starting with Net Interest Income on Slide 16. As the last couple of weeks have demonstrated, it's challenging this early in the year to predict the rate environment, loan demand and other variables that impact net interest income for the full year. But let me highlight the key drivers of our net interest income for 2022. We are assuming the asset cap remains in place throughout 2022, moving left to right on the waterfall. As we have discussed previously, we have a headwind this year from the runoff of PPP and EPBO loans. However, our current outlook is for average loan balances to grow low to mid-single digits from the fourth quarter of 2021 to the fourth quarter of 2022, along with other balance sheet mix changes, this is expected to more than offset that headwind. This net result would increase net interest income approximately 3% in 2022 from the $35.8 billion we generated in 2021. Moving to rates and repricing. The recent forward curve includes approximately 325 basis points of rate hikes this year beginning in May. Assuming these were to play out, net interest income has the potential to grow up to an additional 5%, resulting in approximately 8% net interest income growth in 2022 versus 2021. That said, the implied forward curve has changed a lot over the last 1.5 months, so it's very hard to forecast with any certainty. Another way to view our asset sensitivity is from the disclosure we provided in our third quarter 10-Q filing. It showed that the estimated impact of an instantaneous 50 basis points increase in short-term rates would increase net interest income by approximately $2.7 billion over the next 12 months. Ultimately, the amount of net interest income we earn in 2022 will depend on a variety of factors, including the absolute level of interest rates, the shape of the yield curve, loan demand and cash redeployment. Now turning to Expenses on Slide 17. We made progress last year on our efficiency initiatives and we continue to identify new opportunities. Our portfolio of initiatives that includes realized and identified potential gross saves has grown from approximately $8 billion to $10 billion, and we are continuing to work across the Company. We expect to execute on our remaining identified initiatives over the next two to three years, and we'll continue to invest across our businesses. Importantly, similar to last year, we are excluding from our efficiency initiatives the resources needed to address our risk and control work, and we'll continue to add resources as necessary to complete this important work. We've been reducing expenses across our businesses, but let me highlight a few examples of the progress we made last year. We eliminated management layers and increased bank control with a 20% decrease in managers with low spending control. We completed approximately 270 branch consolidations in 2021, a continuation of the progress we've made the last few years with branches down 11% since 2019. We've also optimized branch locations based on how our customers are using our branches. Within our technology organization, we reduced non-engineering roles by approximately 40%, driven by accelerated adoption of the agile framework. And headcount across the Company declined approximately 6% from a year ago, excluding divested businesses. In addition to reducing the number of branches, we also reduced our office real estate portfolio by approximately 7% and occupancy expense was down 9% compared with a year ago. This year, we expect to continue to realize savings from these initiatives, including an incremental 5% reduction in office real estate. Additionally, the investments we're making in technology should drive improvements in operations, consumer banking, consumer lending, commercial banking. Importantly, these efforts should not only reduce expenses but also improve the customer experience with enhanced fraud detection, more self-service capabilities and faster underwriting decisions. Now turning to our 2022 Expense Outlook on Slide 18. Following the waterfall from left to right, we reported $53.8 billion of noninterest expense in 2021. This was largely in line with our most recent guidance, except for higher operating losses. We had approximately $500 million of expenses in 2021 related to business exits and restructuring charges and the civil money penalty associated with the OCC enforcement action in September. We also had approximately $1 billion of expenses in 2021 from the Wells Fargo Asset Management and our Corporate Trust Services business, which were sold and that will not continue in 2022. So we believe a good starting point for the discussion of 2022 expenses is the $52.3 billion. We are assuming a modest increase in equity markets this year and expect revenue-related expenses to grow by approximately $300 million. This includes expected increases in Wealth and Investment Management and Corporate Investment Banking, partially offset by expected declines in home lending, reflecting lower origination volumes. Higher revenue-related compensation is a good thing, and the associated revenue will more than offset any increase in expenses. We also expect approximately $500 million of wage and benefits-related inflationary increases in 2022 above and beyond the normal level of merit and pay increases, driven by higher personnel expenses, including the minimum wage increase that Charlie highlighted and other compensation changes. Through our efficiency initiatives, we expect to realize approximately $3.3 billion of gross expense reductions from 2022. This reduction is expected to be partially offset by approximately $1.2 billion of incremental investments primarily related to higher personnel expenses in commercial banking, corporate and investment banking and technology as well as increased spending on risk management. We also expect approximately $500 million in increased spending in other areas, including higher FDIC insurance assessments, higher travel and entertainment expenses, which were significantly lower in 2021 due to the pandemic. Accordingly, our full year 2022 expenses are expected to be approximately $51.5 billion, a net reduction of approximately $800 million versus the $52.3 billion. Embedded in our assumptions are approximately $1.3 billion of operating losses for 2022, which is the amount we had in 2021, excluding the $250 million associated with the OCC enforcement action. While we've made significant progress on working through legacy issues, as we've previously disclosed, we still have outstanding litigation and regulatory issues, and related expenses could significantly exceed the levels we had in 2021. We made substantial progress last year in executing our efficiency initiatives, but we still have significant opportunity to get more efficient across the Company. We are focused on achieving net expense reductions while appropriately investing in our businesses. This remains a multiyear process, with the ultimate goal of achieving an efficiency ratio in line with our peers and based on our business mix. We'll now take your questions.

Our first question of the day will come from John McDonald of Autonomous Research. Sir, your line is open.

Mike, I was wondering if you could give us some sense of if the asset cap remains in place, how much capacity do you have to grow loans? Obviously, the H8 data is picking up. It feels like loan growth is getting better for the industry. I just want to make sure that you're invited to that party and you guys can grow loans while staying under the asset cap.

Yes. John, thanks for the question. So just as you know, and I think it's implicit in what you asked, the constraint for us on the asset cap is really on the deposit side. And so that's the part where we're actively taking action to make sure we've got the room we need particularly for our retail clients, and we're continuing to do that. On the loan side, we are not constrained on growth on the loan side, so we still have plenty of room to continue to grow with our clients.

And could you give us some sense, in your NII outlook, what kind of loan growth you're building in and also liquidity deployment assumptions? And how you're thinking about liquidity deployment given where the curve is here?

Yes, sure. Embedded in on Slide 16, we've assumed kind of low to mid-single-digit growth when you compare fourth quarter '21 to fourth quarter '22. And so hopefully, we're optimistic that we'll be able to get there and maybe there's certainly some scenarios where it could grow faster than that, but that's the assumption that we use there. Embedded in that column too on the chart in the loan growth and other balance sheet stuff is some modest redeployment into the securities portfolio; I'd say modest, so sort of low- to mid-single digit increases in the securities portfolio as well. And so, those are the assumptions embedded there. And I think as we look at where the curve is today, we're still being overall pretty prudent and patient, but we are in a very small way beginning to buy some securities in the portfolio.

The next question will come from Ken Usdin of Jefferies. Sir, your line is open.

Mike, you had mentioned that where you did a little bit better last year, $4 billion of gross saves versus what you originally thought at $3.6 billion, and you just commented that you still have a good line of sight as far as efficiency initiatives. Can you help us understand, like $3.3 billion for this year, how you're feeling about that? But more importantly, that line of sight, how far out do you have that? And do you continue to see an ability to take out this type of cost as you go forward even past this year?

Yes. Ken, what we're really trying to do is make sure we embed this in the DNA of how we operate the place, and so that's ultimately what's going to be really important for us over the long run. And I think you're seeing that. The portfolio grew from $8 billion to $10 billion in terms of the initiatives that we've either executed on or in the process of executing. And so, I think you're seeing that progress and growth there. So, you can sort of do the math of what we've accomplished so far, what we've identified for this year and what's left for next year. And I continue to believe that we've got more to do that we haven't sort of built into that portfolio yet. And so, the team continues to work on that every day. As you look at our confidence level on the $3.3 billion that we put into the forecast, we feel good. We've got really good line of sight. And I think given what the team was able to do last year, we have confidence that we'll be able to execute on that.

Let me just add to something that Mike said, which is I'm always a firm believer on these efficiency initiatives, especially in a company like this. Even if you go back over a decade, one of the strengths of this company was never efficiency. It was far more on the revenue side. And so, as we get the efficiencies that we're starting to see, it is like peeling the onion back, where then the next set of opportunities become even clearer. And so, we're ginning up the same process that we did at the beginning of this venture where we came up with the initial $8 billion and said, okay, now what's next in a very methodical way across the Company. So we feel really good about what's in our numbers for next year. And we're going to continue to pursue this. And I think it's, just as you've seen in our numbers, it gives us the ability to spend on our investments and to become more efficient overall as a company. So, I personally don't feel like we're close to done.

Got it. And if I could just ask the other side of that question too, which is that you're doing a little less on incremental investments versus what you did last year, how do you get comfortable that you're doing enough, especially with industry pressures not just inflation but just on the need to continue to, and you mentioned this, Charlie, about all the new things you're rolling out? But how do you land on that number? And how do you get the confidence that it's the right amount that you're reinvesting?

It's a good question. I think we do what most good companies do, which is they sit around tables and they ask everyone to come back with what you want to spend money on and then figure out what you can actually do. I think we've accomplished a tremendous amount on the technology side since Saul Van Beurden, who runs technology for us, was brought in. And I think we're going to try and spend as much as we physically can get done. But I think we're always asking the question of what's next. The different position that we're in versus others is we're still in the ramping-up stage, which I also look at as opportunity because we have moved slower historically investing in some of these areas. And to the extent that we find more efficiency money, it gives us the opportunity to spend more broadly. But I do feel we as a company, we as a management team do feel good about what we're investing next year relative to where we stand as a company.

The next question comes from Betsy Graseck of Morgan Stanley. Your line is open.

I had two questions. One was on the overdraft fees that you mentioned. I think you said that it was like a $700 million impact, but we look at the regulatory filings and the regulatory filings show a higher level of overdraft fee run rate like in the $1 billion kind of range. So I'm just trying to understand why would it be only $700 million?

Well, first of all, we're not eliminating overdraft fees. We're making a series of changes that we think makes sense for the consumer. We have an account that doesn't allow overdraft but we have an account that does allow overdraft. And so we think it's more consumer-friendly than it was in the past, but we do continue to believe that there are a substantial number of customers out there that want us to pay overdraft on their behalf after they've worked through a bunch of the buffers and benefits we're giving them, and they're willing to pay for that.

Got it, okay. So the NSF fees will be eliminated but you'll have a different product that comes in?

NSF fees will be eliminated entirely. Our overdraft fee will stay, but we've added a series of things such as we'll give you availability on direct deposits two days in advance. We'll give you an additional 24 hours after you otherwise would have been charged for an overdraft to cure it. So our overdraft fees will go down, but we're still going to be providing the overdraft product and we'll still be charging for it.

Okay. All right. So I was using too much jargon and that's my bad. All right. And then the second question is on the loan growth that you were talking about earlier in the prepared remarks and with John. LIBOR is no longer able to be used as a reference rate for C&I or CRE or any loan product starting Jan 1. How does that impact you? Is that something that could be a benefit to your loan growth in C&I and CRE? And how are you thinking about shifting the reference rate that you're going to be using with your clients?

We've started that shift already as you would imagine, and we stopped offering new LIBOR-based loan products at some point in the fourth quarter. On the wholesale side, we've done something like 4,500 new facilities based on SOFR, with the large majority using a daily simple rate. So if SOFR moves, that will adjust. Clients are starting to get used to it and start to use it. Complementing what we're doing on the wholesale side, we stopped offering LIBOR-based ARMs last year. We have a couple of tens of thousands of ARMs on the books using SOFR as well. So I think it's starting to take hold.

I was just thinking like the capital markets might not be deep enough yet to be competitive against SOFR product at least for the first half of this year. So could that give you a little advantage here in originating?

I don't see that having a huge impact on loan growth but maybe we'll be surprised a little bit, but I don't see that happening.

The next question comes from Erika Najarian of UBS. Your line is open.

Mike, my first question is for you. Could you give us a sense of what deposit growth or runoff assumption you have in your 2022 NII simulation? And similarly, what kind of deposit repricing you presume?

Thanks, Erika. Look, we're in a bit of a different spot than others, given our asset cap. We're already constrained on deposits and so we're pushing away deposits every week now. And so, I don't expect this year to have much of a runoff in deposits. If we start to see deposit levels going down, we'll stop pushing others off. So I don't see that being a big driver for 2022. As you think about betas and deposit pricing assumptions, it's largely similar to what we saw the last rate cycle. But over the last three to five years, our deposit base has changed quite a bit. As a shorthand, 57% of our deposits are in our consumer and small business banking business today. If you go back a number of years, that was probably closer to 43% or 45%. So the remixing of our deposits as a result of some of the actions we've had to take will kind of lower the overall beta for the first number of rate hikes. But I think it will look pretty similar to what we saw. Since we're constrained on growing deposits, we're not going to be the leader on pricing likely as we go over the next number of quarters.

And just to clarify, so the betas in the last cycle, if I remember, were driven by a handful of CIB deposits, which have been pushed out given asset cap restrictions. So embedded in this NII number is the experience of the last cycle that included those betas, whereas as we actually look out today, you have a much better and less rate-sensitive deposit base.

For sure. The betas might be similar on the CIB deposits. We just have less of them as a percentage of the overall book, which lowers our overall beta.

We don't think about it relative to what the rate scenario is or how much we're making in NII. Think about where we are in the stage of our evolution: we're limiting our investments based upon what can physically be done, not based upon how much we actually want to spend. There are always a couple of small places where people want to spend and you do have to prioritize. A lot of the answer will have to do, as we continue to do our strategic work, with where we want to create additional capabilities across the Company; we would expect the investment number to grow for sure. We're spending a lot on infrastructure. I think we have an opportunity to both become much more efficient and to continue to grow the level of investments that are going to drive business results inside the Company. That's focused on where we need to get to relative to how much money we should be spending as a company as opposed to any upside from changes in rates at this point. Having the pressure to find efficiencies at this stage is a good thing, as it challenges people to come up with where we should be investing.

The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.

I wanted to ask about the cap. Can you remind us where you are in the process from your perspective? Have you implemented everything that you submitted in your proposal and it's just a matter of consistently executing on those changes? Or are there still material changes that you're making to address those issues?

I understand you're seeking more detail and I appreciate that. We have, across all of this regulatory work, a substantial amount to do. It's not right for me to speak about under any specific consent order where we think we are in the process because what will matter is whether our regulators believe it's done to their satisfaction. It's on us to continue to do all that's necessary. When they're comfortable that we've satisfied those obligations, they will make that determination. It's difficult to provide more specificity publicly.

I ask this every quarter because it's such a key part for the stock. I know you have a slew of local regulators on site or virtually. There's a perception that it's more of the central regulators that will make the call. Can you provide any flavor on the frequency of the dialogue with central regulators?

I think it's fair to say the level of dialogue with both local staff and with D.C. is substantial and meaningful. Even from my last role, it's the right thing to do. We have increased the level of dialogue since the new team has gotten here. It's very regular. Both local staff and D.C. staff are extremely important in monitoring and drawing conclusions about the Company. We work hard to treat both respectfully and want them to be as knowledgeable about what is going on with these important issues. We're always available and willing to have those conversations.

The next question comes from Scott Siefers of Piper Sandler. Your line is open.

Mike, I wanted to ask about rate positioning. With your significant asset sensitivity, can you talk about where you're most sensitive on the curve and when and how you'll benefit? Is the first hike the same benefit as the third, or where is it more or less powerful?

The short end of the curve is most meaningful; about two-thirds of the benefit ends up on the short end. When the whole curve shifts up, the short end provides the largest impact. For the first number of rate rises, the first three or four are fairly linear; you can use our disclosures to model that. If you get the increase earlier in the year, it's worth more for the year than if you get it later. Our disclosures are a pretty good guide to model that.

Separately, one criticism in the past is that competitors, particularly smaller banks, can steal talent and business from Wells Fargo. Your loan growth seems to contradict that. Can you touch on that criticism and your comfort with workforce stability and growth?

We feel great about the people we have here. I hear that criticism, but when I ask for specifics, very little comes back. It's a very competitive workplace: we lose people to competition and hire from competition of all sizes. The team we have in place, from senior levels down to people who cover customers, is strong and deep. We're aware of attrition, but it hasn't been a conversation about mass departures. We feel good about the people that are here and we'll work hard to keep good people.

We've been happy with our recruiting in areas like the investment bank; we've hired a few two to three dozen relatively senior investment bankers. We've hired people in the commercial bank on the front line. It's competitive, and we have to be competitive on pay, but people are attracted to the franchise and the direction, and so far it's been constructive.

The next question will come from John Pancari of Evercore ISI. Your line is open.

On the low single-digit to mid-single-digit loan growth assumption, can you give us more detail on how that breaks out among products, either core C&I versus commercial real estate and consumer? Are there any areas of the loan book that you're emphasizing or seeing opportunities to ramp activity similar to the credit card side?

It's a little bit of growth across the board. We're seeing opportunity everywhere. On the card side, we expect growth through revolve balances and intro balances from new products which will start to really pay off at the end of next year into the year after. We've been really happy with what we've seen in the auto space: pretty good assets, short-lived assets and high quality. So we see continued opportunity there. On mortgage, nonconforming originations are growing and we expect some growth there, which will be offset by the EPBO loans running off. In commercial real estate, we expect opportunities in multifamily and apartments. We are being targeted and cautious in areas like office. So it's a bit of growth across the board if we're successful.

Separately on buybacks, buybacks came in a little better than we had expected in the fourth quarter. Can you give us your thoughts on the outlook there, your appetite for buybacks and how you're thinking about the dividend deployment?

We're in a different spot than others given the asset cap, but we still feel like we've got excess capital. We expect continued loan growth which will drive RWA, so we have to be thoughtful. Last year we said we would do at least $18 billion of buybacks through the four-quarter period ending in the second quarter; that is still achievable and we potentially have the opportunity to go above that if we decide it's the right path this quarter or next quarter. We'll look at all the factors when making that decision. On the dividend, a normalized payout ratio target is about 30% to 40% over time, which will take time to reach. Ultimately it's a Board decision on when and how much we increase the dividend.

The next question comes from David Long of Raymond James. Your line is open.

You've talked in the past about operating expense savings being a multiyear initiative. With guidance this year in the $51.5 billion range, should we expect 2023 operating expenses to still be below that level?

At this point, our goal would be to see a net reduction next year. We'll give more guidance on progress as we get toward the end of the year. That will depend on investment decisions, inflation and other factors. Given our view on efficiency, we're targeting net reductions, but we'll provide more guidance later in the year.

Longer term, once consent orders are mostly behind you, if you replace the costs today to improve and upgrade your internal operations with the cost to maintain proper controls and risk management, how much savings do you see there?

There are some savings there, but our focus now is getting the work done and making sure it's operating properly. We're being thoughtful about implementation, but making the processes most efficient and optimized will come later, and that's a few years off in terms of really optimizing the risk and compliance functions.

The next question comes from Steven Chubak of Wolfe Research. Your line is open.

I wanted to ask on the fee outlook. There's noise in the fee line this quarter. You didn't give an explicit fee guide for 2022. With the impact of business sales, the overdraft change, weaker mortgage banking and normalization of equity gains, how should we be thinking about a jumping-off point for fee income looking ahead to next quarter and 2022 more broadly?

You have to take the lines and model them. Investment advisory and other asset-based fees are a function of client assets and market performance. The mortgage space: the fourth quarter number is a reasonable starting point; the mortgage market is expected to be down as refinancings drive that. How well we do will depend on our ability to penetrate the purchase side. So take each fee line and model forward based on underlying drivers.

On excess liquidity deployment, it looks like you deployed some in the quarter. Relative to pre-pandemic levels you've still seen a doubling of excess reserves. Can you size the excess liquidity available for deployment today and if the long end continues to grind higher, is there appetite to deploy more aggressively than the mid-single-digit growth contemplated in the NII walk?

The first place liquidity would be deployed is to support customer loan growth. We've increased mortgage exposure, structured product and CLO exposure, and the decline you saw was largely in the treasury side. Given the rate environment, you'll see us start deploying more; we've started in a very small way already given recent moves. How much and how fast we'll go depends on rate expectations and loan growth. Embedded in our outlook we expect a modest increase in the securities portfolio, and we'll make deployment decisions based on those factors.

The final question for today will come from Gerard Cassidy of RBC Capital Markets. Your line is open.

Charlie, you talked about joining the Net-Zero Alliance with some of your peers. As you get deeper into that and your peers do as well, how should we try to estimate what types of risks you might be coming up against? And how do you monitor those risks?

That's a great question. The whole point of joining alliances is to benefit from each other's experiences and to learn how to think about this. We're going through how climate can impact different businesses from a risk perspective and where the opportunities are. When we talk about getting to net zero, it's not about walking away from clients, it's about helping them transition. We can support clients across the Company with our balance sheet or public markets, and you'll see more disclosure from us and others on embedded risks and what we're doing to reduce emissions more broadly.

Appreciate that. On credit, your credit is strong. Can you give us color on reserves? As credit normalizes, how should we look at reserve building over 2022 into 2023?

Not everyone starts at the same position on reserving across the industry. We feel very good about where we are relative to what we are seeing. On a forward-looking basis you have to make determinations about embedded losses, and everyone's assumptions differ. We believe our assumptions are appropriate and conservative. The ultimate outcome depends on how the economy performs. As we sit here we feel very good about 2022, but it's a living, breathing calculation and it can take different turns. Thank you very much, everyone, for your time, and we appreciate it. We will talk to you over the next quarter. Take care. Bye-bye.

Thanks, everyone, for your participation on today's conference call. At this time, all parties may disconnect.