Michael P. Santomassimo
Senior Executive Vice President, Chief Financial Officer at Wells Fargo & Company
Thank you, Charlie, and good morning, everyone. The first couple slides summarize how we helped our customers and communities last year, some of which Charlie highlighted, so I'm going to start with our fourth quarter financial results on slide 4.
Net income for the fourth quarter was $3.4 billion, or $0.86 per diluted common share. Our fourth quarter results included $1.9 billion, or $0.40 per share, for the FDIC special assessment and $1.1 billion of severance expense, including $969 million, or $0.20 per share, for planned actions. These expenses were partially offset by $621 million, or $0.17 per share, of discrete tax benefits related to the resolution of prior period tax matters.
Turning to capital and liquidity on slide 5. Our CET1 ratio increased to 11.4% in fourth quarter, 2.5 percentage points above our regulatory minimum plus buffers. This increase was driven by our earnings and an increase in accumulated other comprehensive income, reflecting lower interest rates and tighter mortgage-backed security spreads. During the fourth quarter, we repurchased $2.4 billion in common stock. We repurchased a total of $12 billion in common stock in 2023, and we currently expect to be able to repurchase more than this amount in 2024. We will continue to consider current market conditions, including interest rate movements, risk weighted asset levels, stress test results, as well as any potential economic uncertainty with respect to the amount and timing of share repurchases over the coming quarters.
Turning to credit quality on slide 7. As expected, net loan charge-offs increased, up 17 basis points from the third quarter to 53 basis points of average loans driven by commercial real estate office and credit card loans. The increase in commercial net loan charge-offs reflected the higher losses in commercial real estate office, while losses in the rest of our commercial portfolio were stable from the third quarter. As expected, losses started to materialize in our commercial real estate office portfolio as market fundamentals remained weak. The losses were across a number of loans, spread across various markets, and were driven by borrower performance, lower appraisals, or the result of properties or loans being sold at a loss. We substantially built reserves for this portfolio throughout 2023 as criticized and nonperforming assets increased. And while we expect additional losses in the coming quarters, given market fundamentals and capital markets and liquidity challenges in this sector, the amounts will likely be uneven and episodic. Our commercial real estate team has a rigorous monitoring process and continues to derisk and reduce exposure, and we're using this information to evaluate our allowance, which I will discuss later.
Consumer net loan charge-offs continued to increase and were up $118 million from the third quarter to 79 basis points of average loans. The increase was driven by the credit card portfolio, which performed as expected with increased losses driven by recent vintages maturing. Nonperforming assets increased 3% from the third quarter as growth in commercial nonaccrual loans more than offset declines in consumer. The increase in commercial real estate nonaccrual loans was driven by a $567 million increase in office nonaccrual loans.
Moving to slide 8. Our allowance for credit losses increased slightly in the fourth quarter, driven by an increase for credit card and commercial real estate loans, partially offset by a lower allowance for auto loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. While the charge-offs we took in the fourth quarter were contemplated in our allowance, we are still early in the cycle. And after going through our quarterly review process, the coverage ratio in our CIB commercial real estate office portfolio remains relatively stable at 11%.
On slide 9, we highlight loans and deposits. Average loans were down from both the third quarter and a year ago. Credit card loans continued to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 122 basis points from a year ago and 12 basis points from the third quarter, reflecting the higher interest rate environment. Average deposits declined 3% from a year ago as growth in Corporate & Investment Banking was more than offset by declines in our other deposit gathering businesses, reflecting continued consumer spending and customers reallocating cash into higher-yielding alternatives. Period-end deposits included in the chart on the bottom of the page were up $4.2 billion from the third quarter as declines in consumer banking and lending were offset by slightly higher deposits in Wealth and Investment Management for the first time in over a year, as well as higher commercial deposits, which included our efforts to attract clients' operational deposits. As expected, our average deposit costs continued to increase, up 22 basis points from the third quarter to 158 basis points, with higher deposit costs across all operating segments. The pace of the increase was similar to the third quarter. Our mix of deposits continued to shift with our percentage of noninterest-bearing deposits declining to 27%.
Turning to net interest income on slide 10. Fourth quarter net interest income declined $662 million or 5% from a year ago due to lower deposit and loan balances, partially offset by the impact of higher interest rates. I'll provide details on our 2024 net interest income expectations later on the call. Turning to expenses on slide 11. While our fourth quarter noninterest expense included the FDIC special assessment and $1.1 billion of severance expense, including $969 million for planned actions, expenses declined from a year ago, driven by lower operating losses. While most of the planned actions should result in lower headcount, some of the actions are related to our workforce location strategy, which should lower occupancy costs and provide other benefits but may not always reduce headcount. Total expenses increased from the third quarter driven by the FDIC special assessment, and higher severance expense. Personnel expense increased $554 million from the third quarter as higher severance expense was partially offset by lower benefits and incentive compensation expense, including certain year-end adjustments, as well as the impact of efficiency initiatives, including lower headcount.
Turning to our operating segment, starting with Consumer Banking and Lending on slide 12. Consumer, Small and Business Banking revenue increased 1% from a year ago, driven by higher net interest income, reflecting higher interest rates, partially offset by lower deposit balances. We've been focusing on controlling expenses and lowering the cost to serve our customers, which includes driving digital adoption, simplifying our product portfolio, and using technology to automate our operating environment. As our customers continue to shift to lower-cost channels, resulting in fewer teller transactions and handled call volumes, we've reduced our total number of branches by over 280, or 6%, from a year ago. At the same time, we have been refurbishing our branches as part of an accelerated multiyear effort to transform and refresh our full branch network. I'll highlight other ways we are investing to improve the customer experience later on the call.
Home Lending revenue increased 7% from a year ago. Lower gain on sale margins and originations, as well as lower loan balances were more than offset by improved valuations on loans held for sale due to losses in the fourth quarter of 2022. We continued to reduce headcount in Home Lending in the fourth quarter, down 36% from a year ago, reflecting market conditions as well as our new strategy.
Credit Card revenue declined 1% from a year ago, driven by the impact of introductory promotional rates and higher rewards expense, partially offset by higher loan balances and interchange revenue. Payment rates have been relatively stable over the past year and remained above pre-pandemic levels. New account growth continued to be strong, up 17% from a year ago. Auto revenue declined 19% from a year ago, driven by lower loan balances and continued loan spread compression. And Personal Lending revenue was up 13% from a year ago due to higher loan balances.
Turning to some key business drivers on slide 13. Mortgage originations declined 69% from a year ago and 30% from the third quarter, reflecting the progress we made on our strategic objectives for this business as well as the decline in the mortgage market. As we executed on our strategic objectives, we've also made significant progress on reducing the amount of third-party loans serviced, down 18% from a year ago. The size of our Auto portfolio has declined for seven consecutive quarters and balances were down 11% at the end of the fourth quarter compared to a year ago. Origination volume declined 34% year over year, reflecting credit tightening actions.
Debit card spend increased 2% from a year ago, with both discretionary and nondiscretionary spend up 2%, with growth in most categories, except for home improvement, fuel, and travel. Credit card spending continued to be strong, was up 15% from a year ago. All categories grew with double-digit growth rates in every category, except fuel, home improvement, and travel [Phonetic].
Turning to Commercial Banking results on slide 14. Middle Market Banking revenue increased 6% from a year ago, driven by the impact of higher interest rates and higher deposit related fees, reflecting lower earnings credit rates, asset-based lending and leasing revenue increased 9% year over year due to the impact of higher interest rates and improved results on equity investments. Average loan balances were up 2% from a year ago, driven by growth in asset-based lending and leasing.
Turning to Corporate & Investment Banking on slide 15. Banking revenue increased 15% from a year ago, driven by higher lending revenue, higher investment banking revenue due to increased activity across all products, and stronger treasury management results. As Charlie highlighted, we've successfully hired experienced bankers, which is helping us deliver for our clients and positioning us well for when markets improve.
Commercial Real Estate revenue grew 2% from a year ago, reflecting the impact of higher interest rates, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago, driven by higher revenue in structured products, equities, credit products, and commodities. Average loans were down 3% from a year ago, with growth in markets more than offset by declines in banking and commercial real estate.
On slide 16, Wealth and Investment Management revenue declined 1% compared to a year ago, reflecting lower net interest income, driven by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives. The decline in net interest income from a year ago was partially offset by higher asset-based fees due to increased market valuations. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so fourth quarter results reflected market valuations as of October 1st, which were higher from a year ago. Asset-based fees in the first quarter will reflect valuations as of January 1st, which were also higher from a year ago. Average loans were down 3% from a year ago, driven by a decline in securities-based lending.
Slide 17 highlights our corporate results. Revenue declined $345 million from a year ago, reflecting higher deposit crediting rates paid to the operating segments. This decline was partially offset by improved results in our affiliated venture capital business on lower impairments. Turning to our expectations for 2024 starting on slide 18. Let me start by highlighting our expectations for net interest income. As we look forward, there are a number of factors that can impact our results, including the ultimate path of rates, the shape of the yield curve, quantitative tightening and fiscal deficits, consumer behavior and competitive behavior, to name just a few, all of which we have little to no control over. This makes it particularly difficult to estimate net interest income for 2024. There is more uncertainty than usual given the market's strong view of rate cut timing and the quantum.
Looking at our results, while we had strong growth in full year net interest income in 2023 versus 2022, our net interest income came down modestly each quarter last year, driven by the higher deposit pricing and mix changes. You can see this impact when you annualize our fourth quarter net interest income, which was down approximately 3% from our full year 2023 net interest income of $52.4 billion. Our current expectation is that full year 2024 net interest income could potentially be approximately 7% to 9% lower than our full year 2023. This expectation is anchored on the forward rate curve and a series of business assumptions, including: lower rates and the recent forward rate curve, which, given our modestly asset sensitive position, would be a headwind to net interest income; a slight decline in average loans for the full year, which includes modest growth in commercial and credit card loans in the second half of the year after a slow start to the year; reinvestment of lower-yielding securities runoff and higher yielding assets, which would also modestly extend the duration of the investment portfolio; further attrition in Consumer Banking and Lending Deposits, as well as continued mix shift from lower yielding products to higher yielding; deposits in our other deposit gathering businesses are expected to be relatively stable and market funding will replace the decline in consumer deposits as needed.
We currently expect that net interest income will trough towards the end of this year. As we've done in prior years, we are also assuming the asset cap will remain in place throughout the year. Ultimately, the amount of net interest income we earn in 2024 will depend on a variety of factors, many of which are uncertain, including the absolute level of rates, the shape of the yield curve, deposit balances, mix and pricing, and loan demand.
Turning to our 2024 expense expectations on slide 19. We started our focus on efficiency initiatives three years ago, and we've successfully delivered on our commitment of approximately $10 billion of gross expense saves. Through our efficiency initiatives, we have reduced headcount every quarter since third quarter of 2020 and headcount is down 16% since the end of 2020. Looking at our expectations for this year and following the waterfall on the slide from left to right, we reported $55.6 billion of noninterest expense in 2023, which included the $1.9 billion FDIC special assessment. Excluding this item, expenses would have been $53.6 billion, which we believe is a good starting point for discussion of 2024 expenses. Looking at the next bar, we expect severance expense to be approximately $1.3 billion lower, driven by the $969 million expense we took in the fourth quarter for planned actions. We expect expenses to increase by at least $300 million due to higher revenue-related expense, driven by Wealth and Investment Management. Revenue-related expenses will ultimately be a function of activity and market levels, and therefore, could be higher or lower than this estimate. At this point, we expect all other expenses to be flat, though there are significant efficiencies and increased investments included in this expectation.
We expect approximately $2.7 billion of gross expense reductions in 2024 due to the efficiency initiatives we highlight in the slide, some of the areas where we anticipate additional savings and continue to believe we have more opportunities beyond 2024. Similar to prior years, the resources needed to address our risk and control work are separate from our efficiency initiatives, and we will continue to make significant investments in our risk and control infrastructure.
While we remain focused on executing on our efficiency initiatives, we're also continuing to invest, and we expect approximately $1.1 billion of incremental technology and equipment expense, reflecting higher costs related to the amortization of investment in prior years, as well as new investments planned for 2024. We also expect merit increases of approximately $700 million, which are primarily awarded to employees with lower salaries. We highlight some of the other areas where we plan to invest on the next slide. Our 2024 expense outlook includes ongoing business-related operating losses of approximately $1.3 billion, similar to the level we had in 2023. As previously disclosed, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses. So putting this all together, we expect 2024 noninterest expense to be approximately $52.6 billion. It's important to note that while we've made substantial progress executing on our efficiency initiatives, as Charlie highlighted, we still have a significant opportunity to get more efficient across the company.
Given how critical it is to continue to invest in our business, on slide 20, we provide some examples of our areas of focus for 2024. Let me highlight a few: building the right risk and control infrastructure remains our top priority, and we will continue to invest in this important work. Charlie discussed many of the technology investments we've already made to transform how we serve both our consumer and commercial customers, and we plan to continue to invest in these areas this year throughout our businesses. We are planning to hire more bankers and advisors to grow our Wells Fargo Premier offering to our affluent clients; we plan to launch a new travel-oriented credit card as part of our Autograph suite of products, as well as a new small business credit card this year; to better serve our commercial clients, we plan to continue hiring within Investment Banking and Commercial Banking to support priority sectors and products to help drive growth.
Now let me conclude with slide 21 where we will discuss return on tangible common equity. When we first discussed our path to improving returns on the fourth quarter 2020 earnings call, we had an 8% ROTCE. Since then, we have taken multiple actions to improve our returns, including executing on our efficiency initiatives, investing in our businesses to help drive growth, and returning excess capital to shareholders, including increasing our common stock dividend from $0.10 to $0.35 per share and repurchasing $32 billion of common stock. These actions helped to improve our ROTCE. Our reported ROTCE in the fourth quarter was 9%. But as we highlight in the table, our ROTCE was impacted by a number of notable items. Our 2023 returns also reflected the benefit of rising rates, which helped to drive strong net interest income growth, and as I've already highlighted, we expect net interest income to decline this year.
We still believe we have an achievable path to a sustainable 15% ROTCE over the medium term as we continue to make progress on transforming the company. There are several key factors that support our belief. Our ability to return excess capital; we currently have a significant amount of excess capital, 2.5 percentage points above our regulatory minimum buffers for CET1, and as I already highlighted, we expect to increase our share repurchases this year. I highlighted the progress we've already made to reposition our Home Lending business, including reducing the amount of third-party mortgage loans serviced by 18% from a year ago. As we continue to streamline this business, we expect the profitability to improve. We've grown our credit card business with balances up 40% since the end of 2021 and new accounts 25% higher than the fourth quarter of 2021. However, the current profitability of this business has been impacted by acquisition costs and allowance builds, and we expect profitability to improve as the portfolio matures.
Finally, we've made significant investments the last few years across our franchise to better serve our customers and help drive growth. We expect the revenue growth that these investments should generate in businesses like Corporate & Investment Banking and Wealth and Investment Management will help fund additional investments. So we have many drivers to close the gap and improve returns. In summary, our results in 2023 demonstrated our commitment to improving our financial performance. We grew revenue, reduced expenses, increased capital returns to shareholders, and maintained our strong capital position.
We will now take your questions.
