Sent: Thursday, May 07, 2009 4:40 PM
To: WELLS CAPITAL MANAGEMENT
Subject: Stress Test News Release & Message from John Stumpf
A message to all team members from President, CEO John Stumpf
We're well-capitalized, expect to fulfill $13.7 billion capital
requirement through earnings, other internally-generated sources and
announced common equity offering
As you can see by the news release we issued this afternoon we're
pleased that the Federal Reserve has confirmed that Wells Fargo has
enough total capital even in a severe economic stress case.
I want to summarize for you how we intend to increase common equity by
$13.7 billion as the government requires in its "stress test" plan for
Wells Fargo. Then, I'll review the tremendous opportunity we all have
to collaborate together as One Wells Fargo to satisfy all our
customers' financial needs and help them succeed financially.
"We're strong, secure, well-capitalized, growing market share"
It's important for all of us to remember this: we're strong, secure,
well capitalized, growing market share and we're building capital
every day through retained earnings, and expense initiatives related
to the Wachovia merger. We expect our strong earnings performance,
including strong revenue growth, the $6 billion secondary market
common equity offering, the benefits of lower expenses, the dividend
reduction, and issuing company stock to our benefit plans will
continue to add to our strong capital base and meet all regulatory
capital requirements. We're more firmly anchored in our Vision &
Values than ever before.
It's also important to remember that this "stress test" is not a
pass-fail. It's a government guess about the future - speculation
based on analytical models of what might be future capital needs in a
worst case scenario.
Federal Reserve, Wells Fargo agree on future loan loss assumptions
Both our analysis and the Federal Reserve's indicate we would remain
well above the 6% minimum level needed for well-capitalized banks over
the next two years even under stress conditions. The Company's Tier 1
capital ratio--an important measure of adequate capital to
risk-weighted assets--at 3/31/09 was 8.3% after an approximately 190
basis point reduction for purchase accounting write-downs we took when
Wachovia merged into Wells Fargo at the end of last year.
The Federal Reserve requires that the preponderance of Tier 1 capital
be maintained in common equity, now defined as 4% of risk-weighted
assets for purposes of the stress test. Our own projection of its
downside risk under the adverse case scenario indicated enough common
equity to meet this test, but the Federal Reserve has elected to apply
its own more conservative revenue assumptions in the adverse case
scenario and has asked us to increase common equity by $13.7 billion
by November 9, 2009.
We're very pleased that the Federal Reserve's comprehensive credit
analysis confirmed our own estimates of potential credit losses in
total across all of our loan portfolios. That's not surprising since
the higher risk Wachovia loan and securities portfolios have already
been written down and since banking regulators have previously
reviewed legacy Wells Fargo and legacy Wachovia credit portfolios
while the Company has reviewed Wachovia's loans at least five times
since the Wachovia merger was announced.
"Our strong, underlying earnings momentum"
The main reason the Federal Reserve has required us to hold an extra
$13.7 billion in common equity is based on what we believe is their
excessively conservative estimate of the pre-provision net revenue
(PPNR) in the adverse scenario. Since we believe our earnings and
other internally-generated capital will generate enough capital to
meet the 4% test by November 9, 2009, in effect the Federal Reserve is
asking us to hold a significant capital cushion above 4% for a
hypothetical net revenue scenario that is remote and inconsistent with
our strong actual results so far in 2009, strong underlying earnings
momentum, and the actions we already took to reduce Wachovia's revenue
Our revenue growth the past two decades has been about double that of
the industry. Even during the current economic downturn, we achieved
double-digit revenue growth in eight of the last 12 quarters. Legacy
Wells Fargo grew revenue 16 percent last quarter and customers are
bringing business back to legacy Wachovia, representing 41 percent of
the combined company's revenue last quarter.
Furthermore, our pre-provision earnings in the first quarter of 2009
were above our own submission to the Federal Reserve and 25% higher
than the quarterly average PPNR that the Federal Reserve assumed in
its adverse case scenario.
We would be well above the Tier 1 common equity target of 4% today if
we had not written off almost $40 billion of troubled loans from
Wachovia Corporation when the merger of Wachovia into Wells Fargo was
completed at the end of last year. This reduced the ratio of Tier 1
common equity to risk-weighted assets by about 190 basis points. By
writing off those troubled loans last year, however, the Wachovia
portion of Wells Fargo's losses has been reduced, supporting
profitability and our ability to add to common equity over time. Over
$13 billion of this benefit is expected to remain at the end of 2010
when the stress test period is over.
Nothing has changed: it's still all about revenue growth
So, now what?
Now that the stress test results are public, now that we've outlined
clearly and simply our plans to raise further capital to satisfy the
new requirement, what's next?
Actually, here's the news. Nothing has changed!
Our Vision & Values are the same. Our business model is the same. The
merger integration to combine our two companies in a way that seems
invisible and effortless to our customers and offers them real value
as soon as possible is still ahead of us. Our expense
initiatives--spending our shareholders' money more wisely without
sacrificing our ability to grow revenue--are still the same.
And, as always, revenue growth remains our single most important
measure of success--as we strongly emphasized when we submitted our
report to the Federal Reserve, on which our stress test results were
based. That's because, adjusted for risk, revenue growth reflects the
strength and depth of our customer relationships, the quality of our
service and financial advice, and the effectiveness of our needs-based
selling. Revenue growth means customers are voting with their
pocketbooks--that's why we say the key to the "bottom line" is the "top
Why have we been able to grow revenue at about double that of the
industry the past two decades? How is it possible for us to grow
market share and build capital every day through retained earnings?
It's not just because of our company's proven strength, security,
capitalization, earnings power, and time-tested and very diverse
business model. It's because we believe our Company is blessed with
the most talented team in all of financial services.
We believe not so much in a portfolio of businesses or products--always
reflecting changing consumer needs--but in a portfolio of people
skills. We believe in people as a competitive advantage. We believe in
the talent, skill, experience, loyalty, caring, collaboration and
customer-focus of you, our 281,000 team members. We believe as never
before in your ability to collaborate across lines of business, across
geographies, across time zones to satisfy all our customers' financial
needs and help them succeed financially. That's the true power of
Wells Fargo underlying our financial performance.
"We never put the stagecoach before the horses"
As I've said time and again, we're always careful to put our mission
first and our results second. We never put the stagecoach before the
horses. That's why we don't believe our first job is to make a lot of
money. Our first job is to understand our customers' financial
objectives, their true financial needs, then offer them products and
services to help satisfy those needs so they can be financially
successful. If we do that right, then all sorts of good things happen
for all our stakeholders, and we'll be able to produce
industry-leading returns for our shareholders.
This is why our company has been so successful--we know how to focus on
what really matters. That's why we have our Vision & Values,
time-tested over more than two decades and the envy of our industry.
Satisfy all our customers' financial needs and help them succeed
financially. What could be simpler? I've grown up with our Vision &
Values during my 27 years with our company. I can tell you this
without a doubt: I've never been more confident of our Vision and I've
never been more certain of our Values that I am today.
I have no doubt our company has emerged from these stress test results
just fine and that we'll be even stronger, even more secure, even more
dependable and reliable for our customers and communities. Let me
repeat that. I have no doubt.
Never before perhaps in the history of our company has a Wells Fargo
banking store, mortgage store or consumer finance store meant more for
a neighborhood or a community than it does right now.
Never before have our customers needed more than they do today a safe,
trustworthy, capable financial advisor who can partner with them to
help plan and achieve their financial goals for a home, education,
building a business and retirement.
Never before has it been more important for us to see our customers as
our friends and neighbors--to make them feel at home, show them we
care, make them feel special, give them the right advice, give them
value, keep our promises, reach out to them, know them, thank them.
If we continue doing do all these things well during this painful
economic downturn, we will earn not just their gratitude but all their
business for a lifetime.
I want to thank the hundreds of team members who worked such long
hours the past several months to prepare our submissions for these
tests to our regulators, who were highly complimentary of the
thoroughness and thoughtfulness of our presentations. These team
members gave so unselfishly of their time--sacrificed so many evenings
and week-ends away from their family and friends--we can never thank
them enough for what they've done for our company.
I also want to thank all our team members for enduring all the anxiety
and uncertainty that we've all had to live with the past few months as
every day brought new rumors and more speculation from the media and
analysts about this very public process. There were many times when I
wanted to communicate to reassure you throughout this process but we
had to respect the confidentiality of our relationship with our
regulators. Now we can channel all that energy we wasted on worry and
anxiety about the outcome of this process into actions and behaviors
that really matter--satisfying all our customers' financial needs and
helping them succeed financially.
Thank you! You're the best.
Together we'll go far!!