Category Archives: Commercial Banks

Wells Fargo – SWOT Analysis

Wells Fargo & Company (Wells Fargo) is a diversified financial holding company, providing retail, commercial and corporate banking services through banking stores located in 24 states of the US. Wells Fargo is a US based diversified financial services company offering banking, insurance, investments, mortgage and consumer finance through its sales and distribution network across North America.The company leverages its wide distribution network to gain strong market position. Cross selling also gives the company—as an aggregator—a significant cost advantage over few products or single channel companies. However, ongoing consolidation in the US financial services industry can create bigger rivals with even more diversified businesses, increasing competition in the market.

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Wide distribution network

Cross selling

Diversified earnings distribution across


Strong Credit discipline

Weakening asset quality amidst high real

estate exposure

Limited international presence

Low customer satisfaction



Technology enabled offerings

Growing immigrant population

Growth in the commercial banking industry


Consolidation in the US banking industry Regulations on contingent commission Rising incidents of Online Scams Meltdown in US Asset backed Securities market


Wide Distribution Network
Wells Fargo is a US based diversified financial services company offering banking, insurance, investments, mortgage and consumer finance through its sales and distribution network across North America. Wide distribution network is the chief strength of Wells Fargo that enabled it to become the thirteenth largest financial services firm in the US.
Wells Fargo owns the largest number of mortgage stores (2,400) in the US. Wells Fargo operates the third largest number of banking stores (3,318 stores in 23 states). It also operates the second largest number of stores (banking and non-banking put together).The bank owns 567 supermarket stores and 1,078 consumer finance stores. It has one of nation’s largest telephone banking networks with a call frequency of 20 million calls monthly. Wells Fargo is the third largest branded bank ATM owner (6,900 ATMs).
Wells Fargo commands the largest personal credit market share in Wells Fargo’s banking states. Wells Fargo ranks number two among the debit card issuers in the US; number two among the prime home-equity lenders; and number two among the mutual fund families run by US banks.
Wide distribution network enables Wells Fargo to gain strong market position. For instance, as of June 30, 2007, Wells Fargo was ranked fourth among the bank holding companies based on total domestic deposits, ahead of Citigroup and SunTrust Bank. Among the commercial banks and savings institutions, Wells Fargo ranked fourth based on domestic deposits, ahead of Citigroup and Washington Mutual.

Cross Selling
The company strives to earn 100% of every customer’s business (consumer and commercial)—with a broad product line including banking, investments, insurance, mortgages, consumer and commercial finance, venture capital, and commercial real estate. It rewards customers for buying more services.
In 2007, Wells Fargo’s wholesale banking achieved a cross-sell ratio of 6.1 products per Wholesale customer relationship (4.9 – five years ago) and 7.6 products per middle-market commercial banking relationship. Almost a third of Wells Fargo’s regional commercial banking offices had more than eight products per relationship. Some averaged more than 10. Similarly, Wells Fargo’s community banking achieved cross-sell of 5.5 products per household (5.2 a year ago, about three, nine years ago). Business banking cross-sell reached 3.5 products. In fact, Wells Fargo is the leader in cross selling. In 2007, Wells Fargo’s cross selling strategy enabled it to grow average loans by 12% (over 2006), core deposits by 13%, assets under management by 14%, mortgage servicing fees by 14%, insurance premiums by 14%, and total non-interest income by 17%. Wells Fargo’s goal in each customer segment is to achieve a cross-sell of eight products per customer, which is currently half of its estimated potential demand. Continued succ
ess in cross selling would enable Wells Fargo to increase top line and bottom lines and more importantly it will enable the bank to safeguard its customer-base. Cross selling also gives the company—as an aggregator—a significant cost advantage over few products or one channel companies.

Diversified Earnings Distribution Across Segments
Wells Fargo is a diversified financial services company offering banking, insurance, investments, mortgage and consumer finance and has interests in over 80 businesses.Wells Fargo CEO Richard Kovacevich stated that diversity is absolutely integral to Wells Fargo’s vision, strategy, and continued success. Diverse lines of business help Wells Fargo satisfy most of its customers’ financial needs and achieve continued revenue and earnings growth. Diverse lines of business help Eerlls Fargo raise the level of cross selling. In fact, Wells Fargo’s earnings diversity is evident from the breakup of earnings by broad business category. As of first quarter of 2008, community banking accounted for 34% of earnings followed by investments & insurance, home mortgage & home equity and specialized lending which accounted for 17% individually; wholesale banking accounted for 9% and consumer finance accounted for the rest of 6%. Earnings diversity enables Wells Fargo reduce earnings volatility.

Strong Credit Discipline
Wells Fargo’s credit quality is strong as endorsed by credit rating agencies. .The company maintained its credit risk discipline reasonably well during the years (2001-2006) of excessive risk taking in financial services industry. Wells Fargo Financial does not use brokers or correspondents in its US debt consolidation business. Unlike many of its competitors, Wells Fargo did not make option adjustable-rate mortgages (ARMs). The company did not make negative amortization ARMs. It offered in only a very few instances, below certain credit scores, stated-income mortgages and low-and no-documentation mortgages. Because of its prudent lending to customers with less than prime credit and its decision not to make negative amortization loans, the company is estimated to have lost between two and four percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. The company was saved from these possible losses as it kept itself relatively insulated from lending to high risk customers.
Unlike many of its competitors, Wells Fargo did not participate to any significant degree in collateralized debt obligations (CDOs), structured investment vehicles (SIVs) to hold assets off its balance sheet, hedge fund financing, off-balance sheet conduits, the underwriting of low-covenant or no-covenant, large, highly leveraged loans and commitments to companies acquired by private equity firms through leveraged buyouts (LBOs).
Due to such prudent lending principles, Wells Fargo Bank, N.A. continued to be rated as ‘Aaa,’ the highest possible credit rating issued by Moody’s Investors Service (Moody’s), and was upgraded in February 2007 to ‘AAA,’ the highest possible credit rating issued by Standard & Poor’s Ratings Services (S&P). Of the more than 1,100 financial institutions and 70 national banking systems covered by S&P globally, this upgrade makes Wells Fargo one of only two banks worldwide to have S&P’s ‘AAA’ credit rating. Wells Fargo Bank, N.A. is now the only US bank to have the highest possible credit rating from both Moody’s and S&P. Good credit quality enables Wells Fargo to raise resources at highly competitive rates, and to negotiate tough credit market conditions favorably.


Weakening Asset Quality Amidst High Real Estate Exposure
Since 1993, Wells Fargo Home Mortgage (or its predecessor) has been the largest retail mortgage originator. This distinction is strength in good times but is a weakness in bad times like the current post subprime crisis period. More so because, Wells Fargo was not in the top ten B&C mortgage originators (B&C refer to low quality and high risk loans) till 2001. Wells Fargo climbed the B&C charts consistently becoming the fourth-largest sub-prime mortgage lender (a volume of $42 billion) in the US, in 2005.
In 2006, Wells Fargo was the top retail mortgage lender, originating $158.48 billion in loans through its retail channel and earning an industry market share of 14.2%. In addition, Wells Fargo grew its servicing portfolio to $1.34 trillion and, with the top ranking in this category, had 13.2% of the US home mortgage servicing market share, up from 11% in 2005. A significant portion of the servicing growth in 2006 came from Wells Fargo’s purchase of Washington Mutual’s entire portfolio of government mortgage servicing and a portion of its conforming, fixed-rate servicing portfolio, with loans totaling approximately $140 billion and representing approximately 1.3 million servicing customers. Along the way, Wells Fargo Home Mortgage became the largest subprime mortgage originator (after including co-issuance) in 2006. With increasing market share mortgage origination and servicing, Wells Fargo’s problem loans increased. Problem loans rose from $1,531 million in 2005 to $2,416 million in 2006, a jump of 57.8%. The problem became even more acute in 2007 when problem loans rose by 60.1% to $3,868 million. Along with rising problem loans Wells Fargo had to raise its loan loss reserves. During 2005-2007, Wells Fargo increased its loan loss reserve by 37.1% from $3,871 million to $5,307 million. At the end of July 2007, Wells Fargo earned the dubious distinction of the second largest foreclosure filer. Nonperforming loans as % of total loans rose from 0.54% in Q1-07 to 0.70% in Q4-07 and then to 0.84% in Q1-08. Simultaneously, Net charge-offs as % of average total loans rose from 0.90% in Q1-07 to 1.28% in Q4-07 and then to 1.60% in Q1-08.The trend in Wells Fargo’s charge-offs is expected to continue in the coming quarters exerting pressure on its bottom-line.

Limited International Presence
For a financial services organization of its size, lack of international exposure is a weakness for Wells Fargo. The US, accounted for almost 100% of its total assets ($575.44 billion) as at the end of December 2007. At the end of 2007, Wells Fargo’s earning assets amounted to $445.92 million or 77.5% of total assets. Loans in foreign offices accounted for only 1.6% of earning assets of the company at the end of December 2007. At the same time, deposits in foreign offices accounted for 8.2% of earning assets in 2007. Had Wels Fargo achieved a balance between its foreign assets and liabilities it could have to some extent reduced the volatility in earnings. Even within the US also, Wells Fargo is heavily focused on the midwest and the southeast US. It has limited presence in other geographical areas including growing markets in Europe and other Asia-Pacific countries.This makes it highly susceptible to the domestic market fluctuations as well as puts it at a competitive disadvantage against global players such as Citigroup and HSBC with more geographically diversified operations.

Low Customer Satisfaction
Although the customer satisfaction score of Wells Fargo improved over the last three years it is far less than its peers and industry average. According to the 2006, American Customer Satisfaction Index survey customer satisfaction score of Wells Fargo was 72 while the industry average was recorded as 77%. Also the customer satisfaction score of the company is less than Wachovia which recorded score of 80. Around 5.6% of the premier customers leave the company annually. Wells Fargo’s problems regarding customer satisfaction continued in 2008 as well. According to the J.D. Power and Associates 2008 Retail Banking Satisfaction Study, in the Midwest, where Wells Fargo has a high presence, the bank is among those held in the lowest esteem by customers, Of 21 banks in the Midwest Wells Fargo ranked 17th. Wells Fargo’s lower customer satisfaction scores affect its customer retention.


Technology Enabled Offerings
The majority of payments in the US banking system are being conducted through Automated Clearing House (ACH) or networks of check imaging systems, which offer a cost-effective option for lower-dollar amounts. Wells Fargo processed $65 billion in deposits through the check imaging services since installing it. It has processed more than 15 million checks images, currently averaging half a billion dollars per days. Since 2005 the number of businesses using the check imaging system has tripled and the number of checks scanned grew by 500% to more than 8 million. Wells Fargo’s check imaging services include Wells Fargo Electronic Deposit, a completely internet based remote deposit service; Image-Enabled Lockbox Services and Envelope-Free ATMs, which enables conversion and processing of deposited checks as digital images.The market for check image transactions expected to grow to around 2 billion transactions in 2007 from around 720 million in 2006.
Also the bank introduced its ‘CEO Mobile’, mobile service for businesses service, to a select group of customers in May 2007. The company plans to include additional features like wire approvals, image positive pay exceptions, and administrative tools such as password resets in 2007.The banks initiatives to automate its payment process and other services presents it with the opportunity to generate more business from the increasing demand for the internet and mobile banking services as well as improve customer convenience by faster service.

Growing Immigrant Population
The US is fast becoming a hoard of diverse races due to immigration from Latin America, Africa and Asia. At least one of nine American residents is foreign-born. They have accounted for half the growth of the US labor force since 1995 and currently form 15%of the work force. California has become the nation’s first white minority state and home to one of every three Hispanics in the US. One of every four residents in suburban America is ethnically diverse. US Latinos have estimated buying power of $736 billion, African-Americans $723 billion, Asian-Americans $400 billion. Immigrants and ethnic minorities are the fastest growing segment of first-time US home buyers.
To tap these culturally diverse markets the company introduces various programs. Five years ago Wells Fargo promoted the use of the Matricula Consular as a form of identification to help Mexican Nationals move from the risky cash economy to secure, reliable financial services. Later the company has expanded these services to to include immigrants from Guatemala, Argentina and Colombia. Wells Fargo also partners with US consulates and embassies in Asia to offer banking information to Asians preparing to come to the US. More and more of the banking stores of the company are reflecting the culture of their communities in ethnic backgrounds and language skills, in the art and design of those stores. Wells Fargo’s initiatives could enable it to capture the market increasing its presence in the growing cross cultural community.

Growth in the Commercial Banking Industry
Acquisition of Greater Bay Bancorp would increase the company’s presence in the California region. Greater Bay Bancorp, based in East Palo Alto, California, has $7.4 billion in assets, more than 1,800 employees, and serves consumers and businesses from 41 banking locations in and around the San Francisco Bay Area. Also Wells Fargo opened 109 regional banking stores in 2006.
Moreover the US commercial banking industry has been growing continually since the beginning of the decade and is expected to continue growing further at least until 2010. The US commercial banking industry, which generated total revenues of $457.7 billion in 2005, is expected to grow at a compound annual growth rate (CAGR) of 4.6% over the period 2005-2010, and generate total revenues of $572 billion by the end of 2010. Well Fargo’s strong market position in the US banking industry and its acquisitions presents it with the opportunity to grow its market share further as the industry moves up.

The present company is the result of merger/acquisition of nearly 2000 companies. The company continues to pursue its acquisition strategy while it maintains a focus on cross selling strategy.Wells Fargo’s recent acquisitions (2007/2008) include Placer Sierra Bancshares, Greater Bay Bancorp, United Bancorporation Wyoming, Citi customers in NV and CA, CIT Construction, 7 insurance brokerage businesses and Flatiron Credit Company.
Placer Sierra Bancshares is a Northern California-based bank holding company for Placer Sierra Bank, with assets of $2.6 billion and more than 650 employees serving consumers and small- and medium-sized businesses from 50 locations throughout California as of December 31, 2006. Wells Fargo gains access to Placer Sierra Bank’s 32 branches in eight counties of Northern California (Placer, Sacramento, El Dorado, Sierra, Nevada, Amador, San Joaquin and Calaveras) and 18 locations in Southern California.
Greater Bay Bancorp, based in East Palo Alto, Calif., has $7.4 billion in assets, more than 1,800 employees, and serves consumers and businesses from 41 banking locations in and around the San Francisco Bay Area under names such as Mid-Peninsula Bank, Bank of Petaluma, Golden Gate Bank, Coast Commercial Bank, Peninsula Bank of Commerce, Mount Diablo National Bank, and Santa Clara Valley National Bank. Greater Bay Bancorp also owns ABD Insurance and Financial Services, the nation’s 15th largest retail insurance broker with locations throughout the west coast, and Matsco Financial Corporation, a national specialty lender primarily to veterinarians and dentists. The acquisition of Greater Bay Bancorp helps Wells Fargo gain a combined market share of 20.6% in the Greater San Francisco Bay Area Region.
CIT Construction had $2.4 billion in assets and 235 employees as of March 31, 2007.This acquisition is expected to strengthen Wells Fargo’s operations in middle market to large manufacturers in the construction industry. With the acquisition of United Bancorporation Wyoming, Wells Fargo will become the largest bank by both deposits and assets among banks in Wyoming, the nation’s ninth fastest-growing state according to census data (7/2006-7/2007).
The acquisition of Citi customers in NV and CA will further strengthen Wells Fargo’s number one deposit market share in northern Nevada. These acquisitions mentioned above not only bring new customers but also increase the opportunity for cross selling for Wells Fargo.


Consolidation in the US Banking Industry
The US financial services market, being one of the most matured markets worldwide, is featured by intense competition in all fields. The number of institutions reporting to Federal Deposit Insurance Corporation (FDIC) declined to 8,533 at the end of 2007 from 9,181 in 2003. At the end of 2007, the number of FDIC reporting commercial banks declined to 7,282 from 7,770 in 2003. Further, the competitive pressure is growing due to several factors, which includes cross marketing alliances between unaffiliated businesses, as well as consolidation activity in the whole financial services industry. Moreover, global merger and acquisition (M&A) deal value has been increasing indicating higher competitive pressures. For instance, during 2002-2006, the number of deals and value of deals in financial services (including insurance industry) steadily climbed.The number of deals rose to 937 in 2006 from 801 in 2002. In this period, the value of deals also increased to �200.1 billion in 2006 from 60.1 billion in 2002. Global M&A deal value totaled a record $4.5 trillion in 2007, up by 21% from 2006. Deals in financial services industry accounted for 16% of the deal activity in 2007. The deals in financial services industry are expected to increase in 2008 due to the opportunities created by the subprime crisis in the US. Although, Wells Fargo is one of the largest banks in the US, ongoing consolidation can create bigger rivals with even more diversified businesses which could pose a bigger challenge to bank’s market share.

Regulations on Contingent Commission
High profile government investigations, in the vein of Eliot Spitzer’s enquiry into the insurance industry, have cultivated a legislative culture within the insurance industry. Significant financial penalties have been levied to transgressors and new regulations were introduced. Most of the companies have agreed to support legislation banning payment of contingent compensation to brokers. Insurance companies agreed to stop paying contingent commissions in excess casualty lines in any insurance line in the US where 65% tipping test is met. The test provides that if more than 65% of national gross written premium is written by insurers that do not pay contingent compensation, and insurers that have signed settlement agreements with a 65% test, then the carriers with those agreements must stop paying contingent compensation in the next calendar year, once notified by the attorney general.
Acordia/ Wells Fargo Insurance Services, is the fifth largest insurance brokerage in the world. It is the largest bank-owned insurance brokerage in the US, with over 150 offices in 38 states. Its 4,500 insurance professionals place in excess of $8.5 billion of risk premiums with expertise in property, casualty, benefits, international, personal lines and life products. If legislation is brought out banning payment of contingent commission, the company would face decline in profitability from the brokerage business.

Rising Oncidents of Online Scams
There is increasing concern on rising theft associated with online banking.There have been increased instances of fake websites, phishing, brand spoofing and email scams in East Asia. According to the Association of Payment Clearing Services (APACS) the number of recorded phishing incidents rose 16-fold to 5,059 in the first half of 2006 resulting in a loss of GBP23 million. Losses from plastic card fraud amounted to GBP209 million in the first half of 2006.
According to Joel Helgeson, an independent computer security consultant based in Saint Paul, Minn there has been an increase in the risk of systems crash in Wells Fargo due to online scammers. In August 2007, the Anti-Phishing Working Group, an organization that tracks online fraudsters, had counted 43 live Wells Fargo phishing sites. In fact in the fourth week of August 2007, customers complained that completed transactions details were not reflected in their online bank accounts.

Meltdown in US Asset Backed Securities Market
Global financial markets have been volatile over the last two years despite robust earnings over the past few years. Most financial markets underwent a moderate to severe correction in 2007. Early in 2007 the markets picked up well, until the crash of the US sub prime market, which erased almost all the earnings of the year.The sub prime mortgage financial crisis of 2007 was due to a sharp rise in home foreclosures that started in the US during the fall of 2006 and became a global financial crisis within a year.
As of May 2008, global banks have disclosed 80% of forecast losses on subprime mortgage-related assets. It is estimated that Banks will register at least $400 billion losses (or as high as $550 billion) on $1.4 trillion subprime assets. Of this loss, banks have already announced losses of $165 billion on exposures to residential mortgage-backed securities (RMBS) or collateralized debt obligations backed by asset-backed securities (CDOs of ABS). The announcement of these losses especially those that were not factored in by market forces have led to huge drop in shares and indices related to financial services. Problems in credit markets have led to a perception of recession. The affect of the feared recession had an effect in the Asian financial markets. For instance, the popularly tracked Nikkei 225 fell by 16.1% during August 2007 to May 2008. Added to this, the price of oil has been around $130 for the past few months. Volatility in financial markets could lead to rise in cost of funding and value of financial assets held for trading. Consequently, the company’s asset quality, profitability and capital adequacy could be tested in the coming quarters.

Wells Fargo – Major Products and Services

Wells Fargo & Company (Wells Fargo) is a diversified financial holding company in the US. The company’s key products and services include the following:

Community Banking:

  • Checking accounts
  • Debit cards
  • Individual retirement accounts
  • Insurance
  • Investment management
  • Market rate accounts
  • Mutual fund products
  • Personal trusts
  • Savings deposits
  • Securities brokerage
  • Time deposits
  • Venture capital financing
  • Wealth management

Wholesale Banking:

  • Asset-based lending
  • Employee benefit trusts and mutual funds, including the Wells Fargo advantage funds
  • Equipment leasing
  • Equity sales
  • Foreign exchange services
  • Institutional fixed income
  • Institutional investments
  • Insurance brokerage services
  • International trade facilities
  • Investment banking services
  • Investment management
  • Letters of credit
  • Lines of credit
  • Mezzanine financing
  • The commercial electronic office (CEO) portal
  • Trade financing and collection services
  • Traditional commercial loans
  • Treasury management

Wells Fargo Financial:

  • Consumer financing and auto finance operations
  • Credit cards
  • Lease and other commercial financing
  • Purchase of sales finance contracts

Wells Fargo – Revenue Analysis

Wells Fargo

The company recorded revenues of $39,390 million during the fiscal year ended December 2007, an increase of 10.4% over 2006.

Wells Fargo generates revenues through three business divisions: community banking (64.8% of the total revenues during fiscal year 2007), wholesale banking (21.2%) and Wells Fargo Financial (14%).

Revenues by Division

During the fiscal year 2007, the community banking division recorded revenues of $25,538 million, an increase of 10.9% over 2006.

The wholesale banking division recorded revenues of $8,341 million in fiscal year 2007, an increase of 15.3% over 2006.

Wells Fargo Financial division recorded revenues of $5,511 million in fiscal year 2007, an increase of 1.6% over 2006.

Wells Fargo – Top Competitors

The following companies are the major competitors of Wells Fargo & Company:

  • Bank of America Corporation
  • Capital One Financial Corporation
  • Citigroup Inc.
  • Providian Financial Corporation
  • U.S. Bancorp
  • American National Bankshares, Inc.
  • Commerce Bancorp, Inc.
  • International Bancshares Corporation
  • BancFirst Corporation
  • NetBank, Inc
  • Aon Corporation
  • Countrywide Financial Corporation
  • GE Money
  • Wachovia Corporation
  • Washington Mutual, Inc.

Wells Fargo – Company View

A joint statement by Richard M.Kovacevich, Chairman and John G.Stumpf, President and Chief Executive Officer of Wells Fargo is given below. This statement has been taken from the company’s 2007 annual report.

To Our Owners

Our 2007 results were disappointing. They were not what you, our owners, expect from Wells Fargo. They were not what we expect of ourselves. Our diluted earnings per share of $2.38 declined nine cents from 2006. Two items, in particular, caused this.

First, in the fourth quarter Visa Inc., the world’s largest credit and debit card provider, completed its global restructuring and announced it would be going public, contemplating an initial public offering early in 2008. Wells Fargo owns approximately 2.8 percent of Visa. With the concurrence of the U.S. Securities and Exchange Commission, Wells Fargo recorded a pretax charge of $203 million, or 4 cents per share, during the year (third and fourth quarters) for its share of Visa’s anticipated litigation expenses. These charges were not expected, but we anticipate they will be more than offset as a result of our ownership in the valuable Visa franchise. Second, in the fourth quarter Wells Fargo recorded a special credit provision of $1.4 billion pretax, or 27 cents per share, largely for higher loan losses we expect in our home equity portfolio from indirect channels through which we’re no longer accepting new business. These two items reduced our 2007 diluted earnings per share by 31 cents. So, what happened and why did it happen? What did we do right? What did we do wrong? For the last several years in our annual reports and other investor communications, we’ve been saying to you, our owners, that the financial credit markets were acting as if there’s little or no risk to lending money.* “Liquidity” —the amount of money readily available for investing—had reached unprecedented high levels for individuals, corporations and central banks worldwide. This led, in part, to careless, undisciplined lending, borrowing, investing and overall risk management across many segments of the economy. Many categories of debt became significantly overvalued. Lenders were not being paid enough for credit risk. Credit spreads were at record lows across all asset classes. Aggressive subprime mortgage lenders, many of them unregulated brokers, used “teaser” rates and “negative amortization” loans (which add to the unpaid balance) to put many people in homes they could not afford. Easy access to cheap money encouraged excessive risk taking, highly leveraged transactions and complex pools of mortgage-backed debt obligations (many of which were underestimated for risk by some rating agencies). This foolishness could not go on forever. Something had to give. Housing prices—inflated by speculation and aggressive lending—plunged in many parts of the country. Trust and confidence in the mortgage securities market collapsed. Large global and domestic financial services companies took losses exceeding $163 billion, writing down mortgage loans, leveraged loan commitments and other assets. A long-overdue upward repricing of risk continues into 2008. Despite the pain it has caused many individuals and organizations, long term it is healthy for our industry and our economy. Credibility, trust and confidence in pricing for risk are being restored in the credit markets. This swift retribution is one of the strengths of capitalism.

“In financial services, if you want to be the best in the industry, you first have to be the best in risk management and credit quality. It’s the foundation for every other measure of success… Our company maintained its credit risk discipline reasonably well during the years of excessive risk taking in our industry.”

Credit Quality: What We Did Right

In financial services, if you want to be the best in the industry, you first have to be the best in risk management and credit quality. It’s the foundation for every other measure of success. There’s almost no room for error. For instance, to meet our profit goals for lending to commercial businesses, we can be wrong on credit throughout an economic cycle only about one-third of one percent of the time. That’s a very small margin of error. Our company maintained its credit risk discipline reasonably well during the years of excessive risk taking in our industry.Unlike many of our competitors, we did not make option adjustable-rate mortgages (ARMs)—consistent with our responsible lending principles We did not make negative amortization ARMs. We offered in only a very few instances, below certain credit scores, stated-income mortgages and low- and no-documentation mortgages. Because of our prudent lending to customers with less than prime credit and our decision not to make negative amortization loans, we estimate we lost between two and four percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. We’re glad we did. Such lending would have been economically unsound and not right for many borrowers.

Unlike many of our competitors, we did not participate to any significant degree in collateralized debt obligations (CDOs), structured investment vehicles (SIVs) to hold assets off our balance sheet, hedge fund financing, off-balance sheet conduits, the underwriting of low-covenant or no-covenant, large, highly leveraged loans and commitments to companies acquired by private equity firms through leveraged buyouts (LBOs).

Our balance sheet strength enables us to take the long view. We have minimal ARM interest rate “reset” risk in the loan portfolios we own because we underwrote those loans to account for higher interest rate resets. We sell the vast majority of our mortgage loans to capital market investors. We believe our commercial lending portfolio is among the highest quality of any large bank in the nation. We’re disappointed with the $1.4 billion in special credit provision, but it is less than two percent of common equity after tax, and it’s relatively small compared to the $163 billion in write-downs taken by our competitors.

Only Way to Lend: Responsibly

We’ve built a reputation as an industry leader in responsible lending. Our goal is not just to help customers achieve the dream of home ownership, but to do what’s right for them so they can keep their homes. Our Responsible Mortgage Lending Principles (first published in 2004) commit us to:

  • Price loans fairly and consistent with the risk,
  • Give customers the information they need to fully understand the terms of the loan,
  • Make a loan only if it provides a demonstrable benefit to the customer,
  • Not lend to customers unless we believe they can make the loan payments, and
  • Work diligently to help customers having trouble making their payments so they can stay in their homes.

Because of our Responsible Mortgage Lending Principles and our Responsible Mortgage Servicing Principles, our foreclosure rate in our home mortgage servicing portfolio in 2007 was more than 20 percent better than the industry average. Less than one in every 100 loans in our servicing portfolio was in foreclosure.

We contact customers with impending ARM resets, offer a toll-free number they can call to discuss solutions with a Wells Fargo expert, and provide credit management education programs. In 2007 across the mortgage industry, almost one of every two foreclosures involving a customer with an ARM occurred before the loan was reset at a higher rate, mostly due to too much debt, lower income or a decline in the home’s market value. For those borrowers in financial trouble, about half never contacted their servicer. So, our message to any of our customers struggling to make payments is loud and clear: Call us! If they do, we can work with them to try to find options to help them stay in their home or find other alternatives to avoid foreclosure.

We also must protect the interests of investors who own the mortgage-backed securities and who depend on a flow of payments from those securities. Of the 10 million home mortgages we service, about three percent are adjustable-rate mortgages for customers with less than prime credit whose rates are expected to increase sometime before the end of 2008.

At this time, it appears eight to nine of every 10 of these customers are expected to pay in full, refinance, manage the payment or benefit from a solution. To help keep more of our customers in their homes, we launched in 2006 a free program called Steps to SuccessSM for all our new mortgage customers who have less than prime credit. It provides credit reports and credit scores, access to advice from credit education specialists, financial education and access to automatic mortgage payment programs to help consumers better manage their credit. We’ve signed up 20,000 customers for this program, and they appear to have a lower likelihood of delinquency than our customers not enrolled in this program. We’re a leader in Hope Now, a new national alliance of mortgage counselors, mortgage servicers, capital markets investors and the government to help at-risk homeowners facing foreclosure or higher ARM resets. The industry campaign includes direct mail to millions of at-risk borrowers, encouraging them to contact servicers or counselors for help and a toll-free customer hotline.

In late 2007—partnering with other large mortgage servicers, the U.S. Treasury Department and the American Securitization Forum—we announced our support for a “fast-track” solution for many subprime ARMs scheduled to reset to higher rates in 2008 and 2009. In February 2008, as part of an alliance with our large peers and the U.S. Treasury, we sent letters to both our nonprime and prime customers 90 days or more late in their mortgage payments, offering them, if they qualify, a 30-day pause in the foreclosure process so we can consider a possible solution to help them to stay in their homes.

We’re a strong, well-capitalized, well-funded mortgage lender and servicer and can maintain our liquidity for the long term. With our extensive distribution network and our strong relationships with Realtors, builders and joint venture partners, we have the opportunity to grow mortgage market share responsibly at a time when some of our competitors have gone out of business or are struggling—and we’re hiring highly successful salespeople from our competitors. We’ve been the nation’s #1 retail mortgage originator for 15 consecutive years.

Credit Quality: What We Did Wrong

Our risk management performance in 2007 was not perfect. We made some mistakes. We took on too much risk—and did not price sufficiently for it—in the home equity loans we purchased through indirect channels such as mortgage brokers, bankers and other mortgage companies. Too many of our home equity loans had “loan-to-value” ratios that were too high — the ratio of loans to the fair market value of the property. Sometimes we did not require full documentation for these home equity loans we purchased from brokers because these were prime borrowers who had high credit scores with lower expected risk of default.

When home prices in parts of California and other areas of the country fell dramatically, the severity of the losses was much higher than we or anyone else expected. We should not have offered such lenient loan terms through indirect channels, and we made the mistake of taking on too much risk. We should have known better.

In third quarter 2007, we stopped purchasing home equity loans from third-party correspondents. In fourth quarter, we stopped purchasing loans through wholesalers when the borrowers were not Wells Fargo mortgage customers. We’ve also exited the nonprime wholesale and correspondent channels for first mortgages. In fourth quarter 2007, we placed $11.9 billion of such loans—about three percent of our total loans outstanding —into a liquidating portfolio, and added $1.4 billion to our credit loss reserves primarily for losses incurred in this portfolio. We continue to accept loan applications in the home equity wholesale channel, but only for loans behind a Wells Fargo first mortgage and that have a combined loan-to-value ratio below 90 percent. Balance Sheet and Capital Strength

In addition to credit quality, another important attribute of an outstanding financial services company is capital, or what’s left for shareholders after subtracting a company’s liabilities from its assets. At Wells Fargo, our #1 financial goal is to have a conservative financial structure as measured by asset quality, capital levels, diversity of revenue sources and dispersing risk by geography, loan size and industry. We want to maintain such a strong balance sheet that our customers would put their money in our banks even if there was no FDIC insurance. Capital measurements show how much a bank depends on borrowing and how much “cushion” it has to absorb losses.

Wells Fargo’s capital ratios are among the strongest in our peer group. You can see one of the most important measures of capital strength on the opposite page. Our capital levels as a percent of our tangible assets outpace our peers. This is one reason we have the only bank in the U.S. rated Triple A by both Moody’s Investors Service and Standard & Poor’s Ratings Service.

Our 2007 Performance

Despite the disappointing earnings-per-share results in 2007, our businesses’ core performance in 2007 was strong. Wells Fargo achieved double-digit revenue growth, up 10.4 percent, something very few financial institutions were able to accomplish. Our revenue also grew faster than our expenses (up 9.5 percent), which we consider the best long-term measure of a company’s efficiency. Our return on equity (after-tax profit for every shareholder dollar) was a very respectable 17.1 percent. Most of our businesses achieved very solid financial results. Among their achievements: • Wholesale Banking – Record net income of $2.3 billion, up 13 percent, and revenue up 15 percent, its ninth consecutive year of double-digit growth. Average loans rose 20 percent. Cross-sell reached a record 6.1 products per Wholesale customer relationship (4.9 five years ago) and 7.6 products per middle-market commercial banking relationship. Almost a third of our regional commercial banking offices had more than eight products per relationship. Some averaged more than 10! • Asset Management Group – Double-digit growth in revenue, earnings and assets under management. Wells Fargo Advantage Funds—with assets up 24 percent—is the nation’s thirdlargest fund manager among banks. • Community Banking – Revenue up 11 percent, average loans up nine percent, average retail core deposits up six percent, record retail bank household cross-sell of 5.5 products per household (5.2 a year ago, about three, nine years ago), and we opened 87 new banking stores. One of every five of our retail banking customers has more than eight products with us, and in our top region almost one of every three customers does. Core product solutions (checking, savings, credit cards and referrals of mortgage, insurance and brokerage) rose 11 percent, 16 percent in California. Wells Fargo Packages sales (checking account and at least three other products) rose 21 percent—purchased by almost three of every four of our new checking customers. Consumer checking accounts rose a net 4.7 percent. • Team member engagement – An important leading indicator of satisfied customers who give us more of their business— rose again. Our ratio of engaged to actively disengaged team members in Community Banking now stands at 8.5 to 1 (7.1 to 1 last year, 2.5 to 1 five years ago)—the fifth consecutive year of improvement. The national average for all surveyed companies is only 2 to 1 Wells Fargo Home Mortgage had a relatively good year and was the nation’s #1 retail mortgage originator for the 15th consecutive year despite the sharp housing downturn and turbulent secondary markets. Mortgage originations declined seven percent to $272 billion, but our owned home mortgage servicing (processing the monthly payments of your home loan) portfolio reached $1.53 trillion, up 12 percent from 2006.

Growth Opportunities

As we’ve said for years, our greatest opportunities for growth are right in front of us: satisfying all our customers’ financial needs and helping them succeed financially. Here’s a progress report on three of our biggest growth opportunities: wealth management, insurance and business banking.

Wealth Management Group Our #1 strategic initiative is to grow our investments and insurance businesses to 25 percent of our company’s total earnings. We continue to make good progress. The total assets we managed in our Wealth Management Group —Investment Management, Insurance, Brokerage, Trust and Estate, and Private Banking—grew 10 percent in 2007. We want to give our highest-value customers the most personalized service possible. To that end, we introduced Wells Fargo Private Bank across the country, including several markets outside our 23 Community Banking states. The Private Bank provides personalized wealth management solutions for clients with $1 million or more in Wells Fargo relationship balances, excluding mortgages. Our dedicated relationship teams help clients manage their daily financial needs, preserve and build wealth, achieve philanthropic goals and build a legacy for future generations.

Our Wealth Management Group grew core deposits 28 percent and loans 15 percent—and our offer of 100 commission-free trades through WellsTrade� online brokerage for our Wells Fargo� PMA� Package customers helped us grow self-directed brokerage assets under administration by 35 percent. We also launched The Private Bank online, which generated significant new balances. Insurance We’re the world’s fifth-largest insurance brokerage, third-largest U.S. commercial insurance brokerage, and the largest bank-owned U.S. insurance brokerage, but we’re a long way from being #1 for all our customers’ insurance needs. The last four years, almost half our new insurance business came from Wells Fargo customers—yet only five of every 100 of our 28 million customers have bought at least one insurance product from us. Our goal: one of every five.

We believe this is achievable because insurance (with checking, mortgage and investments) is one of four core products: one that consumers value so much that they’re more likely to buy more products from that same company than from competitors. We want to provide the full line of insurance products that both our commercial businesses and retail household customers need to help them succeed financially.

As part of a broader relationship conversation with our customers (not just “transactional selling” of insurance from a third party), we now help our banking customers via the phone and the internet plan their insurance needs, recommend the best product choices, and update them as their needs change. This is an “inbound” service model—triggered by events in our customers’ lives and channeled to our insurance sales centers through referrals from our banking stores and our Wells Fargo Phone BankSM centers (1+ million such referrals in 2007, up 50 percent). Our acquisition this year of Greater Bay Bancorp in northern California also brought us ABD Insurance and Financial Services, the nation’s 15th-largest insurance broker. This expands our insurance presence on the West Coast and adds insurance products to our menu that especially benefit the technology, real estate and construction industries. Also in 2007, we acquired six insurance brokerages and nine insurance portfolios in California, Georgia, Illinois, Michigan, Minnesota, New Hampshire, North Carolina, Ohio, Texas, Utah and Washington. Business Banking We’re making good progress in broadening and deepening our relationships with businesses that have annual revenues up to $20 million. Our sales of product “solutions” to businesses through our banking stores rose 16 percent this year, up 40 percent from two years ago. Small business loans, usually less than $100,000, rose 19 percent, up 40 percent from two years ago. We’re the #1 U.S. small business lender in dollars for the fifth consecutive year.

We’re also #1 by this same measure for loans to small businesses in low- and moderate-income neighborhoods. Since 1995, we’ve loaned $35 billion to businesses owned by women, African-Americans, Latinos and Asian-Americans. There’s still tremendous opportunity to do better. We want our business banking results to be as good as our consumer results, especially in cross-sell. More than four in 10 of the small businesses that opened checking accounts with us bought a package of four or more products from us at the same time. That’s up from 2.5 of every 10, two years ago, but it’s still lower than the 7 of every 10 of our consumer customers who bought a package of products when they opened checking accounts with us. Our average business relationship now has 3.5 products with us (3.0 two years ago), but that’s still far fewer than the 5.5 products our average retail bank household has with us.

Expense Management

The key to the bottom line for us has always been the top line—revenue growth—but we can’t be complacent about the expense line. We’re known across our industry as number one, second to none, for cross-sell and revenue growth, and now we also want to be known for smart, efficient expense management. We’ve always paid close attention to expenses in our businesses, but in 2008 we’re formalizing a process to coordinate expense management consistently and quickly across our company. Obviously, this is a time of slower economic growth, potentially higher credit losses and slowing deposit growth, causing pressure on earnings across our industry, but this is a process we need regardless of good times or tough times. It’s just good business. We’re examining all aspects of how we spend money, from buying goods and services to the structural expenses of each of our businesses. We want to take full advantage of our company-wide buying power and expense management best-practices. Making expense management a competitive advantage across our company should enable us to grow market share when many of our competitors are struggling.

One Wells Fargo: Our Progress

For the past two years, hundreds of our team members have examined processes inside our company that are most important to making it easier for our customers to do business with us. Their work is part of a way of thinking and acting we call “One Wells Fargo”—a culture of collaboration that instinctively and naturally puts what’s best for the customer first—and then delivering it. Our “One Wells Fargo” teams are working on six major initiatives: • Deliver a consistent “you know me” experience for our customers. Example: We streamlined the process for opening checking and savings accounts by compressing the online process from 15 screens with 18 fields to fill in down to five screens and four fields. Completions for the new, shorter application have tripled. • Speak the language of our customers with clear and simple messages. Example: We now have company-wide guidelines, tools and examples of correspondence to help us communicate with customers in ways that are easy to read, understand and act on. We use their language, not “bank-speak.” For instance: Bank-speak Customer-speak Credited Deposited Debited Withdrawn Insufficient funds Not enough money in your account Unauthorized transactions Charges made without your permission Delinquent Past due Delayed availability Your money will be available on (date) • Communicate more effectively with customers electronically rather than with paper. Example: Two-thirds of all our servicing communication with customers now is available electronically —saving 15,000 trees a year. We deliver one of every five of our checking or savings account statements online only, an increase of 50 percent in 2007 alone. • Simplify products. Example: We reduced our “menu board” of checking products from more than 20 down to six checking and savings account packages. This makes it easier for our customers to do business with us and easier for our team members to serve them. We rolled out an automated tool across all our Community Banking states and the Wells Fargo Phone Bank for those situations when we reverse fees. • Fix customers’ problems the first time they contact us. Example: We now track in 14 of our 80 businesses and 15 of our 39 call centers how often we fix problems for customers the first time they contact us. This covers 95 percent of the calls ur customer service team members handle. This year, we fixed problems for three million more customers after they contacted us the first time. By measuring and tracking this and finding ways to improve the process, we expect the number of first-time fixes to improve significantly over time. • Address recurring complaints affecting customer loyalty. Example: Making it easier for our customers to reconstruct where they paid for goods and services. When they review their debit card, ATM and online bill pay transactions, they now see the name and location of the merchant where they made the purchase or payment rather than just the generic “Check card activity.”

Working Together

Wells Fargo has been at the forefront of every major innovation in financial services, including being the first to offer internet banking (1994). How does this happen? It does not, we can assure you, start with technology in search of a need. Nor does it start with outside consultants. It starts with our customers and the team members who serve them. Everything we do at Wells Fargo starts with what our customers need. Developing products and services to satisfy their financial needs requires an environment in which our team members at every level (most often those closest to the customer) are free to use their “what if” imaginations. They then should be assured that they’ll find open, receptive minds across our company willing to listen to their idea’s potential. Then come the most important steps— developing the new idea, designing the system, processes and technology, testing with customers and making changes based on their feedback, and then rolling out the well-tested new product to the marketplace.

In our annual report this year, beginning on page 12, we show you how our customers benefit from our latest and best products and services—created by our talented teams—and how every new idea we have for better serving our customers starts by “Working Together” with them.

We thank all our 159,800 talented team members for their outstanding accomplishments during what has been one of the more challenging years we’ve ever experienced in financial services. We thank our customers for entrusting us with more of their business and for returning to us for their next financial services product. We thank our communities—thousands of them across North America—that we partner with to make them better places to live and work. And we thank you, our owners, for your confidence in Wells Fargo as we begin our 157th year. And now we’re going for great in ’08!