One on one with Wells Fargo CEO John Stumpf

2014 started off better than the year before for the major banks, with Wells Fargo claiming the top spot in terms of profit, overtaking rival J.P. Morgan as the most profitable bank for 2013. Even though the mortgage business has slowed as interest rates rise, refinancing, capital markets and a better economy are all contributing to a stronger environment for the year. Wells Fargo creates about a third of all mortgages in the country, so I caught up with CEO John Stumpf to find out what higher interest rates, changes at the Federal Reserve and more regulation will mean for 2014. My interview follows, edited for clarity and length. Q: Characterize what you saw in the final quarter of the year and what you're expecting from the business climate in coming months.

A: The quarter was very strong. We had strong loan growth and deposit growth, which are fundamental parts of the business. A lot of people focus in the mortgage business, but if you look year-over-year, about two thirds of our originations were refinances, and about a third were purchases. In the quarter, just the reverse happened. About two thirds of originations were purchases and a third were refinancing. As loan prices go up, refinancing ebbs, which is not a bad thing. It means that housing is getting better. Another thing that showed up in our numbers in the fourth quarter was the best credit we have seen in this company in my 32 years here.

Q: Does this tell us that the consumer is healthier? Or are we talking the business environment?

A: This is the $64 question. Where is the consumer? It's not perfect, but compared to the last five Januaries, this is the best I've seen. Washington, D.C., seems to be working better together. There is a budget passed. We're not talking about fiscal cliffs and the debt ceilings and so forth. Unemployment is under 7%. Gas prices are down. Housing values are up. These are all positive signs. Business balance sheets are in the best shape I've ever seen, and consumers have paid down debt. As far as interest rates, people have reset their mortgages so that the 'interest carry,' the debt they carry, is back to something that was like it was in the '80s. Where is the consumer? It depends a lot on confidence. We are a retail spending-driven economy.

Q: Interest rates have moved up, as you noted. Are you expecting this to continue, and how will that affect this better environment?

A: We have to look at short-term as well as long-term rates. I see movement in the long end before I see it on the short end, although I'm not expecting big changes this year. There is talk about 'taper' (the Fed pulling back on its buying of bonds). But remember, taper means buying less, and there's also less product available. When you have fewer mortgages being made, there is less product on the market. That will need to work through.

Ultimately, we need the Fed to get away from this exceptionally active involvement they have been in with monetary stimulus because it's not natural this late in the cycle. I don't know that that helps too many people that much. (With such low rates), I worry about the people who are retired who are earning less on their deposits and their investments than they planned. But still I don't think we will see big rate moves this year even though It will be in that direction.

Q: What kind of a 2014 are you looking for?

A: I think you are going to see increases in the value of homes by between 3% and 5% year over year. I think we will see a mortgage market that is largely dominated by purchase money. It would not surprise me if we were in a $1 trillion- to $2 trillion-mortgage marketplace. I think we will see continued job creation, albeit not as strong as we would like to see. Gas prices, it would not surprise me to see them moderate or stay where they are right now. I think we will see a little better economy than 2013. I'm optimistic. But I don't think it's gonna be a breakout year. I don't think we're at that point yet.

Q: What about the regulatory environment? This was top of mind last year. Are we seeing the rule-making get tougher and more expensive, and will it still top the agenda?

A: I don't think it will be as much as it was last year. We're starting to get a lot more clarity about what the rules are. Clearly, there is a review going on, and there's a lawsuit between the merchants and the Fed regarding where they came out on debit interchange fees. But I can tell you on that issue alone, with what happened recently, the breaches in big merchants, you can sure tell that this is not a risk-free environment. The banks need returns so we can invest in technology and safety (of customers data) because frankly, we have some old technology in that industry, and we are behind where other countries are. That will be dealt with between the Fed and the merchants.

I think there is more regulatory certainty today than there was in the last five years. On top of that, at least in our company, we have gotten a lot of litigation done and have dealt with the issues. We settled our Fannie Mae and Freddie Mac issues last quarter, so we are on our front foot here, looking to do things that are real business- and economy-type moves.

Q: In terms of getting back to regular business, are you expecting to increase your dividend this year? How will you allocate capital to shareholders?

A: This is an important question. This is the time of the year we submit our capital plans to the Fed and wait to hear back in early March where we come out. Last year, we paid out either through dividends or stock repurchases $11.4 billion, which is a lot of money. This year, we have asked to pay out more. It's really great to be able to reward stockholders. We've talked about a 50% to 65% payout because we have built up so much capital, and our liquidity is in such a great spot. We are excited to hear from the Fed and hopefully, will be able to do that.

Q: In terms of allocating capital toward technology improvements, what are you expecting? What should consumers who are worried about those account data breaches do? How can people protect themselves?

A: We don't publicly state our total capital expenditures budget. But I can tell you that technology does dominate that spending, and this is a great example of why we are making this investment. From cybersecurity and from the consumer's perspective, as in the Target case, the consumer must be kept from harm. We are offering credit monitoring. If someone uses their card, debit or credit, and it is compromised in some way, we stand behind them. That's a great benefit and a great value. But you're right, we are making lots of investments in that area, and that will continue.

Q: What about the talk of splitting up the banks? Do you expect this to get more traction?

A: It goes up and down. It manifests itself in different ways. I wrote an article for the American Banker not long ago to say that all banks, small, medium and big, are important to the ecosystem of America. When I got in the industry, in 1975, we had 14,500 banks. Today, we have 7,000, and every one of those, I want to advocate for.

My little home town of Pierz, Minn., is a one-bank town. If that bank went away, that town would roll up and blow away. They are all important. America has been good to us, and we try to be good citizens for America. We serve large customers, small customers. We are one of the largest taxpayers in the country. It's important we do our share in philanthropy.

That being said, no bank and no company in any industry should be too big to fail. The fact is, when you look at Wells Fargo, we are not even one of the 20 top banks in the world. We are No. 4 in the United States. But our size is less than 10% of the GDP in the United States. This is small relative to the rest of the world, where some banks are over 100% of their GDP.

Q: Where is the biggest growth engine for Wells Fargo this year?

A: All of our businesses have an opportunity to grow but maybe the biggest would be in the area of wealth-managed brokerage and retirement. We serve one in three Americans, one way or another. We have about 10% of the deposits in the country, but we don't have that same share of wealth. Many of our customers who call us their bank, keep their wealth somewhere else. That is a huge opportunity for us. I like the insurance distribution business, and I like some of the business we are doing in capital markets. I think the credit card business is also an opportunity for growth. Only 37% of our customers carry our credit card.

Q: I'm glad you mentioned retirement. Most people are not prepared for it financially.

A: You are absolutely right. I think the saddest situation I see is a 60-year-old person or family or couple that looks at their situation and says, 'Uh, oh. I don't have enough to retire, and there's not enough years to earn that.' The sooner people can do that, sit down, have some rudimentary financial plan - 'What do I need to do today to retire when I am 65' or whatever age they think about - they will be less reliant on government. This is not just for the wealthy. This is for the mass market to get in front of before it's too late.

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